Trump Trolling Europe and Lagging Nasdaq

The market is starting to get nervous.  Last week, there was quite a bit of put buying as investors got nervous about an attack on Iran, which caused a small spike in oil prices, which gave back much of the move after Trump backed down.  Also the lingering uncertainty about the Supreme Court decision on tariffs is keeping VIX higher.  Plus, over the weekend, we got a Trump burger on Greenland.  That has pummeled the SPX futures lower.  

You can always count on the Europeans to overreact to Trump.  Its just the way it is.  From an amateur observer, this just looks like a classic Trump troll on Europe.  A nasty one, but still just a troll job.  Overnight, you saw a lot of chicken little selling from European investors as they fear Trump.  They are also likely selling ahead of Trump's upcoming Davos tape bombs, which have been foreshadowed earlier this month.  This actually makes the Supreme Court decision even more important, and bullish if they repeal the Trump tariffs.  It would essentially make Trump's tariff threats toothless, as he will have to use more obscure and less permanent measures to enact future tariffs, which will also likely be contested by corporations.  This Greenland bomb by Trump also puts more pressure on the Supreme Court to repeal the tariffs, as they were never intended to be used as threats against allies.  

Switching to market moves.  The NDX continues to lag the SPX amidst the broadening theme.  The signal is more meaningful during an uptrend.  And it gets more meaningful the longer this continues.  Since the October 29 top in NDX, it has lagged the SPX by 3.0%.  The difference is even bigger when you compare the Mag 7 vs. the SPX.  The Mag 7 is underperforming SPX by over 6% since October 29.  

Since 2008, the NDX has continuously outperformed the SPX, and this amount of underperformance in an uptrend is unprecedented.  This is happenening even though the AI bubble has not popped, and while you have semiconductors as one of the hottest sectors in the stock market.  This is happening while retail investors continue to pour in billions into stocks, at the fastest pace in the past 9 months.  

Despite retail continuing to pile into the market, it is unable to lift the NDX higher.  Amber flashing lights in the background as the SPX grinds slowly higher.  

Investors have been brainwashed by financial media and old data that a broadening market is bullish for stocks.  That is the case when the stock market and the economy were more closely related.  It doesn't apply to a stock market dominated by big cap tech stocks and AI hype.  

The lagging NDX vs SPX after a long, extended bull market is reminiscent of 2000.  In late March 2000, the NDX made a gigantic top that would last for years.  The dotcom bubble was on its final legs, but it didn't pop right there.  The SPX continued to trade in a volatile, sideways range for the next 5 months, even challenging the all time highs in early September 2000, as the NDX continued to lag.  From September 2000, the NDX and SPX both entered a long downtrend that would continue for 2 years.  

I believe we are in that window where NDX continues to underperform the SPX, while the market goes sideways.  There could be marginal new highs in the SPX, but a continued uptrend is unlikely.  Within a few months, it should turn into a bear market.  

Usually investor sentiment is noise, and it doesn't provide much value.  It is only useful when sentiment is opposite of the price action.  AAII investor survey shows investors the most bullish in the past 52 weeks, and way above the historical averages.

There is growing economic optimism as the OBBA stimulus hits the economy this year.  The bond market is starting to pay attention.  The 10 year yield, which has been in a tight 10 bps range from 4.1% to 4.2% since early December, finally broke out to the upside, closing at 4.23%.  Some of the stimulative effect of the OBBA and likely tariff repeal by the Supreme Court are being offset by higher bond yields.  You cannot underestimate the willingness of retail speculators to pump their tax refunds straight into stocks, so I don't expect a sharp down move during this stimulative window in February and March.  After this brief stimulus pump, we'll be back to more normal flows and a fundamentally driven market, one that is vulnerable to a weakening tech sector.  

The magnitude of the gap down does remind me a bit of the big Sunday night/Monday pre-market gap downs from early 2025 on the Deep Seek news and the downgrade of US government debt.  Both of those gap downs were bought, rallying straight from the US cash open on Monday.  And the market continued to rally for a 2-3 more days.  If we don't see that this time, it would be a change of character.  With the post Jan. opex environment, with a lot of options open interest coming off, we could see a bit further of a down move before a sharp reversal.  But, base case, I would expect the market to be higher by Friday than current levels, if past is prologue.  

With the coming tax refund wave, there will be ample liquidity for dip buyers to tap into.  I would not force short trades in this uncertain environment.  A drop on news headlines and uncertainty over upcoming events is a higher probability buy setup than a similar drop on no news.  After the news bomb over the weekend, and the big gap down, I am looking to buy the dip.  There will be a time to short again, but I will wait until the longs are more comfortable and the market close to all time highs before I pull the short trigger.  

The Dotcom vs. AI Bubble

The dotcom and AI bubbles are eerily similar.  Those bubbles were preceded by an extended bull market that convinced the crowd that stocks are much better investments than bonds and real estate.  From January 1991 to the start of the internet bubble in the beginning of 1998, the SPX went up from 330 to 970.  From the January 2019 to the start of AI bubble in the beginning of 2024, the SPX went up from 2450 to 4800.   Both of those run ups before the bubble phase involved massive outperformance of tech stocks.  

Unlike the AI bubble, the internet bubble started with the companies using the internet.  Instead of pumping up the internet infrastructure plays first, the market pumped up the companies using the internet first.  In the beginning, the hottest internet stocks were the companies online, YHOO, AMZN, EBAY, AOL, etc.  This was the time where stocks like the TheGlobe.com and numerous unprofitable companies were at the center of the action.  Eyeballs was the measure of attractiveness, not future profitability.

That was the first stage of the bubble, which started in 1998.  The frenzy was over B to C (business to consumer). The internet based companies doing business directly with consumers were going parabolic.  Even low barrier to entry companies like a Geocities (bought out by Yahoo), which was the MySpace of the time, and Broadcast.com (bought out by Yahoo and made Mark Cuban a billionaire) were deemed to be the internet winners.  Profitability was an afterthought, it was all about eyeballs and growth.  The parallel for AI is a bit difficult, because the AI pure plays using AI are OpenAI and Anthropic , which are both private.  But I would imagine that if OpenAI was public starting from 2022, it would have rocketed much higher than NVDA from 2023 to 2024, but would have likely peaked out by the beginning of 2025, way before NVDA and the semiconductor names.

The second stage of the bubble was much more broad based, starting in 1999, and it focused on B to B (business to business) and internet infrastructure.  Nortel, JDS Uniphase, Lucent, CSCO, JNPR, and various internet software plays (most which no longer exist).  This was when the dotcom bubble truly went into overdrive.  It was when online brokers sprouted up like weeds, and retail investors were pouring in to the market.   Jeff Bezos was Time Person of the Year for 1999.  The obvious parallel to the AI Bubble is the Time Person of the Year cover for 2025, showing the Architects of AI featuring CEOs of NVDA, AMD, META, OpenAI, xAI, etc.  

By early 2000, the B to C names like YHOO and AMZN had already peaked, and were going lower as the Nasdaq was going higher.  We entered the final stage of the bubble, where investors threw all caution to the wind, ignored fundamentals and looked to put money where they could have the most juice (quickest, most explosive moves higher).  This is when the OTCBB market heated up and you saw crazy moves in suspect, scammy names run by get rich quick stock peddlers starting internet based businesses just to sell stock.  

The parallel to this is the altcoin market in cryptos, as well as the quantum computing names.  The altcoin market, along with quantum names, were raging hot in late 2024, took a break during the tariff tantrum in the spring of 2025, and then heated up again in the summer and fall of 2025.  But its been straight downhill since that October 10 bucket shop drive at the crypto exchanges, when bitcoin flash crashed.  Liquidating retail buying cryptos on shoestring margins was like taking candy from a baby.  Just like they did at the bucket shops back in Livermore's day.  

One thing about the final stage of the bubble was that ordinary tech stocks, that weren't considered to be internet focused, exploded higher out of nowhere. In that final stage of the bubble, non-internet tech plays started to ramp up, like biotechs that were focused on genomics, which was a hot thing at the time.   That feels like the space sector now.  Some of the hottest names at the peak of the bubble were not pure internet plays, but semiconductor names.  These stocks were not thought of as internet boom beneficiaries until late in the bubble, as capex kept ramping higher.  The parallels to the AI bubble are the memory makers like MU, Samsung, SK Hynix, as well as the storage companies STX, WDC, and SNDK.  If you look at MU's chart in 2000, its eerily similar to what it did in the 2nd half of 2025.  

There are quite a few investors who recognize that we are in an AI bubble.  But I see very few investors, other than permabears like Michael Burry, preparing for an imminent popping of the bubble.  Most think its still at least a year away.  The common belief is that AI capex will be very strong for 2026, as orders are already booked, so the bubble won't pop this year.   They don't have any urgency in selling before the bubble pops.  The dotcom bubble popped in 2000 even though there were huge capex plans for all of 2000.  Investors don't appreciate how quickly corporations can change their investment plans.  

 

Comparing the stages of the dotcom bubble with the current AI bubble, it is clear that we are in the final stage of the AI bubble.  That final stage hit its zenith last October, and its been sideways since then.  The final stage of the dotcom bubble hit its zenith in March 2000, and the market went into a  volatile, choppy range for the next 5 months.  After that choppy sideways move, the bear market started, in September 2000.  If the AI bubble follows the internet bubble timeline, there is not much time left.  The AI capex growth expectations are sky high.  Investors have already been piling money into the supposed winners of the AI boom for over 2 years now.  But the practical use cases haven't kept up with the hype.  No one likes Microsoft Copilot.  Chat GPT and Gemini are popular, but not transformative.  There will be good uses for AI.  But given the huge power consumption of running these AI data centers, will the benefits outrun the costs?  

Unlike the internet infrastructure buildout, the AI buildout requires a lot more energy, and it seems like AI will be a net energy consumer rather than an energy saver.  For example, the internet drastically reduced the use of paper.  You replaced paper bills, confirmations, documents with electronic documents.  It reduced the need for transportation, the need to talk to a broker, etc.  It doesn't take much energy to run a network, and build out fiber compared to building and running AI data centers.  The internet is an energy saver.  AI is an energy consumer.  AI is supposed to make work more productive, but it seems to just be adept at copying content on the internet.  A lot of it is factually wrong.  Its not completely reliable.  

When the internet came out in the late 1990s, most could tell that it was revolutionary, how it would change everyone's lives.  Just from a trader or investor's perspective, online trading is infinitely better than putting in orders over the phone.  Same goes for sending an email vs. postal mail or fax.  It simplified the ability to get data in real-time.  You could check an up to the minute box score for a current game, with play by play summaries.  Before the internet, you had to watch ESPN for the highlights a few hours after it happened.  To get a box score, you would have to wait for the newspaper the next day.  And you wouldn't get any play by play summaries.  If you didn't use the internet in 2000, you were a dinosaur.  The quality of life difference from using the internet and not using it were huge.  Whether you use or don't use AI in 2026, its not going to make much of a difference.   Its just not comparable.  Its like comparing mass use of electricity to the smart phone.  Yet, you have prisoners of the moment stating that AI will be bigger than the internet.   

While the majority believe that AI will change the world and massively increase productivity, I think it will end up just being a niche product like Siri is for Apple.   Sure there will be more use cases for it in the coming years, but since AI just produces output based on a probabilistic algorithm from large data sets, its not using logic or doing any reasoning.  AI is good at generating cheap video/graphics, so it will replace a lot of graphic designers.  It will be good at replacing Google search results with a Cliffs Notes version that provides a quick summary of what one is looking for, with occasional hallucinations thrown in to keep the AI zombies honest.  

It could add productivity by automating some manual tasks, but we already have tons of software that do the same thing.  That's probably why software companies have been so weak during this AI bubble.  AI is a legitimate threat to overpriced software.  Companies saving money on software costs by using AI instead doesn't add value to the economy.  It just takes profits away from software companies and gives it to the current users of software.  

There are downsides to AI.  I am seeing an exponentially increasing amount of AI slop in Twitter and Youtube.  This is polluting the internet with more content and data that the LLMs will eventually be training on.  AI training on AI slop is like a snake eating its own tail.  I can see it in Twitter posts and replies, that are obviously LLM generated.  You can smell an LLM written post from a mile away.  Same goes for AI generated videos on Youtube.  Can't explain exactly what AI slop looks like, but from pure intuition I can tell its not created by a human. 

Recently, Citrini, a popular Fintwit / Substack subscription seller, has said that bullshit jobs are the ones that are in danger due to AI.  I agree somewhat.  Because AI is good at bullshitting.  AI can displace some white collar jobs, but it will be inferior because even the white collar bullshit artists add some value beyond the BS through basic reasoning and know-how gained from work experience.  It can replace some mediocre and low value workers, but the cost of running and using AI will probably actually be more expensive than just paying the low value workers, or offshoring the work.  

The incremental benefits from AI just don't match the hype or stock valuations.  It will soon be show me time for these AI related stocks.  The stock market will want to see better profitability from all that AI spend.  That could be a disaster.  Even as the SPX hits new all time highs, we are seeing cracks form in the AI data center builders.  ORCL is down 40% from its highs in September.  And its CDS spreads are much higher now than it was a year ago even though the stock price is higher.  Same story for CRWV, NBIS, IREN, and the other AI neoclouds.  Even so called beneficiaries of AI like META are now getting scrutiny over their huge AI capex spend.  META peaked in September at 790, when the SPX was trading at 6450.  The SPX is now almost 7000, and META last traded at 653.  

There is a huge disconnect between the hype around AI and its actual value to business and society.  Its a mass delusion of the crowd.  As a famous Nazi propagandist said, if you repeat a lie enough times, people start to believe it.  The repeated AI hype has convinced a lot of Wall St. that AI will change the world and make companies even more profitable.  

The government released the latest household allocation to equities as a percentage of financial assets.  This is as of September 30, when the SPX was at 6688.  SPX is a few percent higher today, so the equity allocation is even higher now.  At 47.07%, you are nearly 10% higher than at the top of the dotcom bubble, and nearly 5% higher than at the December 2021 market top, which preceded the 2022 bear market.  There is a lot of downside fuel for the next bear market.  

 

 

Start of year fund flows poured in last week, which was greater than the selling from delaying capital gains sellers.  The buying has been focused in small caps, and spread out more broadly towards non-tech stocks.  This broadening out of the market has been cheered on as a good sign by the financial "experts" at CNBC.  Nasdaq has been lagging the Russell 2000 since the late October highs.  Its been over 2 months of underperformance.  The prelude to the start of the dotcom bust was the Nasdaq underperforming the broader market.  

That is what's happening now.  In 2000, it took 5 months of Nasdaq underperformance to finally lead to a bear market.  So this can go on for a few months before you see the market really crack.  The interesting thing about last week was the relative weakness in NVDA and TSLA, the 2 most heavily owned stocks by retail investors.  If retail investor holdings continue to underperform, you are adding more and more pressure.  If this trend continues, which I expect (COT data shows small specs with large net long positions in SPX and NQ futures), the closer you get to the waterfall decline.  

Surprisingly, GS Prime broker data showed hedge funds going on a buying spree in info tech, the largest long buying in the last 5 years.  That buying wasn't enough to keep Nasdaq from lagging the SPX and Russell 2000.

 

Covered shorts on Thursday, as markets are trading stronger than expected and due to the likely bullish reaction to NFP and the Supreme Court tariff decision on last Friday.  Well, the Supreme Court delayed their decision, which briefly caused a dip around 10:00 AM ET, before rebounding and rocketing higher for most of the day to an all time high close.  This delay of the decision is probably a good thing for the bulls, as it will likely delay the top of this move for a few more days.  It is better to get short when prices are higher after the news events and uncertainties are behind us.  

Overnight, we got news of the DOJ going after the Powell Fed.  This is a tempest in a teapot, and I am surprised to see the SPX react so much to an inconsequential news item.  The independence of the Fed is treated like the holy grail, even though its obvious the Fed is politicized.  The Fed governors are picked by politicians.  Which make the Fed governors political, even if they try not to act like it.  Why else would Powell delay rate hikes when inflation was raging hot in 2021 before his term was renewed by Biden?  Its the reaction to the news that's more important than the news itself.  And the SPX dropping overnight on this shows that we have some weak hands in stocks.  It doesn't make me want to short right away, as I don't want to be short ahead of probable bull catalysts in CPI(will be manipulated lower) and the Supreme Court tariffs decision, which will make Trump's tariffs illegal.  But after those events clear, will be looking to short any relief rally.  

The next shorting chance for the bears is around January opex, which is this Friday.  January is the biggest non-triple witching expiration, with lots of LEAP open interest.  A lot of put protection in single stocks, especially big cap tech, will be expiring.  Seasonally, January post opex is a weaker time of year.  Will be looking to re-enter shorts later this week to play for post opex weakness.  

Retail Saturation and the Big Picture

A sign of retail investor saturation: investors are bullish but price action is not.  Let's first identify what's been driving this bull market.  It has been tech stocks, in particular AI related stocks.  Next, what type of investors have been the most bullish and putting the most money into those stocks.  Its retail investors.  Let's look at the stocks that retail investors have been buying the most over the past couple of years.  Its bitcoin/ether, AI names, robotics names, quantum, nuclear, and space.  We can then look at the stocks in those groups that retail is most heavily invested in.  Bitcoin, ether, NVDA, TSLA, PLTR, META, MSTR, BMNR, RGTI, IONQ, OKLO, NBIS, IREN, ASTS, RKLB.  There are a few more names out there, but the above list covers a big portion of retail investor long exposure.  

Looking at the list of retail favorites and comparing them vs. the SPX since late October, you can see the retail pain, which is masked by the index.  While the SPX is down only 1% from the October highs, most of the retail favorites are down double digit percentages.  The most damage has happened in crypto, AI data center, and quantum names.  The crypto pump in 2025 and the subsequent equity issuance from the bitcoin/ether treasury companies have sucked up a huge chunk of retail cash, leaving those investors both heavily invested in speculative stocks, and deep underwater.  Those investors also happen to hold other speculative names which are also down big.  Yet, most investors remain bullish, and some groups, like those surveyed by AAII, have gotten even more bullish since the October highs.  

The bears in the AAII survey are now down to early 2025 levels, before Liberation Day.  

Another weekly investor survey from Helene Meisler shows investors are stubbornly bullish while the index goes sideways, even more bullish than when it was trending higher from the spring to the fall.  

More importantly, retail investors have continued to pile into stocks, with various measures showing heavy inflows.

Ever since 2020, retail investors have poured into US stocks.  And by a couple of measures, that retail inflow accelerated in 2025.  In particular, foreign retail investors, the most fickle investors out there, have a knack for buying the most at tops, have bought massively over the past 12 months.  

It is one thing to keep buying and be rewarded for risk taking, but its another thing to keep buying and be punished for it.  Buying that takes prices higher is self-reinforcing, especially as it gives retail investors more margin buying power.  But when that buying no longer is rewarded, and is being punished, then margin buying power decreases.  Retail has managed to take up these speculative stocks to such high levels that in order to sustain these nosebleed valuations, even more money has to be pumped in to keep the Ponzi scheme going.  At these valuations, fundamentals don’t support buying.  Only FOMO does.  

This is scary because 2026 will likely bring on 2 gigantic IPOs in SpaceX and Anthropic, with opening day valuations likely around $1.5 trillion for SpaceX, and $300 billion for Anthropic.  OpenAI is not too far behind with their IPO, which likely happens in 2027.  The float will be small at first, but you can bet within 6 months of the IPO, insiders will dump en masse huge chunks of stock.  SpaceX, in particular, will be a game changer.  It is the hottest space name out there, and with its huge market cap, will be sucking up enormous amounts of capital from Musk fan boys, space loons, and speculative zealots out there.  That is bad news for the current group of retail favorites, which will have to share in the trough with a couple more giants trying to get fed by retail.   Eventually, stock supply will overwhelm demand and prices should crater for the retail favorite names.

The CFTC has finally caught up to the delay in COT reports, and as of December 23, we have data for equity index futures positioning.  As its a new year, let’s take a big picture view of where we sit in 2026. Below is the positioning for ES and NQ for the past 5 years for small speculators, asset managers, and dealers.  

E-mini S&P 500 Small Speculator Net Position

E-mini Nasdaq 100 Small Speculator Net Position

 

We can see that small speculators are near their 5 year highs for both ES and NQ net positioning.  Also, it has been steadily increasing for the past few months. 

E-mini S&P 500 Asset Managers Net Position

E-mini Nasdaq 100 Asset Managers Net Position

We can see that asset managers are also near their 5 year highs for both ES and NQ net positioning.  
 

E-mini S&P 500 Dealers Net Position

E-mini Nasdaq 100 Dealers Net Position

We can see that dealers are near their 5 year lows for both ES and NQ net positioning.  

Open interest in the ES and NQ contracts has been declining over the last 5 years.  After December 2020 opex, the OI in ES was 2.46M contracts.  After December 2025 opex, the OI in ES was 1.91M contracts.  So the net % positioning is actually higher for small specs and asset mgrs.  On a net % positioning basis, we are around all time highs for small specs and asset managers, and around all time lows for dealers.   Futures positioning doesn't tell you where the market is going, but it shows you which way they are leaning.  Right now, we are at historically bullish positioning among small speculators and asset managers.  There is not much more room for investors to get even more bullish, while there is a lot of room for investors to get less bullish or even bearish.

Options flows also show a similar picture.  The ISEE index measures the ratio of opening long call volume vs, long put volume.  A ISEE number of 150 would equal a ratio of 150 long call contracts opened for every 100 long put contracts.  The fall of 2025 reached levels that are the highest in ISEE index history, which goes back to 2006.  Even higher than the bubbly days of 2021.  It has fallen down some, but still at very high levels.  

When investor flows and positioning get this bullish, as the trend flattens out and speculative stocks weaken, you are sitting on a powder keg.  There is a long term cycle in the stock market that has repeated since 2008.  You have 3 to 4 positive years of up trending markets followed by a sharp drawdown that leads to a flat or down year.  2011, 2015, 2018, 2022 were the 4 flat to down years since 2008.  Its been over 3 years since the last real washout in US stocks.  If the pattern of the past 17 years holds, 2026 should be a flat to down year.  Given how heavily invested retail is, the potential downside is huge.

The same thing that happened to investors from 1991 to 2000 has been repeated from 2016 to 2025.  Investors got used to double digit returns with short drawdowns as investor inflows kept the party going.  When the market peaked in 2000, foreign investors were pouring money into the US market, and retail investors were heavily invested in the most speculative stocks of the time.  The internet was AI.  CSCO was NVDA.  Semiconductors were semiconductors.  History is not only rhyming, its nearly a carbon copy.  Some knee jerk contrarians say that its not a bubble if so many say its a bubble.  Well there were tons of people in 1999 and 2000 who were saying that there was an internet bubble.  And that bubble popped.  We underestimate the intelligence of people in the past.  Humans haven’t gotten smarter.  Technology improvements does not equal human intelligence improvements. 

The beginning of the year is a time to reflect on the previous year and to look at the big picture,  Looking back, I was too bearish and tried to pick too many tops.  As someone whose formative years covered the dotcom bubble and GFC, I became conditioned for a volatile stock market with lots of ups and downs.  Not a grinding bull market with brief, shallow pullbacks and continuous new all time highs.  There have been some valuable lessons about fighting a strong bull market.  Its better to either go with the flow or trade as little as possible.  Even though I traded the least out of the past 10 years, still took some hits.  

But if as expected the market goes into a choppy range with marginal new highs, I will be more active.  It should be a good market for counter trend traders in the first few months, which should be mostly range bound.  After that, starting from April/May, I expect volatility to pick up and the SPX enter into a downtrend.  

We got some news over the weekend, as Trump attacked Venezuela and took out Maduro.  Now, suddenly everyone is a 15 minute expert on Venezuelan oil.  Short term, it doesn’t matter.  Long term, it opens up the potential for a massive increase in Venezuelan oil production.  It will take several years to happen.  It may not happen if there is no political change.  It would somewhat reduce my long term view on oil stocks.  Overall, its a nothingburger that has gotten precious metals investors even more excited, while the rest of the market doesn't really seem to care much.  

Entered into shorts last week, looking for a pullback this month, perhaps down towards SPX 6700.  I expect the pullback to be bought.  Market should ping pong back and forth between around 6700 to 6900.  Will look to play that range for the month.  

Silver Buzz

Silver is currently at the center of the financial universe.  The buzz in silver corresponds with a blowoff top move on the charts.  On Friday, CNBC Fast Money talked continuously about silver and the precious metals.  While some of this is latecomer speculative buying, its seems more like shorts getting squeezed out and throwing in the towel.   Surprisingly, the put/call ratio in SLV was 0.83, and net deltas were not that high.  So you had quite a lot of SLV put buying by speculators and hedgers.  In comparison, the put/call ratio for GLD on October 16 when it had its blowoff top was 0.35.  

With so much less call options speculation and more skepticism about silver than gold, there is a chance that there are still too many shorts in the trade, and you could get one more leg up later this week before you get a sharp reversal of the trend.  If we do get another move up later in the week, it could be worth a shot to go short or buy puts.  With the IV sky high, I think shorting offers a better risk/reward.  

The move in silver and other precious metals only happen during complacent, heavily speculative market environments.  Its not as if we needed more proof that investors have very little fear.  The go to rationalization for being long silver is currency debasement.  And then some will talk about AI demand, etc.  But those rationalizations could have been said 5 years ago, 3 years ago, 1 year ago.  I think its just pure greed driving the move.  

Over the past week and through the Christmas holiday, you got the Santa Rally in the S&P 500.  It was about the most expected Santa Rally that I can remember, which could set up a post Xmas hangover now that you are almost at year end.  Since the Santa Rally was front run a few days early, it would not be surprising to see the end of the Santa Rally front run a few days early.  Last year, you had a short, vicious selloff after Christmas.  I don't expect it this time around, but I think a move that takes the SPX back down towards the levels it was at during triple witching, around SPX 6870, looks doable within the next few days.  

You also saw a lot of selling in the high beta, speculative sections of the market, with space, quantum computing, nuclear, and AI data center names taking big hits on Friday even though the SPX was flat on the day.  Those stocks appear to be saturated with retail bagholders who are underwater and causing a lot of overhead supply to come out after up days.  

We are now in the corporate stock buyback blackout window, which lasts until late January.  We also have delayed capital gains selling that takes place in early January after big up years.  The price action in speculative tech, bitcoin, and overly bullish sentiment are signs that a pullback seems ripe to happen at anytime.  It may not look like it on the SPX chart, or from what you hear on CNBC, but the bears have a lot of things in their favor for early 2026.  I will be looking to put on shorts in stocks and maybe silver this week, to play for January weakness.  

Santa Rally

People are looking for a Santa Claus rally.  All it took was a quick bounce off a 2% pullback for the bulls to come out and say I told you so.  But we are seeing chinks in the AI armor and Nasdaq has been lagging for the past 2 months.  The long term sustainability of this bull market depends on Nasdaq continuing to lead the market higher.  Whatever BS you hear from CNBC regulars about a broadening market being healthy are just Wall St. cliches.  When investors are looking to add more equity exposure, it is to capture upside, not to protect downside.  A broadening market that goes from big cap tech into defensive sectors like health care and consumer staples is not a sustainable formula for a continued uptrend.  That is what has been happening since the late October top.  Going into defensive sectors out of offensive sectors is what fund managers do to lower beta but stay fully invested.  

Last week, you saw Blue Owl pull the plug on ORCL, refusing to fund another AI data center boondoggle.  We are getting closer and closer to the point where all the AI capex needs to start showing some real tangible results.  Open AI no longer has a free pass to unlimited capital raising.  META got punished for their bloated AI spend.  They must be getting metaverse vibes after the post earnings reaction in October.  With the hyperscalers less able to raise debt to build AI data centers, it will make it that much harder to meet the lofty AI capex expectations for 2026 and beyond.   That hurts NVDA, AVGO, and the semiconductors, as well as all the AI data center/utility plays.  It could get ugly once the Street starts to price in this new reality.  

It is also not a good sign to see so much investor optimism while the AI names lag the index.  The NAAIM poll of investor positioning is above 100%.  Past readings above 100% were near short term tops.  

You also have very high bullish readings from other investor surveys, including II and AAII.  A popular Twitter poll by Helene Meisler shows most looking for more upside.  

 Investor flows into equities confirms that investors are still piling in:  

According to BofA, there was a $78B inflow into US stocks last week, which is the 2nd biggest ever.  Just as the uptrend in the Nasdaq is looking tired, you are getting heavy inflows into the stock market.   

It has been an extremely frustrating time for bears and fundamentally based investors, as valuations don't seem to matter.  Numerous attempts on the short side have either resulted in quick losses, or drawn out battles without much to show for it.   But it appears that we are close to an inflection point.  In addition to the above signs of very high optimism, you are seeing high beta themes like bitcoin, quantum computing, AI data centers, nuclear, and AI power related names showing weakness.  These are the conditions that you want to see before getting short.   

The AI story is going from the view of can't do anything wrong to show me results.  That transition will put greater scrutiny on companies blindly pouring capital into AI, which will likely result in less AI capex spending than many expect.  That would be a game changer, something that would really put the market to the test, as AI spending is the main reason this market is so overvalued.  

Seasonality has not played out as many expected.  Investors were cautious about August, September, and October, and those were 3 very strong up months.  The typical seasonal rally in November and December didn't happen.  Now there are only 7 trading days left in 2025, and we are starting to front run the Santa Claus rally.  It would not surprise me to see this Santa Claus rally stall out before the end of the year.  With so many expecting this year end rally, and with Nasdaq lagging the SPX, we are getting a similar setup to the end of 2021.  January could bring market weakness from delayed capital gains tax related selling, stock buyback blackout period, and more skepticism on AI capex.  

Holding off on putting shorts due to low volume, thin holiday trading for the next few days.  Starting next week, if we are above SPX 6900, I will be looking to put on shorts for January.  

The Fed Trap

We are in an era of fiscal dominance.  You wouldn't know it by how much market observers are obsessed about the Fed.  Lots of talk about the next Fed chair, with Kevin Hassett being the big favorite, but Trump trying to act like he hasn't decided and mentioned Kevin Warsh as the other possibility on Friday.  The excitement over the latest FOMC meeting, where investors were expecting a hawkish cut, but it didn't turn out to be as hawkish as they expected.  It wasn't jumbo shrimp this time.  

People are still following the monetary policy playbook from the 1970s to the 2010s.  This is a different era of monetary policy.  Back then, private debt was the dominant driver of the economy.  Bank lending was the primary source of liquidity.  Now bank lending has taken a back seat to the federal government, which is now the driver.  

What we saw on Wednesday, Thursday, and Friday after the FOMC meeting will be repeated many times over the next couple of years.  You get a rally on optimism that the Fed is riding to the rescue, being dovish, and then a letdown when reality takes over.  Fiscal dominance means fiscal policy drives economic growth, not monetary policy.  The US public debt to GDP ratio is around 120%.  Back as recently as 2007, it was around 60%.  So the debt to GDP ratio has doubled in less than 20 years.  That is what happens when government spending gets out of control, when taxes are cut, instead of being raised.  Politicians don't care about deficits, because the public doesn't care.  The public loves those stimmy checks, tax cuts, child tax credits, Obamacare subsidies, Social Security and Medicare, and government pork for this and that.  Of course, the public doesn't like inflation, but they can't put two and two together.  They want the stimmies but don't want the inflation.  

When government debt dominates the bond market, lower short term rates actually can be a reduction in stimulus, as government interest payments go down, lowering the amount of interest income going out to the public.  Sure, some private borrowers tied to short end rates will have lower interest expense, but that is more than offset by private borrowers who borrow long term, which is less tied to short term interest rates and more tied to long term inflation and fiscal policy.  Loose fiscal policy keeps long end yields elevated.  That's why even after the Fed has cut rates from 5.25% to 3.50% over the past 15 months, 30 year yields have gone much higher.  At 120% of public debt to GDP, public borrowing is more important than private borrowing.  Lower interest rates reduce the fiscal deficit.  A reduction in the fiscal deficit slow downs the economy.  That's why these rallies based on the Fed being dovish will be faded as the economy weakens, despite lower and lower Fed funds rates.  

The other important events beside the FOMC was the ORCL and AVGO earnings reports.  They both sold off big after their earnings announcements, on fears of a slowdown in AI capex.  We are slowly going from AI capex being loved no matter what, to AI capex being a boondoggle money pit.  Clearly ORCL has been put in the penalty box, and the market is skeptical about all the investment that its making in AI data centers.  META is heading towards that penalty box, but not quite in just yet.  Just the fact that the market is now punishing debt financed AI capex means these hyperscalers will be more reluctant to just keep growing their capex with regards for future returns.  That ends up hurting NVDA, AVGO, and the hardware/chip companies more than the AI spenders.  

On investor positioning, without COT data, we need to rely more on prime broker data.  GS Prime broker data shows hedge funds slowly increasing their net long equity positions, now up to February levels, before the tariff panic.  

So we have hedge funds with high net equity exposure, and as we know, retail is heavily weighted towards stocks as well, being the biggest net buyers of equities, more than hedge funds and institutions.  Looking at the cumulative equity ETFs inflows for the past few years, the rate at which investors are piling in is increasing, now at a rate that is 4 times greater than in 2022.  That is what happens when investors chase performance, and get complacent.  When investors are heavily long, complacent, and valuations are high, the marekt is vulnerable to a sharp correction at anytime.  

You are starting to see that complacency show up in the options market, with the ISEE index of calls to puts opened back towards high levels.  It looks like a dovish Powell was enough to get investors very optimistic again, even as the Nasdaq lags the SPX, usually a bad sign for the market.

 

We are beginning to see signs that this rally off the November 21 low is running out of gas, with the sudden selling on Friday coming out of nowhere, with AI related stocks lagging badly, and investors going into defensive sectors.  Last week, consumper staples and health care were at the top weekly performers, with info tech at the bottom by a mile.  That's not a market that I want to be long, even if we are near year end with positive seasonal forces coming up in about a week.  

 

I think we are setting up for a good shorting opportunity at year end, with the Nasdaq lagging, with the most important segment of the market, AI, trading the weakest.  Add to that the heavy long positioning in both retail and hedge funds, and you have an environment ripe for a correction.  We should be getting the Supreme Court decision on tariffs any day now, and that could be a short term positive catalyst for stocks when Trump tariffs are deemed illegal, but it is somewhat expected (76% odds on Kalshi).  Not bearish for the next 2 weeks due to the likely delay of profit taking into January for capital gains tax purposes.  But that sets up for a weak January.  A Santa Claus rally after December triple witching opex would set up a good entry point for shorts going into January.  

Back to Boring

The SPX gained 21 points last week, going from 6849 to 6870, while trading in a 96 point range for the week.  That's less than 1.5% for a week of trading.  By comparison, the SPX's range on November 20, the day after NVDA earnings was 236 points, which is 3.5% for one day.  With volatility going down so fast, the VIX is getting crushed.  It closed at 26.42 on Nov. 20.  On Dec. 5, it closed at 15.41.  Whenever the VIX is going down this fast, the opportunities go away and its usually just best to sit and wait.   

You finally got the dead cat bounce in bitcoin, all the way to 94K last week, but the bounce has been fading .  Bitcoin continues to trade heavy, and it being one of the best indicators of risk appetite, is a bearish factor.  BofA client flows show retail being net sellers for the past 4 weeks, a big change from their behavior during past dips, and also the past 52 weeks, where they have been the biggest net buyers.  

Hedge funds continue to show that they don't believe in this market, as they quickly went back to selling stocks after being heavy buyers during the weakness in November.  CTAs and vol target funds sharply reduced equity exposure in November, and have only slightly bought back some of what they sold.  DBMF, the biggest trend following ETF, shows a much smaller S&P 500 position now than what it was during June through October.  Those systematic funds slowly adding back long exposure is supportive for stocks in the short term.

Big picture, retail investors are very heavily allocated to stocks.  They've been buying aggressively since mid 2024. Recent activity seems to indicate that they are close to saturation.  Their stock allocation is the highest since 2021.  There is a lot of downside when this bull market ends.  Its just a matter of how long the topping process takes.  Best guess is that it started in late October, and the process will last for 5 to 6 months.  Bitcoin seems to be acting like a canary in the coalmine for the stock market.

There are mixed signals out there.  Sold the remaining longs last week, and now on the sidelines.  I don't see much of an edge at current levels.  The November pullback shook out a decent amount of weak hands, with put volumes going up and retail investors selling. That shake out could be enough to sustain a rally into the year end.  On the other hand, bitcoin is trading very weak relative to the SPX, and retail investors seem to be low on ammo, with many retail favorite stocks much closer to their November lows than their October highs.  

The most likely scenario is that we get a grind higher to the end of the year, making a marginal new all time high (SPX 6950-7000).  Then I would expect a selloff in January from a mix of delayed capital gains related selling, and a lack of bullish catalysts.  If the Supreme Court doesn't make a decision on Trump tariffs by year end, that would make it trickier to short in January, as that is probably the biggest positive catalyst left for this market.  But I would expect the Supreme Court to make their decision this month, because delaying it just creates a bigger headache unwinding and refunding the tariffs.  

FOMC is the big event this week, but also have AVGO and ORCL earnings which will be a good barometer for risk appetite in AI related names.  A hawkish 25 bps cut is mostly priced in.  I expect Powell to do what he usually does, which is talk about data dependency, be mealy mouth and non-committal.  It is absurd to talk about a hawkish rate cut.  Its like jumbo shrimp.  Forward guidance is a joke.  I expect the market to see through any hawkish tone, realizing that they got another 25 bps cut, and steepen the yield curve and probably rally stocks.  Not a high conviction view, however.

It is interesting to see 10 year yields go up last week even though you had rumors that Kevin Hassett is likely the next Fed chair, and you had weak jobs data (ADP, Challenger).  It appears the bond market is seeing through the weakness and expecting a rebound in the economy in coming months.  Also, overseas yields on the long end in Europe and Asia is putting some pressure on long bonds in the US.  All else being equal, higher yields is bad for stocks.  But that may be offset by the coming OBBA Trump stimmies in the first half of 2026.  Overall, not much to do here.  Watching and waiting. 

Retail Saving the World

Retail investor opinions on the stock market have changed dramatically over the past 20 years.  In the early years of the bull market that started in 2009, most of the population didn't want anything to do with stocks.  Daytrading was dead.  Only the hardcore traders and investors were around.  Then as the market kept rising, they slowly crawled back into the market feeling FOMO starting around 2017.  And it went into overdrive after the Covid money spew and lockdowns gave retail investors the time and ammo to go wild in the stock market.  The rest is history.  

Its been a retail driven market since 2020.  They have only gained in importance as they continue to allocate more of their assets into stocks, and out of bonds and cash.  Retail investors will determine what happens to the stock market in the next 1-2 years.  Hedge funds are no longer the market movers.  The baton has been passed to retail.  

In the early part of the bull market in the 2010s, it was corporate stock buybacks that were providing the endless bid for the SPX.  That trend reached a peak in 2024, and has come down as more corporate cash flows go towards AI capex and less towards buybacks.  Ironically, the popping of the AI bubble and a drastic reduction in AI capex could result in a strong rebound in stock buybacks, which would soften the blow of the AI bubble popping.   

Over the past 12 months, private clients have been buying stocks, while institutions and hedge funds have been selling. 

But on November opex week, from November 17 to 21, retail investors broke from their trend of buying the dip and sold into the weakness.  Looking at how retail favorite stocks and bitcoin massively underperformed in November, it looks like retail investors are running low on dry powder to buy more stocks.  In a turn of the tables, it was hedge funds and institutions buying the dip, as retail sold into the hole.  

Foreign investors have been a big source of the retail buying demand for US stocks.  Looking at the below chart, foreign investors have had a knack for buying heavily before bear markets.  See 2000, 2007, and 2021.  They have bought huge over the past 12 months, buying into the US exceptionalism story.  Not a good sign for the future of this bull market.  

History doesn't repeat, but it rhymes.  2025 is rhyming with 2000.  With 2021.  Stock buybacks are decreasing, while stock prices are higher as hyperscalers reduce buybacks to spend on AI.  The corporate buyback bid is weaker than earlier in this bull market.  

The bull market is now dependent on continued retail investor flows into stocks even as they hold all-time high asset allocations in US equities.  Retail investor behavior this year is one of FOMO + saturation.  Those who want to buy into US stocks have mostly done so.  And they have gone in heavy, leaving them with little dry powder.  The Reddit crowd brags about having diamond hands.  But the big down move in bitcoin, along with recent ETF outflows show that's all talk.  As most traders know, the bigger your position, the weaker your hand. 

Retail investors are holding large asset allocations in equities/crypto with limited dry powder to buy more.  This provides a simple game plan in the coming months.  Short retail favorite stocks.  In the large cap space, here is a look at what retail investors have bought the most over the past 12 months:

 

As expected, NVDA and TSLA lead the pack in cumulative retail purchases over the past 12 months.  Those are 2 good stocks to short in 2026.  Of course, outside of the Mag7, there are plenty of other retail favorites out there that will have much more beta to the market.  Like PLTR, MSTR, BMNR, IONQ, RGTI, OKLO, etc.  Ape Wisdom is a good site which shows the trending stocks on Reddit.  It gives you a good idea of what retail is talking about.   

Sold some of the longs bought during November opex week but still holding about half, looking for more upside.  SPX is getting closer to where the buying should slow down.  But the strength has been surprising and greater than expected, which means it probably goes higher than expected.  SPX 6900 is possible sometime in December.  In hindsight, it looks like we got the panicky bottom after the sell the news reaction to the NVDA earnings beat.  So many traders have been taught that good news, bad price action is bearish. That kind of  thinking probably exacerbated the selling on Thursday and Friday, causing weak handed retail traders to throw in the towel.  

We have a big gap down as there is a Thanksgiving holiday hangover.  However, the strength off the November 21 bottom keeps me holding some longs looking for a bit more follow through buying.  It will get choppier as the fear has subsided quite a bit, so looking to sell remaining longs soon.  Also, the continuing relative weakness of bitcoin is a bit worrisome, although most of those negative effects should be behind us.  There are some positive catalysts remaining such as the Supreme Court decision on tariffs and Trump's pick for Fed chair.  So I'm reluctant to put on shorts before either of those news events come out.  

Bitcoin Led Market

Bitcoin is the talk of the town.  Saylor is still pumping bitcoin.  Its probably been the most hyped up thing since Trump got elected, so you know there are a ton of bagholders in it right now. A ton.  That explains why its trading so heavy even with the SPX down less than 5% from all time highs.  Bitcoin has dropped 30% from its all time highs.  It underperformance vs Nasdaq YTD continues.  

BTCUSD vs Nasdaq

When the market is going up, all they do is talk about the big cap stocks that are going up the most. When the market is going down, all they do is talk about the big cap stocks that are going down the most.  Bitcoin has joined the pantheon of the Mag7 stocks in terms of most talked about financial asset.

Now that bitcoin ETFs have gathered a ton of assets under management, it starts to act more like a highly volatile, big cap stock.  It also increases its correlation to the stock market, which was already high to begin with.  Its only gone higher since IBIT came out.  You can put bitcoin in the meme asset bucket along with the meme stocks.  It has no intrinsic value, like the meme stocks.  The reason meme stocks seem to always be overvalued with bad fundamentals is because stocks with reasonable valuations are usually not volatile.  That is the number 1 requirement to become a meme stock.  Volatility.  The number 2 requirement is strong historical performance.  This is necessary because retail investors are great at extrapolating past performance into the future.  So anything that's volatile and performed well over the past 3 to 5 years could become a meme stock/asset.  The most recent members of the meme asset family are gold and silver.  That means that 1. gold and silver will remain volatile until it loses it meme status.  2. gold and silver are likely to underperform a 60/40 stock bond portfolio over the next 5 years.  

The investors that are getting hurt the most right now are retail investors.  Institutions aren't doing great lately, with their overweight to the Mag 7, but they hold relatively little bitcoin, or meme stocks so they are not doing too bad.  Retail investors are the ones that are enamored with bitcoin.  Its retail investors who have the get rich quick mentality, buying bitcoin, ether, crypto treasury stocks, meme stocks, and call options on big cap AI names and their favorite meme assets.  Those have all gotten crushed.  

 

Institutional investors on the other hand have a keep my job mentality, which means being closet indexers, sticking with megacap tech, and holding little cash in a bull market so that they don't underperform.  Cash balances are now down to 1.2% of total assets at mutual funds.  

Here is the latest look at performance of stocks with most call volume vs Russell 3000.  This is a window into how retail investors are performing vs the SPX.  As you can see, its been straight down since the spike higher in October, now down towards the tariff tantrum lows in April.  Easy come, easy go.  Most retail investors are hurting right now.  They are in a similar position to the immediate aftermath of the blowoff top in March 2000.  So they are probably feeling similar to retail investors back in April 2000.  

 

Retail investors are driving this ship.  It is quite the change from post GFC environment, when retail investors were absent, and only institutions were relevant.  Now its institutions that are reacting to the moves caused by retail.  Its the tail wagging the dog.  

You have to put yourself in retail investors' shoes to understand the movements of this market.  As a whole, retail investors like buying dips, and it has worked over the past few years. But they also like selling the rips.  But they don't like selling for a loss.  This makes it likely that the first few dips get bought, as retail deploys the free cash they have left, like they have been during this selloff.  But with dips becoming more frequent, they run out of that dry powder to keep buying the dip.  I don't believe they've completely run out of dry powder, but they are running low on ammo.  

With so much retail underwater and looking to bail out on rallies and at break even, previous support levels, high volume nodes where lots of retail investors were buying the dip, are where they will sell the rips.  Previous dip buying support levels are now sell the rip resistance levels.  Right now around SPX 6690-6720.  

 

Hedge funds have been much less bullish than retail during the April to October rally.  They haven't bought into the bullish story lines about AI.  In this month's selloff, CTAs and discretionary funds have been reducing equity exposure, putting them towards neutral to slightly underweight.  Unlike 2022, it won't be the hedge funds panic selling into the weakness in the next bear market.  They are playing it conservatively this time around.  The next bear market will be led by retail investors selling.

We've seen a dramatic reduction in call volumes relative to puts.  The ISEE index, a ratio measuring calls vs puts has gone down a lot over the past few weeks.  Put/call ratios are getting towards levels where you see intermediate term lows in a bull market.  If its a bear market, put/call ratios can get much higher than this.  But the base case is we're in a sideways market that is neither bull or bear.  

 

There has been extremely elevated insider selling activity over the past few months, higher than we've seen over the past 25 years, according to the below data.  This confirms my suspicions that retail is absorbing supply from smart money investors that are selling into the high prices.  

 

All the bearish talk about the Hindenburg Omens in late October/early November were correct.  Its usually not the case that when a lot of investors point out a bearish technical indicator, it actually follows through on the downside.  Hindenburg Omens don't always preclude bear markets, but there were a large cluster of Hindenburg Omens in November 2021, a couple of months before the start of a bear market.  And there was a huge mass of Hindenburg Omen signals that showed up in 1999 and 2000.  The internal divergence signals are carrying some weight this time, meaning that it could be a signal of a more vicious down move in a few months.  

 

It was quite a roller coaster ride last week.  NVDA earnings were a huge fake out, something that your rarely see of that magnitude.  This market is no longer that boring market that you saw from July to October.  There are a lot of weak hands out there and they have been exposed.  However, we've had a tremendously strong rally from the April lows to the October highs, with very little opportunity for dip buyers to buy.  That means that you have a fair number of investors who are looking to buy weakness that they didn't see for most of the past 6 months.  Those dip buyers should provide a floor for the time being.  But with each successive dip, it will get more dangerous to keep going back to that well of buying weakness.  

Bought the dips on Wednesday and Friday.  These are just trading longs which I intend to sell on any rips towards SPX 6700.  Initially, the plan was to play for a bigger move higher, but I would rather play for more choppy conditions and free up capital to buy the dip again if we go right back down.  It was notable that the rally on Friday was concentrated in the Russell 2000, which easily outperformed the Nasdaq and SPX.  The Nasdaq was the weakest of the 3 indices, which is not a good sign for a long term bottom.  Instead of a V bottom, we may get a U bottom this time around.  Based on the high volume selling and opex related weakness, it does appear that Friday was the low of this move, but it wouldn't surprise me if we revisit that support zone soon.  

I continue to believe that its a choppy range bound market, which favors fading moves at the edges of the range.  The bottom end of the range looks to have been set on Friday, around SPX 6530.  The top end of the range looks to be around 6900, set post tariff deal in late October.  That range will provide a rough guide to navigating the remainder of the year.  Its too early and not enough dips have happened to start a bear market.  If we get some more chop for the rest of the year, that could set up a nasty January when traders look forward to what happens in 2026.