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.  

It was the Best of Times....

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

― Charles Dickens, A Tale of Two Cities

Just a few weeks ago, retail investors felt like they were on top of the world.  NVDA was hitting all time highs above 200, TSLA was above 450, PLTR was strong, and the quantum, nuclear, AI data center, and space names were all close to all time highs.  Now, there is absolute wreckage in the retail speculative favorites.  Retail investor hell.  And SPX is barely down 2% from all time highs.  

When we look back at this bubble, the story will be of how retail investors once again piled into the most overvalued companies and the most worthless assets, buying the most at the top, and riding it all the way down to the bottom years later.  History doesn't repeat, but it does rhyme very well.  This is 2000 all over again.  Back then, it was also retail investors who drove tech stocks to nosebleed levels, feeling FOMO, talking about stocks all the time, getting NASDAQ vanity license plates, only to see the market crash over the next 2 1/2 years.  

They say it takes a new generation for investors to forget, to get tricked by the market all over again.  Well 25 years is a generation.  Most of these retail investors who are piling into bitcoin, ether, quantum, AI, nuclear, space stocks were in diapers when the dotcom bubble burst.  They have no clue what's coming.   Now they have been conditioned to BTFD.  They believe that anytime the speculative garbage goes down, it will pop right back up, like it did from the bottom in April, all the way up to the top in October.  Or if there is a real bear market, then it will pop back up in a year or two, to much higher highs like from 2022 to 2025.  They haven't experienced a true gut wrenching bear market like 2000-2002, when the market went down for months at a time, with weak bounces that only led to more selling down the line.  

Retail investors have replaced hedge funds as the marginal source of supply and demand in the stock market.  It is clear as day that retail investors were driving the huge up move in speculative stocks and cryptos from May to October, and now that their powder is no longer dry, the demand for these names have disappeared.  Institutions don't want to buy their bags.  The only people even thinking about buying this speculative junk are retail, and they are already all-in.  

Now that retail has already bought up all these stocks and cryptos, they have less capital to actually put to work.  Therefore they've tried to get the most bang for their buck by moving from stocks to options.  Most of these speculative stocks are money losing companies in the Russell 2000.  The call volume has skyrocketed for these speculative names.  

I thought we wouldn't see the retail call frenzy like 2020 and 2021 again for decades, but its already happening, and even to a greater scale in 2025.  This is not sustainable.  In fact, the selloff in the past 2 weeks has been led by the Russell 2000, which is filled with these money losers that retail investors love.  The MEME stock ETF, which debuted a month ago, has basically gone straight down, losing 35% in a month.  During the same time period, the SPX is basically flat.  35% underperformance.  

Similar underperformance for bitcoin, which is getting pounded almost every day, now under 100K.  This so-called store of value, with all the "good" news pumping out from the White House, has managed to suck in a lot of late comer, me too investors who provided the exit liquidity for OG whales who have been dumping en masse for the past 5 months.  

Wall Street was not designed to enrich the retail investor.  It was designed to enrich the insiders, the sellers of stocks, the promoters, the investment banks and HFTs.  Almost all of the speculative garbage that peaked out in October had heavy insider selling.  Since that October peak, it has been straight down for the quantum, AI, nuclear, and space names.  

There are a lot of ugly charts out there.  A lot of blowoff tops.  My mistake during this latest pump and dump of these speculative stocks was to get in too early and get out too early, after making just a small amount.  I was still thinking that these stocks would stay afloat longer, and follow the Nasdaq more closely.  That was a completely wrong view.  Now its clear that these speculative stocks are trading on another planet, that is vaguely tied to the Nasdaq.  Its more like an on/off switch for these stocks.  Its either continuous buying, or continuous selling.  There are very few counter-trends that are worth playing.  You have to be a trend follower for these stocks.  I'm sure they'll be a dead cat bounce eventually, but probably from a lower price point.  

We got the relief rally on the government shutdown ending and then when the vote passed, we got the selloff.  Just a classic buy the rumor, sell the fact situation.  The market is no longer in an uptrend.  It doesn't mean we are in a downtrend.  Its a trendless market now.  The supply demand is much closer to equilibrium.  Which means that both rallies and selloffs will be shorter, and choppier.  You continue to hear more angst about AI, and its boondoggle nature which is starting to become more apparent with bears like Michael Burry screaming about it.  Its ironic that he's getting loud again right after he closed his fund, which probably incinerated a lot of investor capital by buying puts on high flying tech stocks for the past 2 years.  He probably didn't want to work for just a management fee while he tried to dig himself out of a massive hole to get back to his high water mark.  Better to just take his money and run, collect 100% of the profits for himself rather than sharing it with his investors when the bubble pops.  

We got some gyrations with Fed speakers coming out hawkish, putting the December rate cut into question.  It doesn't matter if the Fed cuts or not, as monetary policy without QE is toothless.  Rate cuts don't really matter now.  The short end is much less important than the long end of the yield curve.  With all the T-bill issuance and supply, you are probably taking away more interest income from investors than providing interest relief for borrowers by cutting rates.  Anything that would reduce the fiscal deficit (rate cuts will reduce the deficit) is a net negative for the economy.  Its the long end that matters.  And the Fed under Powell won't be doing QE, so it has no serious weapons to use for the next 6 months.

There are a couple of bullish catalysts for the next few months:  Supreme Court tariff decision and OBBB money coming.  I expect a short term bump up in the US economy for Q1 and Q2 when the tariffs are removed and the tax refunds hit peoples' bank accounts.  It could be enough to keep the market afloat even as the AI momentum weakens.  That would draw out the potential top to 2nd quarter of 2026, which would coincide with a potential good news top with the installation of a dovish Trump puppet Fed chair.  2026 should finally be the year that the long term bears get to feast.  

Still think this market will be choppy until November opex.  I doubt you get back to last week's highs this week.  Its possible that you do undercut last week's lows.  But I would think that any drop down towards SPX 6600-6620 would be buyable for a trade.  Nothing to do here, I need to see the market get to the edges of the 6600-6850 range to put on trades.  

Phase Transition

The relentless uptrend off the April lows is transitioning to a more volatile, choppy sideways rangebound market.  For aging bull markets, these choppy markets are part of the topping process before the start of a bear market. 

Its like water that's slowly heating up, you are starting to see the bubbles form at the bottom of the pot, as we reach the boiling point.  This time, lots of people are seeing the bubbles, the AI bubbles.  Its only with the passage of time and more cooking before you start to see the water evaporate, akin to wealth evaporating after the bubbles pop.  

Tops and bottoms in the stock market are quite different in their behavior.  Bottoms are sharper points in time, and there is a lot less time spent trading at the bottoms than at the tops.  The market will often have V bottoms, but not upside down V tops.  

Tops are usually extended processes that can take several months to complete before the downtrend begins.  The stock market tends to give you more time to buy/sell at elevated price levels, to inflict the maximum amount of pain on as many bulls as possible.  During this topping process, as the market goes sideways, investors get less bullish, even if the market makes marginal new highs.  Usually bullish sentiment peaks several months before the final peak in price.  Based purely on the news flow and the excitement post election in December 2024 (peak of bullish sentiment during this cycle), we have not gotten close to that level of bullishness during this latest run up.  And that's with the SPX up 15% on the year.   Knee jerk contrarians will say that less bulls is better for stocks.  That's usually not how it works.  For example, in 2021, sentiment was definitely more bullish in the first half of 2021 than at the end of 2021, even though the SPX was much higher.  Less bullish sentiment at the end of 2021 was a foreshadow of a weaker market in 2022.  

We are getting mixed flows, with heavy inflows into ETFs for the past week and past month, while flows from BofA clients show heavy outflows from institutions, especially tech stocks for the week of Oct. 27 to Oct 31.  I suspect there were more outflows last week during the weakness.  

Top ETF Flows as of Nov. 5 2025

The weakness starting from the traditionally bullish November has caught quite a few investors off guard.  But there has also been a growing number of short term bears who have cited weak breadth, Hindenburg Omens, a more hawkish Powell, and the AI bubble.  Its a muddy picture where you haven't really gotten enough of a washout for the bulls to run wild again, but you also don't have that complacency that is ideal for putting on short positions near the highs.  With the big gap up, we are in a bit of no man's land, in the middle of a range from the late October highs to last Friday's lows.  

Last week, the market did not give a good entry point to short the super speculative names in quantum, nuclear, and space names.  Instead, the heavily shorted names and the crap that was flying in October got killed.  At current levels, its not such a great opportunity to short these retail favorites in the short term.  

As has been the case for the past several weeks, bitcoin is massively underperforming the SPX and Nasdaq during this dip.  What's even more ominous is that the long time OG Bitcoin whales have been dumping aggressively over the past few months.  Bitcoin now looks like the dirtiest shirt in the laundry basket.  You have created a huge number of crypto bagholders not only in bitcoin, but in ethereum, all the alt coins, and in bitcoin treasury companies like MSTR, BMNR, etc.  That overhead supply will not be easy to get through in the coming months.  Considering all the "positive" catalysts bitcoin had this year, with the Administration pumping it, passing bitcoin friendly legislation, and Wall St. finally joining the bandwagon, it appears that you've created a massive good news top that will last for years.  

We got some positive headlines as the dreaded government shutdown looks to be heading to an end, with Democrats caving in and reducing their demands while the Republicans held tough.  Once again, its Democrats who are scared to offend, to upset the masses, while the Republicans play hardball, expecting the Dems to cave in like they usually do.  That abomination, which is Obamacare, is desperately being kept alive by Democrats, who are getting handsomely paid by the health care and insurance lobbies, to keep funneling hundreds of billions of government cheese into their pockets.  The Republicans are not innocent bystanders in creating the fiscal mess.  The OBBB is another unnecessary bill that just increases the deficit by lowering taxes without decreasing spending, while gifting more corporate welfare into the tax code.  

Not much to do here, gut feeling is that the market will chop around between SPX 6600 to 6850 for the next couple of weeks.  Bigger picture, we have probably entered the topping process, which could last from 3 to 9 months, before the start of the next bear market.  As many of you can guess, this feels a lot like 2000, but with less volatility.  With so much money in the US stock market compared to 2000, with more mature companies dominating the top of the market cap lists in the SPX, its harder to generate the same kind of volatility.  But I do expect many more spastic and random 1% up and down days, with less cash flows going to stock buybacks and more going into AI capex.  It will take a bit more time for the AI bubble to burst, as these big tech firms seem hell bent on continuing their FOMO AI spend.  The big drop post earnings in META is the first shot across the bow that Wall St. will not just cheer blindly for ever growing AI Capex.  The honeymoon period for AI stocks is in the rear view mirror.  Things will get real in 2026 when more investors realize that these big tech companies are just burning money in an endless boondoggle.  

Aging Bull

The real economy is getting stagnant.  Ex-AI, there is not much investment.  The little bit of real growth that is out there is just underreported inflation.  It is a bit scary to see such a weak real economy when there is a $2 trillion fiscal deficit with stocks going up 20% a year for the last 3 years.  It is clear now that the private equity bubble has popped, and the ramifications are starting to be felt.  Private credit growth will be going down, as there was a lot of misallocated capital in private equity.  With big cap tech collecting their rents on the rest of the economy, there is a huge number of smaller companies fighting for leftovers from the fiscal largesse, and struggling.  

But the uptrend in large cap US stocks remains strong.  Yes, you are seeing some cracks in a big chunk of non Mag 7 stocks.  In particular, we got a much touted Hindenburg Omen in the middle of last week, with really bad breadth for an up day.  While those are symptoms of a weakening market, its not an all-clear sign to short the SPX.  You want to see more HOs and the uptrend flatten out a bit more to set up a potential playable pullback.  

The pullback in mid October made investors less bullish, with talks of credit crunch, tariff fears again, and of course October seasonality fears.  But the market gave investors very little time to buy the lows, showing underlying strength.  If you didn't have resting buy orders before the dips, you probably missed the BTFD opportunity.  It is now November.  The seasonality bears will now be quiet.  Stock buybacks return.  It is not a time to overthink it.  The odds favor the bulls.  It won't last for long, but it probably lasts until we get close to November opex.  

With the market at such high levels, the upside from here doesn't look great.   You are seeing more demand for Mag 7 call options, with put-call skew for the group at very low levels.  Historically, forward returns during those periods have been way below average.  This environment arises from both complacency and a FOMO performance chase.  This bid for Mag7 call options after an extended run higher is reminiscent of late 2021 and late 2024.  Both instances preceded big drops in the market.  

Retail investors are aggressively positioned for more upside.  BofA private client asset allocations show clients holding the highest equity allocations in its recorded history, matching levels seen in late 2021.  

There are some bullish catalysts on the horizon.  The fiscal package passed earlier this year (OBBB) provides a lot of economic pump for Q1 and Q2 of 2026, which will help US growth.  This doesn't include potential reduction in tariffs which are likely, in my view, after the Supreme Court makes their decision on the Trump tariffs later this year.   The Supreme Court decision is an underrated event coming up.  A lot of investors aren't even thinking about it, but it is almost like a free call option for US stocks.  If the tariffs remain, then its the status quo.  But in the more likely case that the tariffs are ruled illegal, that is an immediate shot in the arm for the corporate sector in the US, with immediate tariff refunds, and a drastic reduction in future tariff expenses.  And that is not priced in here.  That would be a big boost to the already positive fiscal impulse lined up for 2026.  

With both the fiscal juice from the OBBB and no more Trump tariffs, you could be looking at an environment where investors get excited and push stocks even higher.  I don't think you see a blowoff top due to positioning, but you could see a grind higher in the first few months of 2026.  

If we do get that grind higher in the 1st half of 2026, that would take the market to truly nosebleed levels, just as the fiscal juice starts waning in the 2nd half of 2026.  That would set up a brutal 2nd half of 2026 for the markets.  

We are in the late stage of the bull market.  Its going to get choppier, and the uptrend will flatten out.  But its going to be a minefield for those blindly shorting betting on a burst of this bubble.  I see particular weak spots in retail heavy names and sectors, such as the highly speculative quantum, nuclear, AI data center, and space names.  In addition, I particularly see that the crypto space is saturated with bagholders now and will be trading heavy relative to Nasdaq/SPX.  For index shorts, its going to be tricky.  Betting against retail, who are up to their eyeballs in risk exposure, will be easier than betting against the foundation of the bull market, which is the SPX/NDX.  

Mostly in cash, looking to short speculative names on a rally in the coming weeks.  

Tariff TACO Rally

Here we go again.  Another round of TACOs.  Another gap up.  The SPX looks unstoppable.  We had a VIX spike on a tariff crisis that went away after 2 weeks, and a private credit crunch, that went away after 2 days.  Add to that a below consensus CPI number, and suddenly the SPX has blasted through to new all time highs.  Something just didn't smell right when the VIX spiked up to 28 on less than 3% dip in stocks.  That speaks to speculators being too short in VIX, rather than an omen of bad things to come.  I heard too many people mention that a rising VIX with a flat SPX is a bad sign for stocks.  It was for 1 day, on Friday October 10.  Since then, its been a great sign for stocks.  You cannot get obsessed with one indicator that shows bearishness.  Especially when many on Twitter are mentioning it.  Its the punch that you don't see that hurts you, not the punch that you can see from a mile away.  

Retail investors are winning, and hedge funds are losing.  The most shorted names have squeezed a lot of hedge funds, who are keeping large gross exposures.  Meaning they have lots of longs and shorts.  But the net exposure for fundamental based hedge funds is low on a 5 year historical basis.  When hedge funds are neutral to slightly underweight equities while the SPX is hovering at all time highs in a clear uptrend, being short is hazardous for your wealth.   While retail investors are usually a fade, so are hedge funds.  Especially when hedge funds are fighting the tape.  From GS Prime broker data, US fundamental hedge funds long/short ratio is actually lower now than in the bottom of the bear market in 2022!  BofA flow of funds data confirms that hedge funds have been selling into strength for the past several weeks.  Hedge funds are very skeptical of this bull market.  

Its eye-opening to see a group of fast money investors like fundamental hedge funds fight the bull market like this.  They usually follow the trend.  It gives me pause when I think about shorting this monster.  

In the bond market, the action has been stale.  With Treasuries hanging around 4% 10 year yields, I see little edge either way.  4% 10 year yields seem about right for this market, where you have the real economy slowing hurting the lower to middle class, with fewer jobs, but the stock market and AI economy on fire, boosting the upper class.  The consensus seems about right on the economy, which means the bond market has little to no opportunity here.  

Without COT data, its harder to figure out the positioning on the Street.   Flows data seems to show that retail has been buying while hedge funds have been selling.  Just looking at the price action in retail favorites shows that retail investors have been quite active in this market, and are positioned heavily long.  The put/call ratios have shown heavy call buying since early September, except for the past 2 weeks.  It appears that call buyers have taken a breather, and gotten less bullish after that October 10 tariff scare from Trump.  That now appears to be over, with another TACO delivered via international air mail by  brown noser Bessent.  

Closed out the SPX short and single stock shorts last week into the brief dip that we saw on Wednesday, to exit shorts as gracefully as one can hope for in this bull market.  A couple of weeks ago, I was regretting not being short before the big one day drop on October 10.  Now, I am actually regretting not buying the dip during the VIX spikes, to play for a November rally.  Of course, the market never really gave you much time to buy dips as they went away even quicker than they came, so I am not the only one feeling that way.  

Its fighting an uphill battle to short now, with positive seasonal forces and the return of stock buybacks.  It appears that the brief dip we saw earlier in the month was the BTFD moment, and its clear skies above for at least the next 2 weeks.  

As the SPX hits new all time highs, I will be paying attention to the retail speculative favorites that have already peaked out.  I see plenty among the  quantum, nuclear, space, crypto, and AI data center names.  Those will be prime targets for shorting when the SPX uptrend begins to flatten out, probably sometime in mid to late November.  You have to give the bulls room to run this bubble higher,  to not get run over.  I may not even short SPX, instead focusing on shorting the more volatile and speculative names.  I see much better risk/reward in those than in the overall market.  

Bubble Recognition

They are finally beginning to recognize the bubble.  The AI bubble.  The circular financing.  The Open AI circle jerk.  But they still don't recognize that there are other bubbles.  The bubbles in super speculative, highly shorted stocks.  The bubbles in crypto and gold.  The bubble is far more expansive than just AI.  

Ironically, the weakest performer during this small pullback in risk assets is crypto.  Even though crypto has gone up way more than stocks since 2020, you hear very little talk about there being a crypto bubble.   But the past several days has shown that the weakest hands are in crypto.  When you see bitcoin go from 125K to 102K in a few days when the SPX just has a 3% pullback, you see where the paper hands are.  Of all the bubbles out there in the market, crypto has the least inherent value.  It is the ultimate meme asset.  With meme assets, investor sentiment is the only driver.  There are no buybacks in crypto like you have in stocks.  Crypto treasury companies can only issue stock to buy cryptos if there is bullish sentiment.  There are no value investors in crypto.  They are get rich quick assets.  They attract young investors looking for fast gains.  Many high leveraged, trying to juice up a very volatile instrument.  

It is sad to see so many young investors get duped into buying alt coins, buying into the hype drummed up by the Administration, by crypto pump and dumpers, by those looking to sell their bags to the greater fool.  These crypto exchanges are not real exchanges.  They are not there just to match buyers and sellers.  They are looking to profit off of forced liquidations, taking the other side of the forced selling.  The crypto exchanges had a field day on Friday, October 10, when you had mass liquidations in all the cryptos, especially the alt coins, many of them dropping 99% during the liquidation drive.  Straight out of the late 1800s.  Bucket shop drives.  These crypto exchanges are modern day bucket shops.  

Outside of AI, you also have loads of speculation in quantum computing, space-related names, and nuclear stocks.  It was odd to see mega cap tech stocks trading weaker than these highly shorted spec names during the early part of this pullback.  But then most shorts must have covered as you saw the opposite later in the week.  The price action has been wild, and the VIX continues to be inflated.  You are seeing a lot of intraday and overnight volatility in the SPX but limited day to day volatility.  The dip buyers are very active and aggressive.  They are not letting the SPX stay down.  When they sense that the market is making a short term bottom, they rush in to buy.  Its FOMO + BTFD.  

It doesn't help that you have hedge funds actively shorting this market.  I usually don't like to stay on the same side of the hedge funds when they are fighting a bull market.  It probably means we have new all time highs in the near future, although I don't expect a "blowoff".  

I hear many investors now, parroting Paul Tudor Jones, calling for a blow off top in this AI bubble.  But when investors start to recognize that stocks are in a bubble, they lose conviction, not gain conviction.  Investors are heavily allocated to stocks but with declining conviction.  That is a not a situation conducive to blow off tops.  Besides, blow off tops are rare in the stock market.  It happened once in the Nasdaq in 2000, but the SPX during the same time didn't have a blow off top.   When investors are heavily allocated to stocks with declining conviction, you are much more likely to get a flattening, choppy top.  I believe we have started the topping process, which could be quite extended.  Given the supportive monetary policy, as well as fiscal goodies from the OBBB in 2026, this thing won't roll over quickly.  I expect marginal new highs to come over the coming months.  I could see this process extending out into the middle of 2026.  Perhaps we get a good news top right after the new Fed chair comes in and coos dovish in June 2026.  

For the next 8 months, I expect a market similar to the first half of 2015, where the market was choppy, but grinding very slowly higher, with declining bullishness as the year went on.  Then the bottom fell out in Q3 of 2015.  That would be my base case for this market.  Of course, this time, I would expect a much bigger drop than in 2015.  

We got the macro bears on the prowl late last week, having a field day talking about credit crunches in private credit, SOFR anomalies, and inadequate bank reserves.  They made a mountain out of a molehill.  While I am short, it is not because of some two-bit regional banks having some bad loans to private credits.  Back in the day, when Jesse Livermore was short something he wanted to get out of, he would rapidly sell a small, illiiquid market like oats to scare the crowd, using it as bear bait, in order to cover his underwater shorts in a bigger market like corn.  In fact, if I were a hedge fund with a big short position, I would do what Livermore did in the past and sell a closely watched small, illiquid market like the regional bank ETF, KRE, and watch the crowd go into a tizzy and start talking credit crunch, Silicon Valley Bank part 2, etc.  That would give the hedge fund the liquidity to get out gracefully from their underwater short positions.

The more you observe the markets, the more you realize that speculation is as old as the hills.  So many parallels to Livermore's trading days and today.  

Trump caved on Friday, trying to talk down the China tariff tough talk.  TACO is alive and well.  Still think investors are too complacent here, despite the "credit crunch" fears whipped up on Thursday.  Have a small short position entered in the middle of last week.  Will give it a few days to see if we get one more dip, hoping for some classic post opex weakness.  Will not be overstaying my welcome, as the stock buyback window begins to open up at the end of the month, and positive seasonal forces will be at work soon.