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.  

Retail Investor Frenzy

Retail investors feel invincible.  The meme stocks (except TSLA) are all doing well, the high beta speculative stocks are rallying, and the most popular big cap tech stock among retail, NVDA is the best performing Mag 7 since the April lows.  They have bought more stocks and ETFs so far in 2025 than in 2021, when the everything bubble running on Covid stimulus was at its peak.  

The 2022 bear market didn't do anything to discourage them.  Instead it has emboldened them into thinking that every correction serves as a springboard to a quick move to new all time highs, like what happened in 2020, in 2023-2024, and now in 2025.  

The stocks with the most net call volume are outperforming, another sign of heavy speculation on more upside.  

The ISEE index of calls to puts is now hovering around levels that led to pullbacks in 2024 and earlier in 2025.  

The bull/bear surveys, which are less important, but are also showing signs of complacency and high optimism.  The NAAIM survey number is now above the highs from mid February, and around the post Trump election euphoria levels.  

Technically, the market is looking overextended as its shooting straight up for almost 2 weeks since the Israel/Iran ceasefire.   You had a beat in the NFP number an a big rally ahead of July 4 weekend.  Over the weekend, you had more can kicking / TACO on tariffs as the deadline moves from July 9 to August 1, according to Lutnick.  You had the BBB pork bill get jammed through Congress so that's another bit of "good" news for the market.  So much "good" news in the market lately!  

As the call open interest accumulates and call volume rises, you build up a gamma squeeze higher as we get closer to monthly opex.  This can result in an overshoot which present good shorting opportunities.  We are 1-2 weeks away.  Expecting the "wait till after July 9 tariff deadline to buy" chicken little bulls to start quacking and buying the strength this week.  Sitting on the sidelines, letting the bulls take this as high as they can before taking the other side.  

Bubble Gets Bigger

WW3 was avoided and the market squeezed higher last week.  The BTFD crowd won again, although a 1.5% drop is not much of a dip.  The bubble is inflating again, and that is both good and bad.  Bad if you are short, but good if you are long or in cash waiting to short.   This may be the best thing to happen for the shorts, as such a quick move higher means less possibility of a long term grind higher move.  Those long, slow meat grinder up trends are absolutely deadly for shorts, especially for bears who are long puts.   

In the short term term, there is not much positive for those shorting the market here.  The market shook off one of the worst seasonal periods of the year and just blasted higher last week.  The previous all-time highs didn't even act as a speed bump for this freight train.  Usually you see some hesitation and consolidation at the previous highs, especially after a huge drawdown.  But not this time.  This shows immense buying pressure and its not something I want to fade quickly.  The first half of July is the start of the 2nd half of the year.  Its a time when you tend to see a lot of inflows into stocks and historically the most bullish 2 week period of the year.  

Last week, the big winners were the AI names, especially NVDA, which was the strongest of the Mag 7.  Investors are chasing the highest beta names, as they believe those have the most upside.  The animal spirits are percolating throughout this market.  Its interesting to see though that the recent macro fund favorite, European equities, have been lagging badly for the past month.  It just shows that when investors get greedy, they like to go back to the most reliable and highest beta playbook: US big cap tech.  Haven't seen so much love for big cap tech since 2021.  

A lot of the buying in April and May came from retail investors, in June, a lot of the buying is coming from hedge funds.  Macro HF beta to equities has skyrocketed, and is near the highs in 2024.  

Nothing noteworthy in the COT data last week, asset managers are still reluctant to get back to aggressively long positioning.  Dealers got shorter.  Overall, still a bearish picture for SPX futures, but its been that way for several months.   

I see some tremendous long term shorting opportunities just as the economy is starting to show signs of slowing down (weaker housing market, labor market).  There is a reason that the Fed is starting to get more dovish.  Yet, most investors view the Fed's dovish turn as a big positive.  I would disagree, as monetary policy has lost a lot of its effectiveness with the mass mortgage refi's done in 2020-2021, and the huge budget deficits that provide so much interest income to the wealthy through Treasury issuance.  Lower interest rates = lower interest income coming from the US Treasury.  

Covered my shorts last week for a small loss, but actually excited to see this kind of move up as this bubbly price action sets up a much more volatile and opportunity rich environment later this year.  

WW3 = BTFD

"But as long as the music is playing, you've got to get up and dance. We're still dancing." - Chuck Prince, Citigroup CEO, July 2007.

"What the wise do in the beginning, fools do in the end" - Warren Buffett

World War 3 fears couldn't have come at a better time for retail investors.  They can now load up even more on the most speculative stocks at a discount to sell to the greater fools after the no WW3, no nuclear apocalypse relief rally!

The consensus view among the majority that I see on Twitter and the  financial media is that geopolitical events are usually buying opportunities, and that the recent crude oil rally won't last, and oil prices should go right back down.   It is true that most geopolitical events end up being nothingburgers, and those dips are usually buying opportunities.  But that's when there is actual fear that is generated during those dips.  Right now, we've yet to see real fear from the Israel/Iran war.  The VIX has rallied, bu the market has hardly done anything, only selling off in drips and drabs.  As of Friday's close, it was less than 2% down from the recent highs.  

Talk is cheap, so I don't fully trust anecdotal evidence.  I need to see it backed up by trading and positions data.  The put/call ratios have been subdued since Israel started its attack on Iran a couple of weeks ago.  There remains a lot of wild speculation in the most high beta, speculative names like CRCL and CRWV.  Bitcoin treasury plays that are small cap low float pump and dumps are still hot.  Retail investors love this stock market.  

It is getting late in this bull market.  Really late.  There is widespread retail investor participation.   Retail flows into the S&P 500 are above the everything bubble days of 2021.  You can see this in the huge rallies in highest beta and most speculative tickers.  One of the hallmarks of late bull markets is the lack of fear when you have pullbacks, even on "scary" geopolitical headlines.  When the consensus view is that pullbacks are buying opportunities, that is when things get dangerous.  

The institutional investors are also warming up to this market.  Despite the daily Middle East war headlines, investors in the NAAIM investor survey are now just as bullish as they were in February, before the tariff madness.  

EPFR fund flows data shows huge inflows into equity funds from June 11 to June 17, estimated at $38.1B for the week.  

Still holding the short position put on a couple of weeks ago.  The war headlines are a red herring that is taking attention away from what matters more in the next few weeks:  the tariff deadline decision.  We are heading towards the deadline with a lot of complacency on tariffs, with TACO being the meme of the times.  This provides an asymmetric reaction function to bad tariff news vs good tariff news.  Good tariff news may take this market up 2-3% over a few days.  Bad tariff news would like take the market down 8-10% over a few days.  I do believe it will be another TACO moment as the tariff deadline approaches, but I wouldn't bet on it with any long exposure.  At the same time, if the market pullbacks ahead of the deadline, I would not want to be short ahead of the decision.  

There hasn't been a big move yet, and it looks unlikely that we'll be getting that 5% pullback down to 5700-5750.  While I am longer term bearish, I recognize that Trump is likely to kick the can for the tariff deadlines on July 9, which will get rid of the uncertainty for a few more weeks.  And crude oil should eventually go down after the shorts all are squeezed out this week due to the war.  I expect the Fed to start getting more dovish as the economic data gets weaker.  You are already seeing some signs of internal dissent against the non cutting Powell.  Waller is trying to audition for the Fed chair role after Powell's term ends, and he's coming out super dovish.  

We are in the start of a short term bearish seasonal period after the big June triple witching opex and the start of corporate buyback blackout period.  Staying short for now, but will look to scale out of shorts this week on weakness.  

Kid's Hurdles

The Israel-Iran War will be over before you know it.  The market "overcoming" this event, effectively jumping over kid's hurdles, will be hailed as bullish.  I can already picture the bullish reaction if we get a short term bounce on Monday-Tuesday.   Those managing real money are not freaking out about a war that will last a few days.  Even if it lasted a few months, the fund managers would NOT care.  

Israel knows that it can get away with a lot of war crimes (anywhere) as long as Iran's crude oil export capacity is not touched.  That's a red line they are not going to cross.  Iran's leaders also realize that if they do anything adventurous that would cause a spike in oil prices, it would make regime change even more likely.  So the most likely scenario is a nothingburger for the financial markets.  And the markets are pricing in that fact, by not doing much.  It may freak out some headline focused overleveraged day traders and 0DTE options jockeys but its not going to move the needle for fund managers.  

The war will get a lot of air time and coverage by a hyperbolic media that will try to make it like its the start of WW3.  And I'm sure a lot of bulls will buy into the belief that this is an unstoppable bull market that can overcome anything, including the threat of WW3!  All of a sudden, instead of war being a negative catalyst, it will make people even more bullish on the market.  Of course, getting even more bullish just 2% from all time highs, at historically sky high valuations, with economic growth slowing, and with a tariff off/on switch active in the White House.  The overriding view that I see on Twitter these days is BTFD, TACO, dips on geopolitics is always a buying opportunity, nothing stops this train, etc.  Retail has been brainwashed into believing that the US stock market is invincible.

The 2022 bear market has done nothing to discourage these retail stock gamblers who fashion themselves as long term investors in high growth stocks, with no regard for valuations or fundamentals.  In fact, the 2020 Covid flash bear market and 2022 bear market may have emboldened these punters into believing that if you don't sell during a big down move, stocks will always comeback quickly, and go much higher quickly.  The thought of an extended bear market is the farthest thing from their minds.  This attitude coincides with the highest allocation to US equities in the last 75 years.  Higher than 2000, higher than end of 2021.  

The more you experience the markets, the more you realize that irrational herd behavior can be rampant in the short run to intermediate run.  But this usually results in a painful payback for that behavior in the long run.  

Nothing noteworthy in the COT or put/call ratio data for last week.  The bullish forces from the June quarterly opex are soon to be behind us, and I expect a post opex hangover after the huge rally from the April lows to the June highs.  Lots of calls options are in the money, that will soon expire, forcing dealer selling, and most June put deltas have already evaporated.  We are also entering the stock buyback blackout period in late June, which will eliminate a lot of the positive buy flows for US stocks.  These seasonal factors show up in the performance historically for the 2nd half of June, which are among the weakest of the year.  

The tepid reaction of the Treasury market to the Israel/Iran War shows how little safe haven demand there is for US Treasuries.  The world is awash in Treasuries after the blowout annual budget busters from the US government since 2020.  The unwillingness for Treasuries to meaningfully rally without a big stock selloff means that a stocks up, bonds up scenario is highly unlikely even in a Fed cutting cycle.  This bond market weakness is an incremental negative for stocks.  Bonds continue to trade terrible and I don't see it improving much until you get closer to the end of Powell's term, when the bond market tries to price in a much more dovish Fed from May 2026 onwards.  

Last week, we finally reached my target price level for a good risk/reward short at SPX 6050.  I entered a short SPX position around those levels and plan to hold the short position for several days.