Great Expectations

This relentless, obnoxious rally has been jumping over midget hurdles for the past few weeks.  This display of strength has frustrated bears befuddled by the continued rally with dips quickly bought.  

A list of the hurdles that this bull has overcome since the start of August:

August 1: bad NFP number

August 12: feared CPI number

August 22: feared hawkish Powell at Jackson Hole

Early September: feared bearish seasonality in September

September 5:  bad NFP number

September 9:  bad NFP revisions number

September 11: feared CPI number

The US stock market has overcome all those "potential" negative catalysts because of the pot of gold at the end of the rainbow: Fed rate cuts.   That is driving this aging bull market.  We have the much anticipated FOMC meeting on September 17.  Expectations are high.  

You also saw continued optimism about AI, with ORCL's huge 1 day rally on future AI revenue forecasts.  Of course, those projections are contingent on OpenAI keeping their promise, on Larry Ellison keeping his promise.  I wouldn't hold my breath.  You already saw a big chunk of ORCL's gains taken back from Wednesday's highs to the Friday close.   If that ORCL announcement was made in July, I doubt you would have seen it pullback so hard off the highs.  It's a clue that investor positioning is quite saturated in large cap tech stocks.  It is why Russell 2000 has been outperforming the Nasdaq for most of the past month.  

While the SPX and NDX continue to hit new highs, the 2 biggest retail AI names: NVDA and PLTR are both down several percent from their all time highs hit in August.  Those are subtle signs that investors who want to invest in those names already have.  Now, with rate cuts on the horizon, investors are chasing more speculative names to try to get more bang for their buck.  

On Friday, you saw big moves in the quantum stocks (IONQ, RGTI),  speculative crypto stocks like BMNR, and of course the biggest meme stock of them all:  TSLA.  You cannot underestimate the short squeeze factor.  Hedge funds have historically high gross leverage in their portfolios, meanings lots of longs and lots of shorts.  A lot of high short interest names got squeezed higher, which is a continuation of the trend starting in July.  It appears a lot of hedgies are feeling considerable pain in the short side of their portfolios.  

Exhibit A for this short squeeze is OPEN.  The Chamath SPAC from the go-go days in 2020 is the hottest meme stock in the market.  It also happens to have big and growing short interest.  26% of the float is shorted.

OPEN is the poster boy for meme mania, as the worst the fundamentals, with lots of short interest, the better the squeeze potential.  Its a toned down version of the meme stock bubble of 2021, when GME and AMC went crazy.  It always ends badly, but the speculators all think that they can get out near the top before the bubble pops.  Of course, there always has to be bagholders on the way down.  Eventually, these ADHD traders lose interest and the stocks take the long road to lower prices.  Like AMC below.

The crypto space continues to pump out more PIPEs as the Ponzi continues.  The latest big one is ORBS, which raised $270M by issuing PIPE shares to buy Worldcoin, a worthless alt coin with Dan Ives hired to pump it.  They are feeding the ducks while they are quacking.  The Winklevoss twins IPOed Gemini on Friday, trying to hurry and go public when they can.  You are seeing more and more IPOs lately as private companies are hurrying to go public while the investor appetite is there.  Very late stage bull market behavior.  

What kept me from holding long term shorts was not wanting to get in front of the rate cut optimists pumping stocks higher.  Ever since Jackson Hole, Treasuries have traded quite strong in anticipation of a dovish Fed.  Now that we've had quite a stock and bond rally so far in "bearish September", it sets up a post FOMC hangover.  

You saw 10 year yields bounce back higher on Friday after the euphoria wore off over the CPI numbers.  Given the weakness in the labor market and the rate cut anticipation, you would have expected bonds to act stronger this week.  But with European and Japanese bond markets trading weak, there just isn't that much demand from overseas investors.  China is basically taking all their dollars from their enormous trade surplus and piling into gold, avoiding US Treasuries like the plague.  Its a different era, without Fed QE, you are left with a bunch of price sensitive buyers who don't want to pay up for something with such a huge growth in supply.  The US debt is at over $37 trillion and rising $2-3 trillion per year.  

The economy is clearly slowing but I continue to see lots of denials and stubborn optimism about the economy. The most common reason for the optimism are the big fiscal deficits/ one big beautiful bill / deregulation / AI capex which are expected to support the US economy no matter what happens.  But what has been ignored is the much lower immigration numbers holding back population growth, a key component for GDP growth.  The only things holding up the SPX are AI capex spending and Fed rate cut expectations.  If one of the two fail to deliver on great expectations, there is a huge air pocket below.  

In a past age, when Treasuries were a premier risk-off asset, with a slowing economy with Fed rate cuts coming, buying bonds would be a superior trade to shorting stocks.  But as mentioned earlier, inflation is just too sticky, and the supply deluge too big to make me a long term buyer of Treasuries.  I prefer to make a risk-off bet by  shorting stocks rather than going long bonds.  

We are about to enter the corporate buyback blackout period which usually runs from mid September to late October.  All buyback blackout periods coincide with post triple witching opex, a time when stocks are usually weak.  Below is a rolling estimate of corporate buybacks with historical data:  

Started a short position on Friday with plans to add this week.  Unlike previous short attempts, looking to hold for several weeks as conviction now is higher.  The rate cut optimists are overplaying their hand.  As mentioned before, Fed rate cuts just don't mean much in a fiscal dominance regime + most mortgages locked in at much lower rates.  Lots of room for disappointment during this rate cut cycle.  

Rate Cuts are Coming

Interest rates are now the main focus after the much feared nonfarm payrolls came and went without much damage to stocks.  Friday's reaction to a bad NFP number wasn’t as dramatic as many expected.  The bad jobs number now all but guarantees a dovish Powell at the upcoming FOMC meeting.  The CPI this week is all but meaningless.  In a weakening economy, the Fed prioritizes jobs over inflation.  

Investors are conditioned to believe that lower Fed funds rates is bullish for stocks.  Its likely they will be buying in anticipation of a rate cut and a dovish Powell on September 17.  I do expect Powell to come out dovish, but that’s going to be expected.  Unlike going into Jackson Hole, when the majority were bracing for hawk Powell, but got dove Powell, the expectations will be much higher.  Unless Powell goes big with 50 bps, its probably a sell the news reaction.  Given how reluctant Powell was to turn dovish until last month, I doubt he does the 50 bps.  Especially since he's going to be replaced, there is no need to pander to Trump now.  

Rate cuts are not what they used to be.  In fiscal dominance, lower short term rates means less interest expense for the government, which is less fiscal stimulus.  Lower Fed funds rates means less interest income from T-bills and money market funds.  Most of that interest income is going to the wealthy, who have a high propensity to invest in financial assets.  Less interest income = less inflows into stocks and bonds.  

A weaker job market means less consumption, which feeds into lower corporate profits.  It also means less inflows into 401k's and equity funds.  Passive inflows into index funds and target date funds has been one of the biggest factors in this bull market.  Its clear that the jobs market is slowing, a combination of less immigration, aging demographics, and tariffs.  

Counterbalancing the negatives of a weaker labor market, bond yields went down significantly across the curve, which is a short term positive for the stock market.  When bonds outperform stocks, like last week, target date funds and pensions have to rebalance by selling bonds, buying stocks.  It is this strength in Treasuries which makes me want to be more patient in putting on index shorts.  

Not much in the COT data for index futures, but the COT for VIX futures shows a continued expansion of speculative shorts in VIX.  This sets up a possible VIX explosion higher when these shorts are unwound.  After a 5 month rally, the market is a powder keg.  Any spark that gets investors nervous could cause an explosion. 

VIX COT Positions

I noticed last week an unusually large number of fast money trader warning about September weakness as if it was a near certainty. That’s not common.  Seasonality usually doesn't work when most traders and investors are focused on it.  I think it was these seasonality bears that caused the sharp drop on September 2.  A weak jobs number may be setting a bear trap this week.    September weakness mostly comes in the first couple of days, and then in the  2nd half of the month coinciding with the post triple witching opex period.  This week could be a short window of strength leading up to the FOMC meeting. 

While the SPX was barely up last week, the path from Friday close to Friday close was quite volatile.  Despite the Friday drop, VIX went down and SPX fixed strike vols also dropped.  SPX fixed strike vols going lower even though SPX went down is short term bullish.  However, looking at the important components of the market, signs of weakness remain.  NVDA, which is the most important stock in the world, is lagging badly.  The momentum stocks and retail favorites also mostly underperformed last week.  In the past, retail investors were a non-factor and could be ignored.  But they have become an important segment of the market.  Their increasing participation has caused the market to be stronger than it would otherwise be.  Signs of weakness among heavily owned stocks among retail is an important tell.  Something to keep in mind as we get closer to FOMC and the big triple witching opex on September 19.  September opex is a big vol dampener on both upside and downside, as there is huge open interest.  So definitely would not recommend chasing any big moves from now until September 17.  

Covered all short positions last week, as I was wary of being short ahead of NFP.  On the sidelines for now, waiting for higher prices to re-short.  The plan is to wait until after CPI is released on Thursday to see how the markets react, and assess the situation then for a possible short.  Not everything goes according to plan, so will adjust if conditions change.  

Will the Beatings Continue?

For 4+ months, those who have sold have mostly regretted it.  Either selling their longs or getting short.  They say that the beatings will continue until morale improves.  This market has beaten the bearishness out of the shorts and telling them to throw in the towel.  Those with thoughts about tariffs, economic weakness, and the huge selloff earlier in the year have gotten punished.  Morale doesn't usually change in a few weeks.  It takes time for short sellers to feel enough pain to force them to cover.  It takes time for uptrends to re-establish, for volatility to go back down.  Which means it takes time for CTAs and vol control funds to get back to being heavily long after being flat to short in April.  It appears that enough time has passed for investors to get off the sidelines and jump in.  

Recent allocations for the biggest trend following ETF, DBMF, show them massively long index futures, not only SPX, but also MSCI World developed and emerging markets.  This was not the case as recently as a month ago.  But the rip to new highs after the quick dip on August 1 got the CTAs near max long.  As of August 21, CTAs are at the 94% percentile in net long exposure.  This is actually higher than their net long position in late 2024, before all the rumblings from tariffs rattled the market.  

It has been nearly 5 months since the April bottom.  5 months without a significant pullback is significant.  5 months is enough time for most investors to put the big selloff into the rearview mirror and reload their equity exposure.  A look at past big rallies off of significant bottoms have run into trouble around 4 to 5 months.  The latest examples are August 2023, April 2024, and December 2024.  Each of those local tops was preceded by a rally of between 4-5 months without a 5% pullback.  

From a technical timing perspective, the odds are favoring a 5% or more pullback within the next 2 months.  That doesn't guarantee a pullback, but combined with other data and how investors are behaving, the odds look favorable on the short side.  From a risk/reward view for the next 2 months, I see at most 100 points of upside for SPX, and anywhere from 300 to 800 points of downside.  So while it may be a 50-50 coin flip of whether the market is up or down for the next 2 months, there is a lot of asymmetry between the two outcomes.

Seasonally, we are entering the weakest month of the year, which has been repeated a bit too much by the crowd for my liking.  But most of that September weakness happens after September triple witching opex, which is September 19.  Its very possible that we grind higher towards that September opex, frustrating the seasonality bears who are short just because its September, and then have a rug pull afterwards.  September post opex also coincides with the start of the corporate buyback blackout period from late September to late October.  During that window of smaller than normal buyback flows, a sudden risk off move can accelerate more quickly than usual.  

Under the surface, there are divergences and signs of an upcoming trend change.  One of those is the Russell 2000/Nasdaq ratio.  We are seeing enthusiasm again for the small caps, which used to be a bullish sign back in the day, when there was ZIRP and endless QE.  Now, its a sign of investor overexuberance and trend exhaustion.  For the past few weeks, the RUT has continued to outperform the NDX.  Unlike what the old school paper napkin chartists tell you, strong breadth after an extended rally with laggards rallying while leaders lag is bearish, not bullish.  

Bitcoin is the best indicator for risk appetite among aggressive, speculative retail and institutional investors.  These investors are a small minority of the total investor pool, but have a big effect on prices as they are active traders that are usually price takers, going with the flow.  They are the ones that move markets.  When they are saturated with stocks/crypto, that tells you their next move is likely to be to sell.

Bitcoin has now underperformed the NDX over the past 3 months.   That underperformance has been particularly noticeable and sharp in the past 2 weeks.  The top in bitcoin coincided with lots of euphoria over crypto this summer, which makes this bitcoin underperformance even more meaningful.  There are lots of underwater, trapped longs in the crypto space now.  

IBIT vs QQQ

Another divergence I have noticed is the relative weakness of the NDX vs the SPX, in particular, momentum and large cap tech favorites like PLTR, MSTR, META, MSFT, and bitcoin have recently lagged badly.  

Last week, we saw some more signs that another piece of the momentum trade, AI, is getting tired.  NVDA sold off after beating earnings on Thursday, and the selling accelerated on Friday.  

As I write, we are getting a big gap down as the seasonality bears are on the prowl, fear mongering about seasonal weakness and historically the worst month for stocks, September.  While I am short, I don't think its going to be straight down from here for all of September.  Its possible that there is relief buying after the jobs number, as a weak number would raise expectations for the Fed to be dovish at the September meeting, while a strong number would alleviate fears of a weakening job market.  There is still the much anticipated Fed rate cut at the FOMC meeting on September 17, along with triple witching opex on September 19.  That provides a backstop for bulls, so not expecting a big decline just yet.  

Entered into some SPX and single stock short positions last Wednesday and Thursday.  I anticipate a bit of weakness ahead of nonfarm payrolls, which could be a spot to trim shorts.  Depending on the price action this week, may trim some short positions ahead of NFP on Friday.  We are likely to chop in a small range until September opex, so I wouldn't get too aggressive on the short side just yet.  

Cracks in the Foundation

The raging bull is showing signs of cracking.  The momentum names are the key to this market.  They are what drive the animal spirits which brings in the inflows in a virtuous cycle that keep the bull market going.  The cracks are forming in AI and crypto, the two drivers of the momentum train.  In AI, the biggest ripple has been made by PLTR, which went from 190 on August 12 to 143 on August 20.  That's a 25% haircut in 6 trading days.  While the SPX went down less than 2% during that time.  Compare that to the dip in July 31/Aug 1, when the SPX went down 3%, yet PLTR didn't even go down 5%.  The momentum names were extremely strong during that dip 3 weeks ago.  Its a totally different story now.  The strongest YTD stocks performed the worst during last week's selloff.

In crypto, you can see a similar pattern of relative weakness during this pullback vs the July 31-Aug 1 dip.  When the SPX went down 3% in that dip, bitcoin went down 5%.  In last week's pullback, SPX dipped 2% yet bitcoin went down 9%.  Relative weakness in bitcoin vs. earlier in the summer.  Also, the most important stock for bitcoin is MSTR.  Its premium to NAV is shrinking steadily.  The money suck coming from big crypto IPOs like CRCL and BLSH, and crypto treasury companies selling stock to buy cryptos is slowly sopping up a lot of risk capital that would otherwise go to other momo favorites.  

These are the subtle signs of a weakening bull, when the momentum names are no longer leading and are getting punished on dips.  You can rationalize these moves as being driven by news such as Citron Research's short report on PLTR, which wasn't anything revolutionary (just a dig at the absurb valuation of PLTR compared to another overvalued company, Open AI).  Or META talking down future AI hiring plans.  These aren't significant news drivers, yet they caused quite a bit of damage to PLTR, META, and NVDA.  Those 3 names, probably the 3 most popular AI names out there in the US stock market have all underperformed during this pullback vs the sharper pullback on August 1.  

Another difference is the length of the pullback starting from August opex.  It was a 5 day pullback that was slow and grinding, not a sudden fear induced selloff that quickly recovered like August 1.  A technical sign of saturation.  Also, put/call ratios were quite low for the first 3 days of the pullback, before finally getting to a bit more elevated levels last Wednesday and Thursday.  If you look at the big picture, the cash holdings at equity mutual funds are very low.  There is almost no dry powder among mutual funds, and very little dry powder at hedge funds who also have above average net exposure vs. history.  

Last Friday, we got the much awaited Powell Jackson Hole speech.  Going into the speech, I noticed quite a few "experts" on CNBC, Bloomberg, Twitter talking about how hawkish Powell will be at Jackson Hole.  It probably explains the slow drip selloff going into the big event.  Expectations for Powell were low, so when he did tee up a September cut with some job market weakness excuses, it launched off a FOMO rocket.  Those fund managers who wanted to lighten up on longs did so ahead of J-Hole, which caused them to panic back into their longs when they realized that this rally wasn't done.  They have to keep up.  Its not a choice.  Its a career decision.   

Long term, whether Powell is dovish or hawkish doesn't matter.  The Fed is no longer the driver of markets.  The econ nerds will always focus on the Fed, but economists don't move markets, investors do.  The Fed can move the markets for a day or two, but they don't move it for months and years like they did in the monetary dominance era.  

We are now in a new era of fiscal dominance, where fiscal policy drives the market, not monetary policy.  Monetary policy becomes toothless when lowering rates actually lowers interest income for the private sector (due to the huge national debt levels, high percentage of T-bill issuance) more than it reduces interest expense for them.  The mortgage refi channel via lower long end rates is broken, as the long end has stubbornly stayed high during this cutting cycle.  In addition, most home owners are already locked in to mortgage rates much lower than current levels, greatly reducing refi demand even if long end rates go lower.  Only if/when the Fed does QE will that have a meaningful effect on the stock market.  That may come sometime in 2026 after Trump installs a dovish puppet as Fed chair.  

Over the past 2 weeks, as momentum has weakened, the Russell 2000 has instead strengthened.  On Friday, while SPX went up 1.5%, the RUT went up 3.9%.  We haven't seen that kind of RUT outperformance in a while.  It is eerily reminiscent of July 2024, right before the SPX had a 10% pullback and a vicious VIX spike over 50.  I do not expect that to happen this time around, but I expect a similar bearish response to RUT outperformance over Nasdaq.  

Before 2022, Russell 2000 underperformance vs SPX and NDX during a rally was a warning sign of a pending correction (2014, 2015, 2018, 2019, 2021).  That was why so many investors became obsessed with breadth as a indicator of the health of the market.  Everyone thought strong breadth is a good sign for the stock market.  Since 2022, as we've entered the fiscal dominance/higher rate regime, Russell 2000 outperformance vs SPX and NDX was a sign of short covering/excessive optimism, proving to be an urgent warning sign that a correction was coming.  You saw this in July 2024, before a sharp 10% correction, and December 2024, before a sharp 5% correction.  And it appears that is happening again in August 2025.  

IWM:QQQ price ratio

No significant changes in the SPX COT data.  The VIX positioning is getting more interesting.  Commercial traders keeping adding to an already big VIX long position, meaning speculators are getting short VIX.  This has happened ahead of some explosive moves higher in VIX in recent years, such as November 2021, August 2022, July 2024, and February 2025.  

COT VIX Positions

The big event of the week is NVDA earnings.  Its a quiet week where many are on vacation, and already squared up without much desire to put on big positions.  There appears to be a bit of caution ahead of NVDA earnings, more than last time, due to some recent headlines and relative AI weakness, but that's offset by most people's expectations that they will beat earnings and pump their stock like they always do.  So expecting NVDA earnings to be a nothing burger.  With the cracks in momentum, the sudden outperformance in Russell 2000, and upcoming seasonal weakness, the odds are now favorable for the shorts.  Will be looking to put on shorts in SPX and individual stocks this week.  Looking for a big down move that could last several weeks in September/October.

Don't Look Down

It feels invincible. The pullbacks are brief, and the rallies keep going.  

It's a nightmare for the bears.  Yet, you still have a large group of investors that are worried about weak seasonality until September.   A recent AAII investor survey showed a huge increase in the number of bears and drop in number of bulls, showing the skepticism out there.   Shorts have gotten punished since the April bottom, with heavily shorted stocks rallying much more than the SPX.  Those who have focused on fundamentals have been left behind.  The most speculative stocks have massively outperformed the SPX.  

At the same time, the CTAs have gone from short to near max long.  A look at the trend following ETF, DBMF shows how things have changed over the past 4 months.  From net short S&P 500 futures in April to massively net long, the biggest long position in their portfolio now.  

DBMF Holdings August 15, 2025

DBMF April 8, 2025

CTA exposure to US equities is now in the 97% percentile historically.  

When you have systematics basically max long, with no more room to add, and plenty of room to sell, a selloff from here will be self-reinforcing and could get nasty.  Add to that the retail investor, who is super bullish and aggressively buying calls vs puts.  

One of the best indicators of speculative fever is cryptos.  The ETF market share of cryptocurrency ETFs is rocketing higher.  There is much broader crypto participation in 2025 than in 2021.  Bitcoin went from $68,700 to $15,700 after it topped in 2021.  There are a lot more assets in bitcoin which is a eye of the beholder zero yielding asset like gold, but without the history, jewelry demand, and central bank purchases.  These crypto ETF inflows + crypto treasuries sprouting up like weeds is another sign of the size of this bubble.  Just last week, a crypto stock called Bullish (BLSH) IPOed and sports a market cap of over $10 billion.  The Wall St operators are rushing in to feed the ducks who are quacking over crypto.  We all know how this ends.  This year's momentum buyers will be next year's bag holders.  

We are seeing a growing divergence between large cap and small cap tech stocks, which is 2000-esque.  So many things in 2025 are rhyming with 2000, its eerie.  

One would understand all this speculative euphoria if the economy was hot and jobs were plentiful.  But what's so unusual about this rally is that its happening as the US economy is weakening, with inflation sticky, and a fiscal drag in tariffs coming down the pike.  Its a financial nihilism rally, based on numbers go up and FOMO.  Signs point to a weakening jobs market in the coming months.  University of Michigan survey respondents are worried about the job market, and they are usually correct.  

You are seeing weak demand for C&I loans, according to bank senior officers.  

This is a dangerous market.  This uptrend is breeding a false sense of security.  These type of bubble markets end with a bang.  The first move down will be savage.  The first move down off the March 2000 bubble top was a waterfall decline of 13%, the first move down off the January 2022 bubble top was a waterfall decline of 14%.   But, you can't be too early, especially if buying short term puts.  The downside is big, and the move likely to happen fast, but you need to make a top first.  I am still not seeing enough call buying given how strong this market is.  

We released quite a bit of potential downside energy on that decline into August 1, which could fuel the rally into the end of the month.  I expect Powell to not be hawkish at Jackson Hole, as he will probably lay the foundations for a September rate cut, which is mostly priced in.  That probably gets bulls excited going into month end and NVDA earnings, where I may look to put on a longer term short position into strength.  Watching and waiting, but the time to strike on the short side is getting closer.

The Mental Game of Trading

Having an edge is the most important aspect of trading.  After that comes the mental game.  The mental game is an underrated aspect of trading.  This assumes that the trader has a long term edge.  If you don't have an edge, the mental game only prolongs the downward drift.  Important aspects of the mental game:  Discipline, Patience, Aggression, Risk Tolerance, Hope.  

Discipline

 “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly." - Ernest Hemingway, The Sun Also Rises

The most important piece of the mental game.  In order to maximize lifetime gains, getting to the long run is the most important part.  The law of compounding is often mentioned in investing but usually ignored in trading.  Trading is just investing in shorter term time frames repeated over and over.  Long term investors usually avoid leverage, which allows them to survive and get to the long run.  Traders often use leverage which introduces blow up risk and prevents many from getting into the long run.  

Having discipline to not bet too big.  To not have FOMO and chase.  To not try to catch up and recover quickly (part of : to not bet too big).  Sizing positions correctly to avoid blowing up.  Just as in life, survival is the foundation.  

Patience

"You can beat a horse race, but you can't beat the races." - Jesse Livermore, Reminiscences of a Stock Operator

Traders are always watching the market.  That's like a gambler always watching the action in a casino.  It's tempting to put on trades.  Maintaining the same standards/requirements for entering trades is part of being patient.  A key aspect of patience is also recognizing when a market is good for your strategy and market bias.  A bearish biased trader needs to be pickier and more patient during a bull market and a strong uptrend.  A bullish biased traders needs to be pickier and more patient during a bear market.  For mean reversion traders, being more patient in markets with strong trends, for trend traders being more patient in range bound markets.  

Aggression

"It takes courage to be a pig." - George Soros / Stanley Druckenmiller

There will certain times when your strategy or style of trading will be well suited for the market environment.  You will notice this when you have many consecutive winners or a few big wins.  Its during these times that aggression improves performance.  Being more aggressive in entering trades.  Giving trades more time to reach their destination.  Having more aggressive price targets.  These are the times to follow the cliche: let winners run.  

Risk Tolerance

J. P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my stocks?” Morgan replied, “Sell down to the sleeping point.” - J.P. Morgan

Know your limitations.  Not everyone has the same risk tolerance.  Some traders will get depressed over a 10% drawdown, other traders will act like its almost nothing.  The simplest way to know your risk tolerance is sleep.  If the positions you take bothers your sleep, you have to size down.  Taking too much risk brings fear.  You can only function rationally and follow your plan when you aren't scared.  Scared money don't make money.  

Hope

"Losers average losers" - Paul Tudor Jones

Hope is what keeps us going.  What is a good thing in life, is not necessarily a good thing in trading.  Most people think of hope when things are going poorly.  When you are in a losing trade, hoping it gets back to even.  Or even worse, adding to the loser.  I add to losers and usually regret it.  Sometimes it works, which we remember, but usually it just makes the loss worse.  The time to hope is when your trading is "hot", not when its "cold".  But that's not natural, most people are wired to hope when things are bad, not when things are good.  

Nothing noteable in the SPX COT data as of last Tuesday.  Same goes for the put/call ratio and activity.  Did notice that commercial traders are accumulating a VIX net long position, which tends to happen near tops.  But SPX COT data is more important.  

Staying on the sidelines as SPX has recovered most of its losses from July 31-August 1.  It looks like it wants to grind higher before topping out.  Still keeping the view that this rally off the April bottom will take approximately 5 months to finish, so that would mean a top around early September.  Staying short some single stocks but mostly in cash.  A lot of potential energy being built up for a big down move, but some of that energy was released July 31-Aug 1.  This bull market is riding purely on technicals and momentum.  Most will agree that the fundamentals are not supporting such a big rally.  That's bubble psychology at work and it is fragile.  When the momentum dies out, it will get very volatile.

Significant Local Top?

Risk came fast.  It didn't wait for the tariff deadline to selloff.  Looking back, while a lot of traders were hedging for the August 1 deadline, there were probably quite a few who were also betting on a tariff deadline pop higher, as the tariff news flow was mostly bullish for the weeks leading up to August 1.  Add to that flashback memories of last August when you had a vicious 2 day selloff after the nonfarm payrolls.  That opened the trap door.

Suddenly, everyone, including Jim Cramer is talking about the weak seasonals and how August and September are weak months.  

Maybe Cramer is right this time, but a lot of investors are thinking the same thing.  Perhaps the caution on seasonal weakness is being front run.  Europe likes to take long vacations in August, so they were probably looking to lighten up on equity risk ahead of their long break.  

It has been nearly 4 months since the market bottomed on April 7.  It has been a long rally, but nothing out of the ordinary when compared to other rallies off of big selloffs.  The most recent example being the rally off of the August 5, 2024 bottom.  That rally lasted 6 1/2 months, hitting the high of the move in February 19, 2025.  But most of the upside of that 6 1/2 month rally was made in the first 4 months, with a significant local top made in early December.  Before that, you had a relentless 5 month rally off of the October 27, 2023 bottom, which made a significant local top in early April.  

SPX 2 year Chart

Based on the enthusiasm in meme stocks and cryptos in July, it feels similar to the post election euphoria last November/early December.  From December to February, the market chopped in a roughly 5% range from 5800 to 6100 for 2 months before the waterfall decline.  You may see something similar, but I would expect the choppy range trading time period to be less than 2 months.  Investors have added significantly to US equities in 2025, making it more likely for the topping process to be shorter.  Economic weakness is more apparent now than back then, so recession fears will flare up more easily.   

If you look back at the last bear market in 2022, it wasn't necessarily a big bond bear market that led to the stock bear market.  You've had bond market weakness without a bear market in stocks many times, including 1994, 1999, 2006, and 2013.  It was the fear of a Fed induced recession from a rapid increase in short term interest rates.  Back then, it was fears of the lag effect of higher rates and an inverted yield curve.  The stock market's primary fear is always weaker earnings coming from future economic weakness.  That is what caused the panicky selloff post Liberation Day. 

It was quite notable how strong the bond market was on Friday.  10 years yields have been trading in a range from 4.20% to 4.50% for several weeks, but it feels like it will break down from that range towards 4.0% or lower.  While Powell didn't reveal his hand for the next Fed meeting, there will be increased pressure to cut rates now that you've got a weak nonfarm payrolls report with weaker than expected CPI numbers the last 2 months.  Of course, these government inflation numbers are works of fiction, but the Fed and many of the brainwashed economic community take them as unadulterated facts.  Those in the real world know inflation is still raging hot.  

With "contained" inflation and a weak NFP, Powell will have plenty of justification for a September cut and more.  Given how well the market responded to last September's Fed cut, I'm sure that will keep many Fed obsessed investors bullish on the market during this topping process.  

History has shown that the worst bear markets happen during a Fed cutting cycle (2001-2003, 2007-2008), not a hike cycle like 2022.  This time, Fed rate cuts will have even less effect in stopping economic weakness.  One, the huge national debt actually neutralizes the positive effect of lower short term rates via lower interest income from T-bills and short term Treasury notes.  And the huge mortgage refi cycle in 2020-2021 means there will be limited stimulus from lower mortage rates if the long end yields fall.  There is no guarantee you will get much of a fall in long term yields due to the massive fiscal deficit and government debt load.  The view on long term US government debt is rightfully negative, as politicians have shown no willingness to cut spending or raise taxes despite worries from investors about the increasing debt and deficits.  

Short term, the Fed obsessed investors will keep this market from crashing, as Fed funds are pricing in a near lock for a September cut.  A stronger bond market also keeps the risk parity funds from selling stocks.  Lower bond yields are bullish for stocks, all else being equal.  But bond market strength is only a positive if the economy outperforms expectations.  Investors have been burned selling stocks near a bottom based on recession fears over the past 16 years, they have gotten complacent.  You can see the complancency in investor asset allocations, which have low cash levels.  Surprising with short term interest above 4%.  

The COT data as of July 29 showed a bit of buying from asset managers, but net long levels are still much lower than the highs late 2024.  Overall levels are still very high, so not really a sign of asset manager bearishness.  

SPX Futures Asset Managers

Looking for a bounce attempt early this week, which likely fails and we drop back down towards SPX 6200.  Looking for range bound trade in August, mostly between 6200 and 6400 on the SPX.  Trimmed some single stock shorts on Friday, but looking to put those shorts back on in the coming weeks.  Not looking to put on any big index positions until late August/early September.  

Meme Mania

It appears that we have reached the top for meme stocks.  While many traders like to compare this to 2021, the breadth and firepower of this meme mania is far less than that crazy period.  Since 2021, retail investors have been sheared through numerous pump and dumps.  The HFTs, market makers, and pro traders got their pound of flesh taking the other side of these stock gambling addicts.  

The free capital available for the meme stock chasers is much smaller now.  There is no crazy Covid stimulus gravy train driving these moves.  The firepower is just not the same now vs when the government was handing out stimmies and fat weekly unemployment checks.  What capital is available for speculation is mainly getting sucked up by crypto treasury companies issuing overvalued shares to buy cryptos.  According to the WSJ, $86B has been raised for crypto treasuries so far in 2025.

Its amazing how much demand there is from investors who are trying to catch the next MSTR by paying 2-3x mNAV in companies that continuously dilute equity to buy cryptos.  Just the sheer audacity of these promoters and hucksters is amazing to watch.  They continue to hype such an obvious Ponzi scheme.  And its working, so far.  But the price action of bitcoin in recent days signals that we are at a local top, if not a final long term top.  The scam is just too obvious to sustain for long.  

The current mania in meme stocks and cryptos is almost as bad as the tulip mania several hundred years ago.  At least the internet bubble had a foundation of plausibility due to how revolutionary it was.   Now these companies aren't even pretending to try to grow revenues and be profitable.  Its just about pumping stock, sucking in the sheep, and feeding the ducks when they quack.  The veneer of legitimacy is getting thinner as the market trades more on memes and technicals than on fundamentals.  

We have the AI bubble, but its mostly confined to NVDA, AVGO, TSM, CRWV, and a few other smaller beneficiaries.  The lack of breadth in the AI names is quite telling.  There just aren't many companies that are using AI to make a profit.  Only those that are selling infrastructure that AI runs on is making money.  Even back during the dotcom bubble in the late 1990s, there were several profitable internet companies that weren't infrastructure related (YHOO, AOL, etc.).  Productivity gains from AI is heavily hyped, but its hard to measure.  Since so much energy is required to train and run these LLMs, you will need to have a lot of productivity gains to match the huge amounts of electricity consumption from all the AI data centers.

Investors and traders are running out of good small cap companies to invest in, so bad ones are getting pumped.  Even with all the pumping in heavily shorted names, the Russell 2000 continues to trade terrible vs the SPX.  Investors have now mostly given up on breadth as a bull/bear indicator, because the Russell 2000 has been lagging for so long.

Since the April bottom, there has been a huge short squeeze targeting cookie cutter long/short hedge funds.  They were all crowded in the same names, for good reason, but they put a target on their backs by doing so.  Traders have realized that its a lot easier to spook short sellers into covering stock and creating a short squeeze than to convince investors to buy stocks based on fundamentals.  High short interest stocks have massively outperformed low short interest stocks over the past 3 months.  You have to go back to late 2020, early 2021 to see a bigger divergence.  

The systematic long short HFs have gotten crushed as the SPX has gone higher.  

When hedge funds lose money, they reduce risk and close out positions not because they want to, but because they have to.  That's what causing these short squeezes in highly shorted stocks.  But once the weak hands have covered, there is no further buying demand because no one who actually looks at fundamentals would want to buy these names.  The price action this week in heavily shorted names and meme stocks is quite telling.   While the SPX has grinded higher all week, the heavily shorted stocks have lagged all week.  The chart for meme stock OPEN, the AMC of this recent meme mania, tells all. 

 The peak in excitement for these meme stocks was a week ago.  Since OPEN, sympathy meme plays like DNUT, KSS, and GPRO have had recent pumps but died out quickly.  The meme stock bagholders are beginning to pile up, and that dead weight of overhead supply will be weighing on future pump attempts.  

The COT data for SPX and NDX futures as of July 22, 2025 shows asset managers selling into the rally.  Asset managers have been reluctant to add to their big net long position into the furious rally off the April lows. This is not what you want to see if you are short the indices.  

Surprisingly, the put/call ratios have not been that low during the grind higher this week.  It appears that we are still seeing put buyers looking to hedge ahead of tariff announcements on August 1.  You probably need to get past that deadline and have the uncertainty go away before you can find a reliable top.  We did get some more trade deal optimism over the weekend.  But we've squeezed about as much juice as you can from these announcements.  I want to see the VIX go a bit lower and for more call volume to get back into index shorts.  

It has been a tough times for short sellers.  This is about as bad as it gets, although 2021 was pretty bad for shorts as well.  But there was a good reason to avoid shorting back then:  the overflowing Covid stimulus and liquidity.  This time its not liquidity that's driving the move, its pure animal spirits and FOMO.  The 2020-2021 everything bubble ended with a 25% bear market when M2 money supply growth and liquidity exploded higher.  This bubble doesn't have the same ammunition.  Considering how overvalued and overextended this market is, it would not surprise me to see a worse bear market after this bubble bursts than the last one in 2021.  But we need to get to the top first.  Its tough to time the top so it may take multiple attempts on the short side before success.  For short sellers, its important to keep losses contained to be able to capitalize when the worm turns.  

Covered my SPX short for a loss late last week.  Still maintaining most of my single stock shorts which have been trading much weaker than the overall market.  The strength, lack of pullbacks, and resilience of this market is surprising, but it sets up better opportunities for the fall  These relentless, one way grind up moves often peak about 5 months, after the bottom, or start of the move.  The market bottomed on April 7.  5 months from April 7 is in September.  If there are some better indications of a top from options or COT data, I will consider putting on an index short before then.   If not, will probably just focus on single stock names with bad fundamentals.  

Crypto Treasury Ponzi

Financial nihilism seems to have reached a permanently high plateau.  In 2020 and 2021, it was the endless wave of SPACs allowing grifters like Chamath to get huge chunks of equity for taking two bit companies public to sell to unsuspecting investors.   The trillions in Covid stimulus effectively went from the government money printer to the grifters and corporate insiders who sold stock to the public.  Then there was payback in 2022 for all the printed money chasing the same number of goods and services.  High inflation, higher rates, and a much less forgiving bond market.  

Those side effects linger, but the speculative fire remains.  The liquidity is no longer as flush as 2021, but it still flows in the form of massive fiscal deficits, although without the money printing coming from the Fed.  Thus, bond yields remain high, the real estate market remains soft, and small caps lose out to large caps.  Outside of the oligopolies and anointed large caps, earnings growth is stagnant.  Private equity has picked over every non-listed corporation with a fine toothed comb, and are running out of businesses to buy.  Leveraged buyouts don't work as well with 10 yr yields at 4.5% than when there was ZIRP and 10 yr yields traded with a 1 handle.   The real economy is definitely slowing.

So when investing in real businesses don't work anymore, but the SPX keeps hitting new all time highs, there is a simple solution for the investment banks and the grifters.  Profit off selling stocks.  In 2020 and 2021, SPACs were the vehicle to suck up investor capital.  In 2025, its crypto treasury companies sucking up capital through PIPEs: buying BTC, ETH, SOL, etc. and then selling more stock through ATMs to buy more cryptos.  Money is now flowing into stocks, which then goes into cryptos.  Crypto treasuries are now the vehicle sucking up dumb money.  In order to be able to sell as much stock as possible through ATMs, lots of famous, and promotional finance figureheads are used to increase liquidity and the amount able to be sold thorough these ATM offerings.  

Theoretically, selling overvalued stock to buy cryptos allow for the book value of the stock to rise at the expense of the sheep buying the overvalued stock, who are of course hoping to sell at a higher price to the greater fool.  Its also a Ponzi scheme.  The earliest investors, the ones who get in on the PIPE, get in at the lowest price.  Then,  wild, greedy speculators chase the price higher after the PR announcement, allowing the crypto treasury company to sell bloated, overvalued shares to buy the crypto asset that they are linked to, increasing the price of their stock which is linked to the asset that they buy.  Into the strength and liquidity provided by the late comer speculators, the initial investors can cash out a fat profit.  

It works as long as you get a steady flow of greedy speculators willing to buy overvalued stock, which creates a steady buy demand for cryptos.  When the demand drops, the realities of all that supply sold to the public will then weigh on the stock price, which makes it harder to sell enough stock without crushing the stock price to below mNAV.  Without selling stock, there is no more money to buy cryptos, chopping off one of the big sources of demand.   And this scheme only works when you have the greater fool willing to pay above mNAV for these crypto ponzis.  When those fools run out, then there is no ability to pump up the price of cryptos with capital coming from the greater fools.  Then the price of cryptos collapses, as well as the crypto treasury stocks.  Who knows when we get to that point, but it doesn't feel that far away.  This kind of hot and heavy speculation doesn't last for long.  I suspect the floor on this will fall fast and hard, as the underlying asset has no real value other than for speculation.

The speculative mania has lifted a lot of boats in July, as you are seeing big moves higher in nonprofitable tech stocks, with the corresponding large call speculation.  

The last time you saw this kind of call buying frenzy in low profit, highly speculative stocks was in December 2024, and before that, February 2021.  Unlike February 2021, you don't have several trillion in helicopter money in the form of Covid stimulus being dropped on the heads of everyone in a developed country.  

The difference between December and now is that you've had a lot more time for retail investors to load up on these speculative stocks, making these markets that much more saturated with retail money.  The thing about retail money is that its a much more fickle source of  capital flows vs institutions.  A large population of retail investors are in stocks to get rich quick, thus the demand for the highest beta, most speculative stocks.  20%/year, what the SPX has delivered for the last couple of years, is not enough.  They want more.  Fundamentals are an afterthought.  Its all about what's hot, trending, and meme worthy that can lead to fast moves higher.  

Listening to finance and investing podcasts, its clear that the zeitgeist of the moment is huge fiscal deficits leading to dollar debasement.  This is the rationale to overpay for US stocks.  Not much talk about tariffs anymore.  And when tariffs are brought up, its no big deal, because of TACO.  The complacency is real.  The herd has gotten super greedy, going beyond bitcoin, to the more speculative ethereum and other alt coins.  This rampant buying in crypto has been rationalized by laws passed in Congress that are favorable for crypto.  The value of crypto currencies are in the eye of the beholder.  There is no cash flow, no fundamental need for it.  Unlike gold, it has no secondary uses like jewelry.  There is a short history and the "brand" has not stood the test of time like gold.  But it has a lot of buzz, and hype behind it.  Its the symbolic asset of this era.  

Unlike AI, which has to eventually prove itself by providing value beyond the cost of capex, bitcoin has nothing to prove because it doesn't promise anything, or provide anything of value.  Bitcoin and cryptos just exist, for speculation, and for theoretically providing a store of value against dollar debasement.  That's a low bar to climb over.  Lots of assets provide a store of value against dollar debasement, which actually have real world value.  The most obvious one is real estate.  Its funny how so many people are negative on the US real estate market, yet positive on cryptocurrencies.  Aren't they both theoretical hedges against dollar debasement?  Of course, one asset hardly trades, and is no longer in the good graces of the get rich hucksters out there.  While the other trades 24 hours, with lots of volume and lots of get rich quick hucksters.  Its like we're back in 1999, when beanie babies were the hot alternative investment.  Or 2021, when NFTs were hyped up.  

On a different note, recently, Morgan Stanley's Mike Wilson, who was bearish most of the time from 2021 to 2024, finally became bullish on the market in the past few months.   After a nearly 1000% move higher in SPX since March 2009, saying this looks like a new bull market?  LOL.  The guy who used to always talk about high valuations and P/E ratios no longer mentions them, when they are even higher now.  When analysts with a bearish lean like Wilson are suddenly bulls, its a sign that most bears have been slaughtered, or just thrown in the towel.  

Last week, I put on index shorts as well as shorts on some speculative stocks which have squeezed higher.  The speculative call activity and overextended market is setting the market up for a 5% pullback.  Looking for the pullback in the next 1-2 weeks, ahead of a potential negative catalyst on August 1 from tariff announcements, as well as weaker seasonal tendencies.  With this amount of wild speculation, it takes a few weeks to cool off, for dip buyers to get satiated.  So not expecting a sharp drop here.   But a pullback in the coming weeks would set up the market for a final move higher which would then probably top out in September, and lead to a bigger correction and possibly the start of a bear market in the fall.  

Speculative Fire vs Tariff Extinguisher

Speculation in bitcoin and AI is flaming hot.  But tariff headlines are making a comeback, and starting to act as a fire extinguisher.  Investors still view these tariffs as TACO material, which is encouraging for those looking to put on short positions.  You want to see complacency out there as the news flow gets worse.  But the outperformance of the high beta sectors and speculative names reveal some subtle clues for the short and long term.  

At the start of the month, my initial thesis was that we could see a meaningful, long term top in July, based on the slowing economy, huge amounts of equity fund inflows, and retail investor overconfidence.  There were signs that bitcoin was starting to lag vs. SPX.  To confirm a long term top, you want to see Nasdaq underperform vs. SPX, and the SPX underperform vs. Russell 2000.  That has not happened.  Bitcoin has surged higher and is again a leader in this market.  You are seeing strength in AI names, and big cap tech continues to trade strong vs. the overall market.  

This is not what a final top feels like.  You are not seeing a big chase for the Russell 2000, which you often see late in a rally.  In the past, the Russell 2000 used to be a leading indicator for the SPX.  Now its a leading indicator in the contrarian sense, where Russell 2000 outperforms right before a big downside reversal.  

However, it feels like the beginning of the topping phase.  The highest beta, most speculative stocks in the market are outperforming the market, and have even gone up when the SPX has gone down.  AI bubble is getting bigger.   Bitcoin is on fire.  You are seeing a very active pump and dump market, which can happen around local tops, but usually not around final tops.  These are signs of a rally in the late stages, with long positioning getting saturated.  When retail investors are this active and confident, bad things happen in the long term.  

If we are to make a comparison, this feels more like December 2024 than February 2025.  Remember, the speculators were much more active and bullish in December 2024, enjoying the Trump victory afterglow, than in February 2024, when the SPX made marginal new all time highs with AI names and bitcoin lagging.  

Big picture, there is limited upside and lots of potential downside.  Equity allocations among BofA private clients is now the highest since early 2022.  

We are seeing the CTAs rapidly increase their equity exposure as the longer term moving averages and trend indicators turn technically bullish.  The DBMF trendfollowing ETF has been increasing SPX longs considerably for the past few weeks.  The vol control funds have been rapidly increasing long equity exposure as the 3 month vol window starts to replace early April vol with early July vol.  When the systematic funds start piling in, after a huge up move,  that's a warning sign that a trend reversal is near.

There was nothing noteworthy in the CFTC COT report for index futures.  The ISEE index is showing lots of call buying in July, as speculation is rampant out there.  

The market has been shakier since July 4.  This is not what was expected, as the seasonal strength is for the SPX to continue to rise into the middle of the month.  And usually July opex week is a bullish time for the market.  But the tariff threats are starting to wear down this market, slowly but surely.  The plan was to put on shorts into strength on July opex week, and we may get that.  But if we do not, I will not be chasing weakness and looking to put on shorts into a down market.  The Nasdaq and big cap tech are just too strong for me to short into the hole.  If we get an up move towards SPX 6300 this week, I will look to put on a short position.  If we grind lower, I'll wait on the sidelines.