Iron Chin

This stock market keeps taking big blows and keeps on moving forward like a zombie.  Its got an iron chin.  You have to be impressed by the price action relative to the news flow.  

We came into last week with worries about reciprocal tariffs, which Trump warned about on Friday, Feb. 7, leading to a weak close.  That little news bomb took the SPX down about 1% in 2 hours.  Then the market grinded higher to recover most of those losses into the CPI number on Wednesday, which came in hot. The CPI  took the SPX down about 1% over a few minutes.  Then the market grinded higher to recover all those losses and managed to put on gains after the reciprocal tariffs announcement was more bark than bite.  

If you are selling stocks based on tariff fears, you are selling low.  There is no edge in chasing news based moves unless its for quick daytrades.  Those taking on positional shorts because of these little bits of "scary" news are going to be punished over the long run.  You always have to consider the price action relative to the news, and whether you are coming off of a purge or a pullback, or coming off of a period of complacency.  The pullback from mid December to mid January was lengthy enough for a strong uptrend to reset positioning to more neutral levels.  That gave the market some "immunity" to the bad news wave that you had over the past few weeks, starting with DeepSeek, and more recently, the tariffs.  

At the current juncture, despite being at all time highs, it doesn't feel like there is much excitement out there.  That make its tricky to try to time a short here.  Intuitively, it feels like a bear trap to short strength into a string of bad news that came out: DeepSeek, tariffs, and hotter inflation.  The resilience of this stock market doesn't make me super bullish.  It does make me reluctant to put on shorts though.  Cash seems like a good place to be right now, waiting for the bulls to push the market higher to set up a short opportunity.  

The COT data as of February 11 showed very little movement among asset managers.  They still are not rebuilding their long positioning that was rapidly reduced in December and January.  Their positioning is still a large net long, but not extreme like it was late last year.  Not much to read into at current levels.  Also, leveraged funds still have a large net short position, which usually needs to start going down to more neutral levels to get a steady downtrend going.  

The market feels like its quieting down from the spastic sharp down moves and steady grind higher recoveries over the past 2 weeks.  I expect the SPX volatility to continue to contract as the range trade narrows, leading to an explosion of volatility later in the year.  We are coiling up for a big move down sometime in the next 6 months.  You can sense that being long US stocks is becoming more of a sucker's game, as most investors now admit that stocks are overvalued, but they have to keep up with the indexes to keep their jobs, so they have to stay fully invested.  But you can feel their reluctance investing at these levels.  Its similar to what you saw in the middle of 2018.  The market did grind higher into the fall, and then went into a vicious downtrend that ended with a capitulation into year end.  I can picture a similar move playing out this year.  

We got an interesting move in bonds last week, as the CPI torpedoed bonds all in one day, but it quickly recovered those losses.  I hate to compare this bond market to those pre-2020, when inflation was never a true concern.  But it has the feel of 2014, when the bond market would shake off hot jobs numbers, regaining losses from strong economic news quite quickly.  It also happened to be the year that crude oil was slowly weakening.  The lack of strength in WTI crude is a positive sign for bonds, as you can't get people really scared about inflation until you see oil prices really go higher.  That's not happening here.  

Still maintain the small long SPX position, but I'll look to start selling this week.  The risk/reward seems about even here.  Short term neutral to slightly bullish.  Long term bearish.  

Being Desperate

“Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.” - Bill Gates, Tony Robbins,.....

The market will seek out your weaknesses, find them, and test them.  One of those weaknesses is desperation.  Especially for full time traders.  When you have to make money, then you are trading from a weakened position.  Its easier to succeed when you want to make money, but don't need to make money.  

I've noticed that I've usually traded better when I've been winning than when I've been losing.  Its because losses affect your mindset differently than wins.  After losses, most traders, including myself, want to recover those losses quickly to get rid of the negative emotions that come from losing.  The bigger the loss, the stronger the urge to recover losses quickly.  This means trading from a desperate position, which is a position of weakness.  

After wins, most traders are not in a hurry to get into the next trade, because they already have a feeling of satisfaction from recent wins.  The bigger the wins, the stronger the feeling of satisfaction and the less urge to rush into the next trade.  This is trading from a position of strength, with no desperation.  

When you are not desperate, you don't take marginal or negative EV trades.  You don't sacrifice the optionality that cash provides by being stuck in those mediocre to bad trades.  When you have free cash, you have the option to take advantage of good opportunities that come along.  Just by not being a desperate trader, you can take advantage of more good opportunities because you aren't stuck in mediocre to bad trades.  

This is why I've noticed a streakiness to the results of not only my trading, but other peoples' trading.  The psychological aspect of this game is extremely important.  But since its so vague, and hard to quantify, it is underestimated and often ignored.  When I first started in this business, I gave little thought to psychology and emotions and mind control.  Its only after several years of experience and observation that you realize how psychology is such a huge part of the game.  

Becoming a full time trader is hard because of the need to make money.  Trying to make money in the markets is similar to trying to get a loan at the bank.  When you have enough money and don't need to make money, then it becomes easier to make money.  When you try to get a loan at the bank, its much easier to get a loan when you have collateral, i.e. real estate, to put up to get a loan.  If you have nothing, the bank doesn't want to lend to you.  If you have a lot, the bank will want to lend to you.  

If you really need to make money from trading, its hard to not  be desperate.  When you have lots of expenses, and no income except from trading, its nearly impossible to trick your mind into thinking from a position of strength when you are in a position of weakness.  Its why those that do make it as full time traders are mostly young traders, who don't have families, who have fewer expenses, and less to lose when blowing up.  The nothing to lose mentality actually can reduce the desperation of having to win.  And if you add risk management to that, then you have a chance to make it in the long run.  

Nothing noteworthy in the COT data or the put/call ratios last week.  Asset managers made small reductions in net long positions in index futures, and dealers reduced some of their net short positions.  Bond yields have stabilized around 4.5%, which is good news for risk asset holders.  It looks like we got the fear based bottom in both bonds and stocks in January after the hotter than expected NFP number along with the pre Trump inauguration jitters on tariffs.  

Last week began with tariff news at the start of the week, and ended with tariff news at the end of the weak.  These headlines ignite 1-2% moves, but they don't last.  The more often you get these headlines, and the more predictable they become, the less they will move the markets.  It appears a lot of selling was front run on Friday afternoon ahead of the potential announcement of reciprocal tariffs.  If tariffs are the worsㅅ thing that can happen to this market, then that's not really bad news.  Tariffs are easily taken off, and their effects are overrated.  Especially if you get all those tax cuts that Trump is looking for.  

Still holding a small long position, not looking to make any big moves here, in this narrowing range.  Although if I didn't have any position, would be taking a long position on any tariff fear induced dips this week.   

Lowering Expectations

Once again, the market gets kneecapped by news, this time, something that was kind of expected.  Everyone knew that tariffs were coming, just not sure when and how much.  The reaction to the news is a bit surprising, since this wasn't completely unexpected.  It shows you how much optimism was priced into the market after the Trump win, as everyone was talking about the good things coming, and not much about the potential bad things coming.   We are still working that off, with these violent gap down moves, showing you how bad it is to be long stocks when there is so much enthusiasm.  

Its been 1.5 months since the beginning of the real shake out, starting from the December FOMC meeting.  Usually, these shake outs and pullbacks last about a month.  But this one has been so choppy with big moves in both directions, that its not a typical pullback.  Its more of an off/on selloff that would normally be completed in less than a month, but with the intermittent face ripper rallies, you've not been able to get a real purge of the saturated positioning that was present a couple of months ago.  

With this latest piece of "bad" news, we are getting closer to the end of this choppy correction.  This is not a stable condition for the market, to have these huge gap downs and then equally huge face ripper rallies right afterwards.  Eventually you either blast higher and resume the uptrend, or the market keeps going lower, really flushing out the weak hands and scaring investors.  

From an economic viewpoint, there should still be an initial boost from the Trump win with more investment spending and looser credit and regulatory conditions at the banks in the next few months.  It makes it likely that you will have at least a bounce from these selloffs, or more likely, a typical resumption of the uptrend after a corrective period.  

Tariffs are overrated and overhyped.  Because they are unpopular, they are unlikely to stay on for the long term.  Most of the US population doesn't like higher prices for imported goods.  Most of the US population won't benefit from any trade protection coming from tariffs.  And most of the US population doesn't like lower stock prices that are coming from tariffs.  Since most of these imported goods can't be substituted by goods produced in the US, it just ends up being a tax on consumption and production.  From past history, Trump is likely to declare victory over his tariff strategy after he gets some token concessions.  

Its actually a better thing for the market to have the tariffs come out from the beginning, in order to lower expectations for the coming quarters for economic growth.  The expectations were a bit too lofty going into 2025, with irrational expectations of strong growth coming from de-regulation and future tax cuts, with very little concrete evidence.  Now investors are slowly coming back to reality, with the DeepSeek news and now tariffs driving away a lot of that unbridled enthusiasm, and keeping the trend on a more sustainable path.  

The string of big gap downs and bad news is actually a bad thing for the bears in the short to intermediate term.  There was a risk that if you didn't get any bad news, and the market kept going higher after the bottom in mid January, you could have had a nasty blowoff top made in February/March, leading to a much bigger correction.  Since the SPX has been contained below 6125 on the rallies, it means that the selloffs don't have as much fuel, and won't be as long lasting.  You just haven't had enough time for the weak hands to build up big long positions again, like they did in early December.  

The COT data as of last Tuesday, didn't show any big changes in positioning, with asset managers adding a small amount to their net long positions.  Looking at the ISEE index, you can see that the enthusiasm has been pared back to more normal levels of call buying.  

The excessive optimism has been pared down and you are back to more neutral levels of sentiment among investors.  You can see that in the NAAIM exposure survey.

The bond market has stabilized closer to 4.50% after selling off to 4.80% 10 year yields.  This should help stocks from going down much further.  The bond market doesn't seem to be fazed by tariffs, which shows that speculative positioning is much lighter and you probably have CTAs short bonds here, which adds potential short covering fuel for bonds if inflation isn't as sticky as many expect for 2025.  

Still holding the small long position from last Monday, I may add to the position if there is a further selloff from the current levels in the coming days.  Leaning bullish, but not a great risk/reward so keeping positions small.  

DeepSeek News Bomb

Will DeepSeek be the straw that broke the camel's back?  We'll find out within the next few weeks, but my view is that this is another hyped up story that ends up being ignored in a couple of weeks.  Most investors think that AI is the next big thing.  They think it will be a game changer that makes a big chunk of human labor obsolete and drive huge productivity gains.  In theory, if you combine AI with advanced robotics, that could happen.  If it was so easy and obvious, why hasn't it been done already?  Robots have been around for a long time.  So has AI.  Faster GPUs are what's making this all possible?  Or even DeepSeek?  

I admit that I am skeptical about lots of new techologies that get hyped up.  One that I was definitely not skeptical about from the start was the internet.  It was obvious from the get go how huge it would be.  Most could feel the difference right away.  There was no abstract theories or views of the future that was needed to get people to believe.  Just being able to send email and browse the internet with Netscape was enough to get people to see the immense possibilities.  

With AI, you have to be believe in the unknowable future, an abstract, theoretical view of how AI will change people's lives.  Its mostly theory, currently with limited practical uses that are expansive.  ChatGPT and making AI generated videos is nice, but its not a sweeping technology that changes the way people communicate and get information.  They talk about all the productivity enhancements from AI, but if so, why aren't more people getting fired from the big tech companies that are getting this great AI productivity boost?  Higher productivity means less workers needed.  

The reaction to the news is surprising, given how much bonds are up.  It definitely feels like a lot of weak hands got long last week after the inauguration, so this is probably some stops getting hit, as well some dealer delta hedging overnight as IV goes up as prices go down.  Moves like this does show how much more fragile and dangerous this market.  When you have so much money that's flowed into US stocks, many by late to the party, less informed weaker hands, you can get these big gyrations out of the blue.  It speaks to the saturation of long positioning among investors.  There is no other way to explain these sudden drops in the market, like what you saw at the last FOMC meeting, and now again overnight on DeepSeek fears.  

There were no big changes in the COT data as of Tuesday, January 21.  Asset managers have aggressively reduced net longs, but from a historical view, its still a big net long position.  The pullback from mid December to mid January did purge some overextended long positioning, so the market now is not as dangerous as it was in December.  But big picture, you will get these big one day drops more often going forward because of the higher valuations.  

Based on the price action you saw overnight, it is definitely weaker than it should be given the news.  So whenever I see a huge move like this that doesn't make sense, I prefer to wait and let the dust settle before making any big moves.  I do believe its a shakeout type of move that will eventually reverse, so its at least worth taking a small position looking for a bounce.  I put on a small long in the overnight session, looking to hold for several days.  If we didn't have such a big up move over the past 2 weeks, I would be considering a bigger position.  But we're not at great levels for longs, so only going with a small position.  

Easy E Market

US equity investors have had a wonderful ride over the past 16 years.  You can really say that there was only one real bear market, the one from January to October of 2022.  The Covid crash went down over 30% in February and March 2020, but lasted less than 2 months from top to bottom.  And it basically went straight up from the bottom.  That's not a real bear market.  So one real bear market over 16 years, which lasted just 9 months, and then another rocket ride higher immediately afterwards in 2023 and 2024, going up over 70% in 2 years.  

This market is straight outta Compton, its an Easy E market.  Being a passive investor in stocks, just buying index funds, shouldn't be this easy.  Stock investing was never meant to be this painless.  The reason you get higher returns in equities over bonds is because there is more risk, due to be being lower in the capital structure, and thus more volatility.  But it seems as if bonds are now more risky than stocks!  

These kind of unusual, one way markets, with valuations reaching historical extremes, have not had happy endings.  1929. 1973. 2000.  2021.  All of those market tops (except 2021, which was a plain liquidity and stimmy bubble) were characterized by a select few group of large cap stocks leading the market higher.  In 2024, the small and mid cap stocks continued to lag the large cap names, and for good reason.  The earnings growth has been concentrated in the large cap stocks, in particular, big cap tech.  Those who are looking for a mean reversion towards small cap stocks are ignoring the earnings fundamentals of those smaller companies.  They have lower profit margins, many are unprofitable, and many are in decaying businesses with low barriers to entry and lots of overseas competition.  

More and more, capitalism is becoming more crony and concentrated, with regulatory capture and lack of antitrust enforcement leading to more oligopolies and monopolies.  This is unfavorable for smaller companies that have to compete against much more profitable and powerful companies, who can bully the smaller players.  Like Walmart using their buying power to squeeze their suppliers for lower prices.  Same goes for Facebook and Google squeezing their advertising customers for higher ad rates because there are no alternatives.  The larger companies expand their margins at the expense of the smaller companies and consumers, resulting in the rich getting richer, and the middle class and poor getting poorer.  

None of this changes with Trump back as President.  I don't expect much change at all despite all the optimism about tax cuts and deregulation.  Washington is a huge swamp, and there are tons of lobbyists and insiders who don't want change.  

The hype surrounding tariffs is overblown, just like it was in 2018 and 2019.  At least this time, it seems like most investors are seeing tariffs for what they really are, just a negotiating tool to try to coax better trade deals, not a long term strategy to increase US manufacturing.  The problem for Trump is that China and the other major US trading partners know this and will go to the brink, because they know that Trump won't sacrifice the US stock market and the US economy to try to win trade deals.  

What is priced in, and expected by the majority of investors is an optimistic outcome for the US economy.  So even if there are no long term tariffs implemented, there is a lot of room for the US economy to disappoint.  I see very few discuss the implications of less immigration into the US, which is negative for growth.  In a low cost labor shortage situation that the US is in, less immigrants puts a constraint on growth, while also increasing wage inflation, which will hurt margins for businesses relying on cheap, immigrant labor.  

Due to an aging population and less population growth, economic growth will likely disappoint over the next 4 years.  Bonds should make a better investment than stocks during Trump's 2nd term, something that would surprise many.

The COT data for SPX futures shows some dramatic positioning changes among asset managers.  They have aggressively pared back their monster net long position, to now get to levels that were seen nearly a year ago.  All the build up of those longs from May to December 2024 have been liquidated.  

This is similar to the asset managers reducing their extreme net long positions in the 2nd half of 2021, even as the SPX was making higher highs and higher lows.  It appears that we reached a sentiment top in the market in early December, and while we likely reach new all time highs, it will be with less enthusiasm among the investor community.  That is actually a bearish sign, because all of the major tops over the past 25 years (2000, 2007, 2021) happened as optimism topped out months before prices topped.  There is probably a few more months left for the market to grind higher amidst waning numbers of bulls, based sheerly on momentum.  But once that momentum dries up, which it likely does sometime in the next 6 months, there is a lot of downside fuel with all the overvaluation and high US equity positioning among households and foreign investors.  

Last week we got the fake breakdown panic move under SPX 5800, which spring loaded the market to shoot up after the CPI came in softer.  It looks like the 1 month long pullback starting with the sharp FOMC day drop on December 18 is now over.  That is about standard course for choppy pullbacks in a bull market.  You rarely see more extended pullbacks in an uptrend like this, unless of course, the uptrend is over.  But that is not my base case.  Considering how much asset managers purged their SPX futures long positions, I would expect another spurt higher in the coming weeks.  

Unfortunately, I sold too early last week, expecting a short term pullback which never came.  I am looking to get back in the long side, in small size, if we get some retracement this week.  I am not sure I will be getting it, as this market now seems poised to make new all time highs within the next couple of weeks.  

Bond Rout Flashbacks

The market is getting a flashback to past bond routs seen in much of 2022, and fall of 2023.  This time, its happening despite inflation stabilizing around 3% and with the Fed no longer in its higher for longer stance.  Instead of being led by a weak short end with higher for longer fears, now its being led by the long end with Trump induced supply concerns about lots of coupon bond issuance, tariffs, and more tax cuts. 

I remember back in October 2023 when the 10 year was approaching 5%, Rick Santelli of CNBC suddenly went crazy and talked about 13% 10 year yields as if he was being time transported back into the early 1980s.  Yields topped out soon afterwards and went straight down for 2 months.  

While we don't have the Rick Santelli contrarian indicator this time around, I am getting similar vibes about investors' opinion on the bond market, without a lot of fundamental changes.  

Sure, Trump will threaten and probably slap on some tariffs, but that increase on prices on imported goods will be offset to some degree by less consumption in services and non-imported goods.  I would be more worried about a resurgence of inflation if China and the emerging markets were suddenly running hot, with commodity prices surging higher and the dollar much weaker.  I just don't see why anyone would get excited about the current inflation picture.

As for growth, I just don't see a sudden surge in the global or the US economy that would justify a big bond market selloff.  That strong nonfarm payrolls number doesn't tell you much.  You saw a bunch of hot nonfarm payrolls numbers in 2023 and they were wholesale revised in 2024.  The NFP data collection process is broken and its a dinosaur which doesn't give you an accurate picture.  Based on worker behavior, they are clearly less confident about the labor market, as you see much fewer job quits.  They all say that deregulation and Trump bump for the economy will increase growth in the US, but there is nothing concrete to those proclamations.  Its parroted commentary from the investor community that induces people to sell bonds.  

This particular bond selloff has less merit than the one you saw for much of 2022 and fall of 2023.  First, the Fed has actually cut 100 bps, so you have a yield curve that is upward sloping, which makes it more attractive and positive carry for leveraged funds to buy longer maturity Treasuries.  Second, Trump will be looking to replace Powell and appoint a much more dovish Fed chair for 2026, so its unlikely that you will see a selloff in bonds catalyzed by front end weakness like much of the past 2.5 years.  Third, with reverse repos outstanding down to much lower levels, the end of QT is coming sometime this year.  Lastly, the idea that tariffs are bad for bonds isn't proven, and its unlikely to be the case because tariffs are a tax on consumption, which will hurt growth, which is arguably the more important factor for bond prices than cost push inflation.   

That being said, I would prefer to buy stocks than bonds in the current environment because this belief that Trump policies are bad for the bond market can go on for several more weeks until its disproven later in the year.  

I just can't picture an end to this grand bull market in US stocks ending on yields going up.  The much more likely scenario is that growth and earnings disappoint, and you get a selloff in stocks based on growth fears, not inflation/higher yield fears.  

Back to the stock market.  The COT data as of 12/31/2024 shows asset managers purging more of their net long positioning, selling 57,000 more ES contracts to get down to a net long position last seen in early November, and early September, before the FOMC 50 bps rate cut and the Presidential election.  It reminds me of the asset managers reducing their large net long positions in the 2nd half of 2021, as the SPX was in the last innings of its rally.

You finally saw an increase in the put/call ratio on Thursday and Friday, as investors finally started buying puts.  ISEE index dropped down sharply last week, to levels last seen in October.  A lot of the froth has come out of the speculative names as well, especially the quantum stocks that got hammered last week.  

Last week was wild, and didn't get bulls much time to sell the rally, once again, even less time than the brief rally around Christmas.  Thus, I missed the graceful exit and unfortunately didn't cut losses on the way down.  I'm not holding a big position, but I don't intend to add to it as there could be one more move lower towards SPX 5700 on this down wave.  

Not much to do here, I will hold on to the long position, and ride it out here, I do expect a rally soon, and it could be a lasting bottom if you see some panic and capitulation this week.  

Coal in the Stocking

The Santa Claus rally, which is supposed to start on Christmas Eve and last until the 2nd trading day of January did not deliver on the hype.  The SPX ended up down during that period, only 0.5%, although it felt worse than it actually was.  The dips are sharp and scary when they happen, but shallow.  The 3 day post election rally from November 6 to 8 covered a range of SPX 5865 to 6012.  The market has traded mostly in that small range for the past 2 months.  Yet the VIX has gone from 14.94 on November 8, to 16.13 on January 3.  The market is hurriedly moving up and down in a range, but ultimately going nowhere.  

The speculation in volatile, momentum stocks remains hot.  There has not been a noticeable flush out of weak hands, even with that VIX spike above 28 after the December FOMC meeting.  Its been a listless back and forth movement that doesn't signify much.  While a lot of investors were caught off guard when there was no year end rally, it just shows you that the fast money was offsides, but it hasn't permeated to the larger, slower money.  

With the COT data delayed by 1 business day, you don't have futures positioning data that covers the post Christmas selloff.  The pre Christmas data that covered the big drop and recovery post FOMC showed asset managers with nearly the same net long position, although open interested dropped huge after the quarterly triple witching expiration.  It was mostly dealers covering shorts and hedge funds adding to shorts.  

It appears that the post Christmas selloff was traders and fast money investors front running the potential delayed capital gains tax related selling in January.  When too many investors look at the calendar to make their selling decisions, you have price insensitive flows that roll over bids with reckless abandon.  That's what you saw happen from December 27 to January 2.  With Friday's all day rally, it looks like the most eager, price insensitive sellers are mostly done.  

You happened to see a lot of the selling on the first trading day of 2025 concentrated in the biggest winners of 2024 like AAPL and TSLA.   It shows that there were a lot of investors just waiting for the calendar year to change to take profits in their big winners, in order to delay capital gains taxes.  Of course, they could do that by selling in February or March, but apparently the Fed's "hawkish" cut made them nervous and eager to sell as soon as possible in 2025.  

The selling in the big winners in early January is not a sign of a weak 2025.  What is a sign of a potential weak 2025 are the high equity allocations, excessive Trump fueled optimism about the US economy, and sky high valuations.  Add to that the bond market weakness, and you have a potentially explosive situation to the downside sometime this year.  

The vibes coming out of CNBC and Twitter is still a lot of complacency, but less bullish enthusiasm and much fewer calls for a melt up.  It is likely that we've reached the sentiment top for this bull market in early December.  That doesn't necessarily mean that we've reached a price top yet, but it does mean that upside is limited from current levels.  I would be surprised if the SPX went above 6400 this year.  In general, you need investors to get more bullish for prices to keep rising in perpetuity.  When investors are getting less bullish, prices can go up in the short and medium term, but not for the long term.  

The put/call ratios continue to show a lack of put buying and lots of call buying in individual names.  But the excessive call buying is gone. This supports the view that we're probably going to be stuck in this range.  

Missed the graceful exit during that brief Christmas rally, as I was expecting the market to give bulls more time to sell at the highs.  But alas, too many were trying to play for that Santa Claus rally and the exit was too narrow for everyone to get out at high prices.  I believe there will be a chance to exit more gracefully this week after most of the eager capital gains related profit takers have sold already.   Looking for a potential move back up to SPX 6050.  This time, I will be more quick to sell, as I do not want to be stuck holding the bag again on the next swift move lower, which likely will happen again this month.  

Volatility in December

Well that elevated quickly.  We went from SPX 5930 to 6049 over 3 trading days, in normally a slow time of year, and then gave back a huge chunk of the gains as there were no bids on Friday.  I don't like to make a big deal out of a couple of weeks, but the way the market is selling off is eerily similar to what happened in late 2021.  In 2021, despite a rising market, the VIX was regularly in the high teens, low 20s.  But this market has seen VIX in the low teens for most of the year, and realized vol has been low, until this month.  And its not as if the market is that much off the highs, we're around 2 percent off of all time highs, so its unusual to see VIX jump so much this month, in what should be a less volatile time of year. 

While we did get that low volume bounce last week, I wasn't able to capitalize on it.  The plan was to sell either last Friday or Monday of this week, expecting a grind higher for a few more days.  It is a change of character to see the market go down after a quick rally so soon after having flushed down only a few days prior.  Usually the market will linger near the highs for at least a few days after the sharp rally as the latecomers buy, but not this time. 

It show that saturated long positioning seems to be weighing on the up moves, and any small bit of concern among investors is enough to create sharp selling.  The move higher in yields seems to have dampened the risk taking psychology that was pervasive before the FOMC meeting.  You still see pockets of rampant speculation as retail investors chase momentum in small cap pumpers, but the move back under $100K for Bitcoin is a barometer of less risk appetite for the moment.  

On CNBC, the consensus view was that the low volume move lower was no big deal, and not to take too much meaning from a low volume, slow moving time of the year.  From past experience, I would take the opposite view.  The action in December is often a preview of things to come for the next year.  In December 2021, you saw a sudden rise in volatility and very weak breadth, a precursor to the market weakness to come in 2022.  In December 2014, you had quite a sharp pullback out of nowhere, and that was a prelude to a choppy and weaker 2015.  

There could be some selling in the next 2 trading days, as the last day of the year is actually not that bullish historically.  There could be some front running of capital gains tax related selling in early January, as well as late rebalancing flows looking to sell equities and buy bonds.  I do expect the bulls to come back in early January, so I don't expect really severe selling until after the Trump inauguration.  

The options market still shows a lot of call buying and over lack of put hedging among investors.  The ISEE index remains in nosebleed territory, and only briefly went down during that post FOMC selloff.  Its right back to where it was when there was hardly a worry in the world.  

ISEE Index

After the heavy selling in the bond market over the past few weeks, we're now at 10 year yields around 4.60%, which make it interesting for an intermediate term trade.  I will be looking to buy bonds early this week as the lack of bids seems to be year end liquidity related and I expect buyers to come back in January.  I am not so optimistic on the US economy as compared to the crowd, and think the Fed can quickly change their tune if you see lower inflation prints or a slightly weaker labor market.  

I don't think this market is strong enough to just come right back after just 1 day of selling.  There is no real support at this 5950-5970 level.  You need to get back down to the 5850-5900 zone to get more motivated buyers to step in.  While I am long, I will likely trim some of my position today to setup to buy lower and/or to buy bonds.  

The Power of Triple Witching

Everyone has blamed the selloff on a hawkish Fed even though they went through with another 25 bps rate cut.  If you look at the price action, it seems to make sense, but then you look at the elephant in the room, that no one notices.  Its the options market, and in particular the SPX, which controls a huge amount of the the market's total notional exposure.  This is especially pronounced during the 4 quarterly expirations coinciding with the futures expiration, well known as triple witching expiration.  The hedging and systematic positions that get built up are disproportionately focused on those 4 expirations in March, June, September, and December.  Of the 4, December is by far the biggest, which can often lead to large outsized moves around the quarterly expirations, when they are unexpected.  

Coming into the FOMC meeting last week, the market was grinding lower slow, but with very little volatility.  And with FOMC meeting days having a bullish bias all year, it appears a lot of hedgers decided to delay their annual rollover of put buys/calls sells for 2025 into the latter part of last week, after the FOMC.  Also a lot of fast money momentum traders were probably looking to exit late last week after what they thought would be the start of the Santa Claus rally.  Well when you have an elephant (SPX hedgers) try to exit along with a bunch of fast money bulls at the same time, you can get violent down moves like you saw last Wednesday.  

Last week's move doesn't change my outlook at all for 2025.  These sudden sharp drops are just a symptom of a market that is saturated with long positions, with few discretionary traders left to buy when there is a dip.  The vol control funds had gotten back to near max long positioning.  The biggest trend following ETF, DBMF, increased their SPX positioning to the largest of the year.  At last check, they are holding a $556 million long position in SPX futures, with a total net asset value of $1,237 million.  They are nearly 50 percent long their fund in SPX.  Not to mention they are long over $200 million in MSCI and MSCI emerging market futures, making them net long 62% equity index futures. That is a huge long position for them.  All of the systematic funds were back in the pool as of early last week.  It may be a different picture today, but I doubt it.  It takes most of these trading systems several weeks to go from net long to neutral, and a few weeks more to go from neutral to net short.  

Was it a coincidence that once the SPX quarterly options expired on Friday AM at the open, the market shot up over 100 points?  The CNBC Fast money crowd will credit the PCE and whatever Fed talk happened that day with the move, but it looks like the options market was a huge driver of the price action from Wednesday to Friday.  

The force that options are having in this market reminds me a lot of 2021, when you had rampant speculation in short term calls.  Just like the past 2 monthly options expirations, you had lots of selling around the options expiry.  A lot of it due to call selling from the speculators who don't have the funds to exercise their ITM options, thus being forced to sell before they expire.  You see a big drop in the open interest after these expirations, and with much more call activity than put activity, it leads to a lot of net deltas that come off the dealer's books, forcing them to sell their longs which they used to hedge their short call positions.  These options dynamics are a symptom of call options speculation run amok.  

By last Thursday, you did finally see the put activity increase as investors go nervous and the volatility increased.  The ISEE index plunged on Thursday and Friday, back to levels not seen since the Monday ahead of the 2024 election.  

While we don't have the COT data from Wednesday to Friday, we did see asset managers reduce their net long positions, although small specs remained heavy long. 

I would assume that the asset managers pared back a lot more of their long positions into the weakness from Wed. to Fri., as they are usually trend followers.  We'll know for sure in next week's COT report.  

Given the intense selling and prices getting close to 5800-5850 strong support, I did some buying of SPX on Thursday and Friday.  With the exaggerated moves due to opex and time-sensitive sellers last week, I expect that to setup for a Santa Claus rally this week.  We already saw part of that start on Friday as soon as those SPX AM options expired.  Looking for a further rally as we enter a very seasonally positive part of the year, along with big capital gains held by most investors.  These investors will likely to be very reluctant to sell for the remainder of the year, in order to delay their capital gains tax hit for 1 more year.  It probably means that whatever selling that was delayed for tax reasons will likely hit the market hard in early January.  

Big picture, I remain bearish on stocks, as there are numerous signs of long positioning being saturated, and with asset managers unwilling or unable to increase their net long positions much further from here.  Volume will go down a lot this week, and low volume markets usually favor the long side.  The urgent sellers did their selling late last week, so that should give room for a healthy bounce this week, to potential resistance around 6050-6090. 

Nasdaq is the Leader

The Nasdaq massively outperformed both the SPX and the Russell 2000 last week.  On Twitter, it seems like the paper napkin technicians are suddenly concerned about the weakening breadth out there.  In the distant past, until 2018, breadth was a good predictor of future broader market weakness.  You would see breadth weaken as the market grinded higher, and that would be a reliable signal of an impending pullback.  But things have changed since 2018.  Weak breadth no longer provides a reliable signal.  

Instead, it is strong breadth, with Russell 2000 outperformance, which has become a more reliable signal of an impending pullback.  Russell 2000 has become a barometer of investor exuberance.  Whenever investors feel super bullish, they gravitate towards the more speculative Russell 2000 for the extra juice.  The surge higher in Russell 2000 as the Nasdaq 100 lagged the SPX and Russell 2000 foreshadowed the local top in July.

Nasdaq 100/Russell 2000 Price Ratio

As you can see in the ratio chart above, the QQQ/IWM ratio topped out a few days before the SPX made its top in mid July and early September.  Those happen to be the only 200+ point pullbacks in the past 6 months. 

When the Nasdaq is outperforming the SPX, it is usually bullish for the market.  When the Nasdaq is lagging, it is usually bearish for the market.  What you saw in October and November is an anomaly.  The Nasdaq was noticeably lagging the SPX during that time and the market kept going higher.  You can credit the Trump hype effect for that phenomena.   Investors incorrectly viewed a Trump presidency as being bearish for tech stocks, and bullish for small caps.  Fast money piled into small caps after the Trump win, only to sell when they realized that there were no greater fools willing to pay a higher price for small caps.  Small caps are merely trading vehicles, not something that investors believe in for a long term investment.  They have underperformed large caps because their earnings have underperformed.  The Russell 2000 is merely a sideshow.  The total market cap of the Russell 2000 is about the same as the market cap of AAPL.  That shows you how insignificant the Russell 2000 is to the big picture.  

So the very mild pullback last week is actually a bullish short term sign, with Nasdaq 100 regaining its leadership.  Remember, investors are not going to pay nosebleed valuations for financials, utilities, and other so-called benefactors of the Trump trade.  Those sectors can only go up so much before they flatten out.  You don't get investors excited about momentum building up in low growth names.  You need to see the momentum in mega cap tech and high beta tech to pump the SPX to even more nosebleed valuations.  Investors are willing to pay sky high prices for tech stocks if they are going higher.  They are not willing to pay sky high prices for other, more boring sectors.  

Longer term, the highly concentrated rally focused on tech stocks is a sign of a weakening economy.  But shorter term, its a bullish sign that we're still not at the top of this bull market.  In an interview with the Interactive Brokers CEO last week, he noted the following:  

You can see that over 70% of trading volume is in Mag 7 stocks.  And outside of that, its mostly crypto related companies and cryptos.  That tells you where the individual investors are putting their money.  They are almost all in on high beta and spec names.  Very reminiscent of late 1999 and 2000, but that's a story for another day.  

You will not see real pain in the overall stock market until you see Nasdaq 100 really underperform.  The US economy is now extremely financialized.  With the heavy allocation to equities among households, and in particular megacap tech, a Nasdaq 100 bear market would cause a reverse wealth effect, slowing consumer spending, leading to an economic slowdown.  That's not something on many investors' bingo cards for 2025 and 2026. 

Not much movement in the CFTC COT positioning for the major stock indices, with asset managers and small speculators remaining heavily long.  You continue to see lots of call buying on the ISE.  There is a lot of options speculation in individual names, in particular TSLA.  With just 2 weeks till the end of the year, I would expect the recent big gainers to hold their gains as many investors will want to delay capitals gains into 2025.  That is also part of the reason that you are seeing Russell 2000 underperform, as many small caps are tax loss candidates. 

While the Nasdaq 100 strength was a bullish factor last week, the suddenly weak bond market and rise in yields was a bearish factor.  If you consider both, the current situation is about neutral.  I did cover some of my shorts on Friday, and now only hold a very small short position which I will likely close out today.  With volatility staying low even during last week's pullback, that is a good sign for the bulls.  A market that doesn't want to selloff much even with such bullish positioning makes it tough to stay short for long.  Just a 1% pullback, and even that's been a struggle to get for the bears.  On the short side, you have to take your points when they come and not get greedy.  The pullback started last Monday, so its on day 6.  I doubt the market can go down much more this week before bouncing again.

I don't see much edge at current levels, with bullish seasonal factors about to really kick in as we get closer to Christmas.  The opex forces from triple witching coming up this Friday could induce a bit of volatility as institutions do some last minute position squaring and year end hedging before the holidays.  But its not worth betting on much movement this time of year.  The complacency and lack of fear, high amounts of call buying, and heavy bullish positioning are potentially bearish elements.  But its been that way since the election, and still we grind higher.  Nothing compelling here, although if we do get a further move down towards SPX 6000 this week, it could be worth a small long play to ride the seasonal tailwinds. 

Trump Mania

Just when you thought things couldn't get crazier than 2021, they are getting crazier.  Compared to 2021, the breadth of the insanity is less, but the intensity is greater.  From late 2020 to late 2021, you had a speculative surge that included graded sports cards, pie in the sky NFTs, hundreds of worthless SPACs, meme stocks, and lots of tech stocks.  In 2024, you started with the AI mania, which is still ongoing, but the fast money speculators are now migrating to the Trump mania, with Trump meme stocks like TSLA and PLTR leading the pack with bitcoin and its related names like MSTR and COIN.  

You have fewer stocks participating in this speculative bubble, mainly because a lot of newbies got burned the first time around in 2021, and don't have the stimmies or the income to buy up the flavors of the day this time around.  The survivors of the 2021 bubble popping are wealthier, more selective in their speculations, but still very reckless and fearless.  2022 wasn't painful enough, and was too short of a bear market to discourage these hogs from chasing momentum.  That's why you are seeing such a quick comeback to now form a second bubble, just 3 years after the previous one popped.  It's probably the first time in financial history that you have one bubble emerge so quickly after the previous one popped in the same asset class. 

The 2021 bubble was about trillions of dollars of fiscal stimulus liquidity sloshing around looking for a home.  The 2024 bubble is about US superiority, capped off with a Trump election victory, where almost everyone believes that the US has the best economy, and that US stocks are the best investment.  The European and Asian stock indices have lagged the SPX badly this year, especially since April.  The 2 biggest manias that we've seen this year, AI and Trump, are based in the US.  You can only play both manias through US stocks.  For AI, its basically NVDA, and a few tertiary names like AVGO, DELL, etc.  For Trump, its TSLA, PLTR, bitcoin, and bitcoin related stocks.  Sure you have some quantum computing names going crazy recently, but those are all small cap names, and a drop in the ocean compared to the AI and Trump related names.  

Investors are moving their money in response to what they believe is US superiority.  The inflows into US equity ETFs and mutual funds are the greatest in history.  As a percentage of market cap, they are higher than anytime since 2000, including 2021.  

The highest ratio of calls to put in the ISE since it started in 2006.  The demand for put protection and bearish bets is historically low.  

Despite this lopsided buying of calls over puts, the SKEW index is showing out of the money puts as being historically rich vs. out of the money calls.  In fact, the SKEW hit its highest level in history last week.  In the past, high SKEW readings have portended corrections in the SPX. 

The ominous signs just keep piling up.  If history is our guide, 2025 should be a massive inflection point, which will catch many investors off guard.  Those are the moments where those who can look at the big picture will thrive.  

When will this mania for US stocks end?  It ends when the perception of a Trump presidency being bullish for the US economy and US stocks is broken.  That could take several months into his term.  The hype is greater than the substance.  People are talking about deregulation and tax cuts but those are vague, and even if concrete steps are announced, the firepower will be limited.  It won't be enough to overcome less immigration, tariffs, and possibly less government spending (due to DOGE, blocking Biden stimmy spending, etc.).  Tax exemptions on tips or overtime is a drop in the bucket.  Corporate tax rates are already low at 21%, lowering to 15% won't do much, and it may be hard to pass as its not something that's very popular among the public. 

If there is no noticeable improvement in the US economy by the 2nd half of 2025, then you could see an exodus like you've never seen before in such a big asset class.  A lot of the recent inflows into US stocks are coming from foreign countries, so they will have less tolerance for pain, especially if the US dollar weakens along with the SPX.  A lot of FOMO money is rushing it.  At the highest valuations in history.  Resulting in the highest US household allocation to equities in history.  There is a lot of hot money betting on this thing to continue.  This isn't long term money being put in.  Its fast money looking for fast returns.  They'll run for the exits if things go downhill.  

Don't expect much movement for the next 3 weeks, investors will be looking to delay capital gains into 2025, which should push out a lot of potential selling into January.  At the same time, market looks overextended short term and overexuberant.  There should be some systematic year end hedging coming in the next 2 weeks as December is the biggest hedging month for SPX options.  Above average amounts of OTM call options sales / put option buys are likely to be initiated.  Still holding a small short in SPX which I am stuck in.  With the bond market suddenly looking stronger, not expecting heavy selling, so I'll look to exit sometime on any mild pullback within the next 10 days, to re-enter sometime at the end of the year or early next year. 

Greater Fool Theory

Investors are not oblivious to valuations.  They just put less importance on valuations when markets are either 1) in a bubble 2) in a crash.  During a bubble, investors don't care that markets are overvalued because prices keep going up and they continue to make money.  During a crash, investors don't care that markets are undervalued because prices keep going down and they continue to lose money.  

Market conditions where investors ignore fundamentals are not stable.  I.e., those conditions do not last for long.  In bubbles, the greater fool theory is hard at work, as investors believe that someone else will buy their stocks at higher prices, sometime in the not too distant future regardless of valuations. 

The crowd is not stupid.  They can easily figure out that stock valuations are high.  Its out there in clear view.  In fact, many will admit that the market is overvalued.  But they believe that the market will stay overvalued and go up anyway.  That is what defines bubble psychology.

Fundamental value becomes less important.  Price momentum becomes more important.  A survey of individual investors done by the Yale School of Management shows the following results over the past 25 years.  

Proximity to Platonic Ideal of 100% Believe Overvalued, 100% Believe Market Up Next Year

The underlying belief that arises from bubbles is that investors think that prices will rise in the short term, regardless of what they think about the long term.  Investors have high conviction that prices will rise in the short term, but they also know that eventually the party ends, so they are not as positive about prices going up in the long term.  Short term positive, long term neutral to negative.  The stock market tends to do much better in the long term when investors are short term negative, and long term positive.  

It is this greater fool theory which makes investors' time horizons shorter.  It also causes investors to chase after high beta, volatile, and rising stocks.  MSTR is a perfect example of the type of stock that comes into favor near the peak of a bubble.  Boring, slow moving stocks are ignored.  When people see others making all this money in bitcoin and related stocks, big cap tech stocks just don't have the same appeal. 

In this bubble environment, put protection is an afterthought, and considered a waste of money.  Call volume rises and put volume falls.  In the options market, more and more evidence is building that investors are leaning very heavily towards calls over puts.  Individual stock put/call skew in S&P 500 stocks shows heavy bullish positioning.  

Conference Board survey of consumers shows record levels of optimism towards stocks, with 56.4% expecting stock prices to be higher in one year.  

No one knows when the party ends.  But when you see so many signs of highly bullish positioning, pervasive optimism, and an extended uptrend at historically very high valuations, usually there isn't much time left.  The long term risk/reward for long positions is quite poor.  On the other side, it presents an opportunity for great risk/reward for long term short positions.  These parabolic moves due to short squeezes, speculative fever, or just plain FOMO are hallmarks of a bubble market.  They always end with long term down trends.  Over the coming weeks, as we get closer to year end, I will look to put on some long term shorts in individual stocks which I can see go down 60-80% over the next 2 years.  

We got another move to an all time high in the low liquidity, low volume Black Friday session.  It looks overextended in the short term, so have put on a starter short position. Not looking for anything big here, something around a pullback of 3%.  The bonds have been acting strong lately as Treasuries catch a bid with European bonds trading higher over the past several days.  This will help limit any downside for stocks this month, along with positive year end seasonal forces, so wouldn't get aggressively short.  The time to look for bigger down moves will be early 2025, so keeping a lot of powder dry until then. 

Speculative Fever

In the late stages of a bull market, the fear of missing out is greater than the fear of losing.  FOMO happens when your friends and neighbors are making money and you are not.  People don't live in a vacuum, they notice what others are doing, whether they are doing well or not.  Envy is a great motivator for investors to do things that they would otherwise not do.  Rationality goes out the window in these environments.  That is when you see parabolic moves.  Speculative waves go from one sector to another.  The hottest sector among speculators was AI in the spring and summer of this year, with NVDA, SMCI, AVGO, DELL, and TSM blasting higher.  The speculators' baton is now being passed from AI to Bitcoin. 

Exhibit A:  MSTR/Bitcoin.  This is at the heart of the speculative bubble that is happening right now.  When you see massive short squeezes and irrational price moves that defy the fundamentals, you are near the peak of the mania.  After the crazy squeeze this month, the market capitalization of MSTR stock is now over 3 times the value of the Bitcoin on its balance sheet.  MSTR's non-bitcoin related business is meaningless compared to its bitcoin holdings.  This reminds me of the 3COM/Palm spinoff during the dotcom bubble, where Palm was valued way more than the Palm holdings of 3Com, considering that 3COM stock holders owned a huge chunk of Palm.  It was one of those cloudy arbitrage situations where rampant speculation led to a supply/demand mismatch that overwhelmed the arbitrageurs' capital and willingness to hold the long 3COM, short Palm position.  The same is happening with the arbitrageurs' willingness and capital to hold the long Bitcoin/short MSTR position.  IBIT, the biggest Bitcoin ETF, is up 43% over the past 6 months, compared to 150% for MSTR.  As recently as September, the returns were equal for IBIT vs MSTR. 

Exhibit B:  TSLA.  TSLA is a $1.2 trillion company that is trading like a Trump meme stock.  It is one thing to have a small cap trade like this.  It is another thing to have a trillion dollar company gaining 65% in a month based on hopes that a Trump administration will slash all transportation regulations and allow TSLA to do whatever it wants with full self driving and autonomous vehicles.  Never mind that TSLA full self driving is not ready for prime time and requires the driver to hold the steering wheel and be alert at all times.  The dreams of Robotaxis roaming the roads has clouded any kind of judgment on the stock.  Reality is not on anyone's mind.  Its a speculative frenzy that is only taking a backseat to the Bitcoin mania.   

 

Exhibit C:  QUBT/IONQ.  Quantum computing is suddenly a big thing among speculators.  It had its 15 minutes of fame back in 2021 along with various other themes, but this one is running super hot recently.  Never mind that these 2 companies, in particular QUBT, are basically just prototype companies that are more interested in pumping up the stock and selling shares to the public than actually running a profitable long term business.  

Its a speculative frenzy out there.  The current environment rhymes with 2000 and 2021, but 2024 is more focused on certain themes and less broad based.  Just like 2000 and 2021, investors are heavily loaded up with equities with few worries about the economy or the stock market.  Valuations now are historically in the 99th percentile, just like 2000 and 2021.  From a seasonal perspective, the end of year in a big up year like 2024 is usually strong.  You rarely get big pullbacks during the holiday season after such huge gains, with long term investors incentivized to delay stock sales into 2025 to push out capital gains taxes to 2026.  Seasonally, this is a bullish time of year, although most of the bullishness happens around the last 10 days of November and the last 10 days of the year.  

The ISEE options data shows heavy call buying for much of 2024, higher than 2021 when complacency and speculation was very high.  Call options speculation is overwhelming any kind of demand for put protection, causing the put/call ratios to plummet. 

 

The COT data as of Tuesday, November 19, when SPX closed at 5917, shows non-dealers buying the dip, reinforcing their complacent positioning.  Usually asset managers are reducing net longs into selloffs, but not this time.  Its almost as if everyone knows that all dips are to be bought, not sold.  Only suckers sell on dips.  SPX asset manager net longs is at the highest levels since early 2020, and around the highest levels of the past 10 years.  Other times when we've reached this level of asset manager net longs and dealer net shorts, was in early 2018, early 2020, and now.  We had a huge selloff after the blowoff top in January 2018, where SPX dropped 11% from the highs.  We all know what happened after the top in early 2020, and now we're in a similar point with regards to positioning.  Seeing similar extremes in net longs among asset managers in Russell 2000 futures, reinforcing the overall bullish positioning out there. 

SPX COT Positions

Russell 2000 COT Positions

 

 

 

The ratio of leveraged long vs leveraged short ETF assets is now at a 3 year high, last time being above 12 in December of 2021.  That just happened to be the top of the market right before the start of the 2022 bear market.  

 

Still holding a small long position that I didn't exit gracefully after the post election moves up and down.  I will be selling the remaining long today and watch and wait to look for a short entry.  Despite the positive seasonal influence on the market, I see an opportunity to put on shorts to play for a pullback in the coming weeks.  The way the market just dropped on just a hint of less Fed easing from Powell and some overblown nuclear war fears after Russia's threats show that long positioning is quite saturated.  With VIX back around 15, the positive influence of reduced vol on equities will be limited.  Upside should be capped around SPX 6025 and downside on a pullback could take it to SPX 5800.  Based on last week's price action, you are not getting the same reflexive buying pressure on dips like you did earlier in the year.  Its a sign that positioning is stretched and there are not many buyers waiting to get in. 

Getting a gap up based on optimism that Trump's Treasury pick, Scott Bessent, will be positive for the stock and bond market.  I disagree, considering how little power the Treasury has compared to what Powell can do for the next year and a half to spoil Trump's party.  Trump, not Bessent will be making the final calls on tariffs and spending plans/tax cuts.  Back in Trump's first term, Mnuchin was basically a Trump lackey, doing whatever he was told.  That's why he lasted so long in the Adminstration, unlike others who actually had a backbone.  Bessent either becomes Trump's lackey or he gets fired.  That simple. 

Powell will be incentivized to play for legacy and be hawkish on his way out, so don't expect any dovish gifts for the next several months unless the economy really craters.  More and more, the non-consensus trade of a weaker US economy vs the past year is coming into view, as any focus on cutting government spending, raising tariffs, reducing immigration, and reducing the deficit will not be a positive for the US economy.  Of course, in the heat of the moment, speculators only see dollar signs ahead, and have blinders on.  This blind optimism phase doesn't last long, especially when everyone is already loaded up long.