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.  

Approaching the Apex

We are approaching the top of the mountain.  For anyone who's climbed a big mountain, the closer you get to the top, the greater the sense of excitement,  achievement, and euphoria.  This is what is happening in the US stock market.  You can sense it from the return of complacency (TACO trade), speculation in risky assets like bitcoin, and even seeing the beginning of a move towards low quality, like the Russell 2000 (massively outperforming SPX in the premarket).  

With Russell 2000 lagging so badly over the past year, when it starts outperforming after an extended rally, its often a sign of investor exuberance and excessive speculation.  The Russell 2000 is a different barometer than it was in the pre 2020 era.  Before 2020, the Russell 2000 usually outperformed coming out of bottoms as risk seeking investors flocked towards the more speculative and higher beta small caps.  Back then, Russell 2000 would top out before the SPX and Nasdaq, acting as a canary in the coalmine signal of waning upward momentum.  No longer.  Now Russell 2000 outperformance is a sign of investor complacency and exuberance, happening after extended rallies.  

Tops take time to form, which make them tricky to trade.  Tops breed complacency.  Bottoms breed fear.  The tops that lead to bear markets (not just corrections) usually have the following attributes:  

1. Consistently high inflows into equity funds/ETFs and speculative high beta stocks showing increased retail investor interest in stock speculation/investing.  (Check) 

2. Big gains in the stock indices over the past 2-3 years.  (Check)

3. Historically high valuations.  (Check)

4  Economic growth decelerating. (Check)

5. Investors getting less bullish as uptrend flattens out and gets choppy, but still staying fully invested.  (Check)

We reached a peak in investor bullish sentiment in December 2024, after Trump winning the election.  There was euphoria over future tax cuts and deregulation and hopes for a repeat of the SPX performance during Trump's first term from 2016 to 2020.  The Fed meeting last December where dove Powell left the room and hawk Powell returned was the beginning of the topping phase.  The SPX reached higher highs in February, but investors were getting less bullish as tariff news started to come out.  Usually bullish sentiment tops out before prices do.  There is often a delay of several months before dropping bullish sentiment eventually shows up in the SPX with a big selloff.  

In the 2000 top, investor bullish sentiment actually hit a peak in December 1999, when the original dotcom bubble bellwethers YHOO and AMZN peaked.  The Nasdaq continued to go higher until March 2000 but that was led by second wave of dotcom bubble stocks like CSCO, various semiconductors, and speculative biotechs.  Just as NVDA was the first wave speculative leader of the 2023-2024 boom due to AI, it topped out before the second wave of more speculative stocks like quantum computing, PLTR/APP type of pseudo AI names, and of course bitcoin, which are still going.  

You are seeing a second wave in the bitcoin froth with various junk small caps starting bitcoin treasuries, leading to one day jumps in their stock of hundreds of percent (SBET, NAKA, etc.).  We are finally getting some big IPOs in the bitcoin sector, with CRCL and STRD.  This is all happening as the US economy is noticeably slowing, with historically nosebleed valuations.  

Tops take time, but they don't last forever.  The most extended top was in 2000, when the SPX chopped violently in a range for 8 months from December 1999 to August 2000.  Then the bear market started in earnest in September.  In 2007, the SPX went most sideways from June to October, so 4 months in a choppy range before the start of the bear market.  In 2021-2022, the SPX went mostly sideways from September 2021 to March 2022, about 7 months trading in a choppy range before the bottom fell out and the bear market really got started.   So the 3 most significant tops in the past 25 years took approximately 4, 7, and 8 months to complete before a bear market really got started.  

The SPX is no longer in a clear uptrend, but in a sideways chop, with long term moving averages flattening out.  It has been 6 months since bullishness hit a peak last December, and we've been in a choppy range ever since.  Given how much time we've gone sideways, something has to give.  If my thesis is correct and the current market is forming a meaningful top, history says that there is not much time left before a bear market starts in earnest.  

Given that its been 2 months since the SPX bottomed in April, enough time has elapsed for many traders to get back to previous net long exposures.  Retail investors have consistently been the most bullish on this market.  That is 2000 type of stuff.  That is a bad long term sign, as they are historically even worse market timers than the institutions.  The TACO trade, less fear about tariffs, more calls for all time highs, and increased complacency among investors are signs that the market has priced in a lot of good news and optimism.  It took some time, but hedge fund net flows are now back to beginning of the year levels, and above levels seen at the all time highs in mid February.  There is now ammo for both retail and hedgies to panic if we see a significant correction in Q3, which is my base case.  

Private client equity allocations at Bank of America show historically high levels.  Only the crazy speculative period in 2021 tops the current levels at 63%.  This is potential fuel for a nasty bear market if private clients just get back to just average levels of 56%.  

The latest COT data was a mixed bag, as asset managers meaningfully decreased SPX long positions even though the market went higher for the week ending June 3.  However, small speculators increased their long positions.  

You saw something similar as asset managers decreased SPX long positions as the SPX grinded higher in late 2021, as the SPX was making a meaningful top.   

Last week was brimming with weak economic data, which was mostly shrugged off.  The feared nonfarm payrolls report is behind us, and tariff fears are much diminished with Trump recently having a good call with Xi, opening the door for chicken little longs to buy as there is now more "certainty".  Now expectations on tariffs are too bullish, as most assume the drama is over.  While that's possible, knowing Trump, he loves to shake the tree to become the center of attention again and then be the one to play hero and make trade deals, pause tariffs, or try to pump stocks by saying its a good time to buy, etc.  He is both the arsonist and the firefighter.  All the while being the center of attention, which he craves.  I expect him to throw a wrench into the TACO trade before the July 9 deadline for the tariff pause.  With the amount of buying and re-risking that's happened over the past 2 months, I expect a sharp correction for the next 2-3 months.  

Still not yet at that exquisite short moment, but we are getting close enough that I would rather be a bit early than try to time the top perfectly and miss this golden shorting opportunity.  Thinking the most likely scenario is a top around SPX 6050 after the CPI release and a short term pop in both stocks and bonds on that data point.  But I'll probably start scaling into shorts into any strength this week starting on Tuesday and adding till the end of the week.  For those with a bearish bias, this week will be the time to strike.

TACO = Complacency

They're talking about the TACO trade.  Looking in the rearview mirror.  Again.  Yes, Trump always chickens out.  But it's a red herring.  It assumes that this is a good stock market to invest in if Trump doesn't go through with his tariff threats.  That is a news-centric view of the market that ignores long term fundamentals, positioning, and recent investor flows.  

With the rise of the retail investor, market viewpoints have gotten more short term, less fundamental, and more news-driven.  The percentage of volume coming from retail is much higher now than it was even 10 years ago.  Its probably higher than it was even in 2000.  It breeds short term logic and causes kneejerk market reactions.  

Last week you saw Trump back off within days of the tariff threats he put on the EU.  It led to a huge gap up.  Then you had another monster gap up in the works after the Court of International Trade, whoever the hell they are, said that Trump's tariffs were illegal.  By the way, these judges are part of the swamp, as they will do anything to further corporate welfare, in order to boost the stock market.  Its irrelevant because Trump will chicken out anyway on the tariffs.  But still, it shows you how deeply entrenched corporate lobbyists are in all branches of government.  The market reaction to that kneejerk rocket higher in the overnight session was valuable information.  The market sold the news relentlessly, taking back all the gains in the regular market hours.  

The same thing happened to NVDA, as it gapped up much higher after better than expected earnings, only to see all the gains evaporate on Thursday and Friday.  The market is starting to feel heavy above 5900, as good news is not being followed by sustained strength.  Its quick moves higher that are now faded.  

It has lowered the bar for entering short positions in the coming weeks.  Still looking for that exquisite short opportunity if SPX breaks above 6000 and the paper napkin chartists get even more bullish, but it might not happen.  Early June is a bullish time of the year seasonally, and the systematic and CTA funds are still either short or have very low equity exposure.  But the discretionary funds and retail crowd are back to high equity positioning.  

The NAAIM sentiment survey shows institutional investors are back to being very bullish.  

The COT data showed large speculators adding to longs.  We are seeing signs of long saturation in the SPX price action.  There could be one last gasp rally in June due to systematics jumping on to the bull bus.  Or it could be that we've seen the top already for this move in the overnight market on that tariff ruling from the Court.   Hopefully we get that last gasp rally as that would set up a really great short entry for the big move lower that should happen in Q3.  

What was the most interesting part of the COT data last week was in the Treasuries.  Across the curve, small speculators added big size to their net long positions.  This is counter to the weakness that we've witnessed in May for the long end of the curve.  They are buying the dip heavily in Treasury futures.  Small speculators tend to be wrong so it does make me begin to question my thesis of economic/stock market weakness leading to Treasury market strength, especially in the long end of the curve.   In any case, its a bit of a bearish sign for bonds, and even for stocks.

2 Year T-Note Futures

10 year T-Note Futures

Ultra Treasury Bond Futures

On the sidelines but looking for a good spot to get short.  The bulls are on borrowed time here.  Retail investors are complacent and heavily invested in stocks, and the price action is getting heavier.  Institutions are a bit cautious, but still way above average net long positioning if you go back to a 20 year window.  Lots of economic data coming out in the next 10 days, it may help form a top if its better than expected and the cautious bulls finally get on board.  

Push Pop Bubble

If you've ever played around with push pop bubbles, you can push down on the bubbles, and they go down, but the slightest push back in the other direction makes the bubbles pop up again.  This feels like a push pop bubble market, where you can push the bubble down, but it eventually pops back up without much effort.  It feels so resilient, which is what the market is conditioning traders and investors.  Yet, the overall condition is dangerous, with rampant call speculation and theme stock chasing, high levels of equity holdings among households, and high levels of foreign ownership of US stocks.  

We are close to the end, maybe the end? of the up phase of the market.  You have the return of the retail speculators bidding up speculative theme stocks in  bitcoin and quantum computing (RGTI, QBTS, IONQ).  There is renewed excitement over AI stocks, such as CRWV.  Stocks with high short interest are being squeezed, as hedge funds hold large gross positions, meaning lots of longs and shorts on the books.  Those shorts are squeezing the crap out of their portfolios.  Once again, hedge funds have become the punching bag for the market.  They were the most beared up of all the major institutional groups this year.  

Retail has trounced the hedge funds this go around.  And you can see retail investors getting bold, buying aggressively in this market.  There was data coming out of JP Morgan showing retail investors buying the most stocks ever in the first hour of last Monday after the downgrade of US sovereign credit.  They were also aggressive dip buyers on the Deep Seek and tariff induced dips back in late January and early February.  They may be getting set up again here, with markets showing short term resilience to "bad news", only to see a much bigger down move a few weeks later on no news.  I think it will take a bit longer this time for the SPX to collapse, as we've already had one in April, so its likely to take several weeks for the complacency and positioning to set up for another waterfall decline.  Gut guess is sometime between mid July to late August for that waterfall decline to happen.    

Not much interesting happening on the COT front, as you have asset managers slowly adding long exposure, but nowhere near the highs of late last year.  You are seeing more call buying in the past 2 weeks, back to high levels, where the market is vulnerable to deep pullbacks.  

On a much longer term chart, you can see how extreme the call buying got in late 2024, and how high it still is at the current time.  Even during the everything bubble in 2021 you didn't see this level of call buying.  Retail is basically all in on US stocks.  In particular, the most speculative and highest beta names.  There are flashing amber lights in the background.  April was a big warning, that this market is fragile.  Yet investors have been so well rewarded buying the dip and hanging on to their longs, that they are bold and aggressive, and almost feel invincible.  This is what it felt like in 2000.  

Last week, we got a few scares, from rising bond yields, to Trump's tariff threat against Apple and the EU.  Within a few days, Trump has already retreated from his threats.  Proving that his threats are becoming more bark, and less bite.  Bond yields have quickly dropped back down from the lows seen last Wednesday.  As I suspected, the US economy is just not strong enough for bonds to really selloff and for 10 year yields to hit 5%.  I expect the next big down move to come from recession fears that are accompanied by yields going lower, not higher.  

After all the up and down last week, we're almost at the same spot as we were last Monday after the US credit downgrade.  Its been a tempest in a teapot, moving quickly up and down, but ending up back in the same place.  I expect more of these violent moves up and down in a SPX 200-250 point range, until the complacency builds up and the systematics are no longer in a low net equity position.  

Took a quick short last week and covered quickly, as I have little confidence in a big move lower yet.  The plan is to wait to put on a bigger short position as the weeks go by as we head closer to a more seasonally weak period for the markets(mid July to mid October), when the residual fears from April are further erased from traders' minds.  The exquisite short opportunity is still ahead of us, so I will not be rushing into any short positions.  Perhaps a little breakout above 6000 will get the CTAs long SPX again and induce latecomer bulls to buy the top.  

Chasers are Back

Its as if Liberation Day didn't happen, the trade wars are behind us, and its all blue sky ahead.  The market is moving on from the negative effects of tariffs, towards the positive effects of tax cuts and blowing out the federal budget to pump up the economy.  Trump was initially viewed as a huge boost for the US economy after getting elected, with excitement over tax cuts and deregulation.  Then the tariffs started coming out.  And it was as if Trump didn't care about the stock market and was hellbent on putting on tariffs no matter what.  And that ended up being the wrong thesis, with Trump caving amidst the heat.  Now we are back to pumping on tax cuts.  Life is a circle.  

Many remember how the markets kept going higher as the Trump tax cuts were initially passed in late 2017, eventually resulting in a parabolic blowoff top the following month.  I am sure some are expecting the same thing to happen this time.   But 2025 is not like 2018.   

In 2018, the fiscal deficit was in the low single digits.  The 10 year yield was in the high 2% range, not in the mid 4% range.  You had much less retail investor participation back then.  Now, almost every Joe Schmo is in the stock market.  No, this is more like 2000 than 2018.  Those who claim that this is the most "hated" bull market are laughable.  The retail trader flows data from JP Morgan are showing huge retail buy flows since last summer.   The fund inflows over the past year have been outsized, and much bigger than any year since 2008, with the sole exception of 2021, when the Covid money spew spilled out to all risk assets.  Speculators are heavy into this market.  There is still a lot of hot money in the US stock market.  

Last week, after the relief rally on the China trade talk news, the most speculative Mag7 names NVDA and TSLA rallied hard, along with various smaller cap spec names like RGTI, QUBT, HIMS, etc.  A lot of it was short covering, but there was also new long positions getting put on.  Its almost a reflexive reaction to an up market.  They flock towards the high beta spec favorites TSLA and NVDA.  It reveals the high risk appetite out there.  

Lot of fund flows have been going to leveraged Nasdaq 100 ETFs, mostly on the long side.  As you can see, these levels are back to the bubbly time period in late 2024.  

It late April, as the SPX was struggling to break above 5500, I saw many investors compare this market to 2022.  Now that we've V bottomed all the way back above 5900, there are now comparisons to 2020.  It shows you how quickly market views change in this market, and how bullish the crowd has become in such a short period of time.  

The COT data as of last Tuesday didn't reveal much, as the expected increase in asset manager longs happened, along with small specs.  What was a bit suprising was that dealers reduced their large short positions into the rally.  They are usually fading the big moves.  Big picture, it really doesn't change anything.  We could see a few more weeks of a grind higher in the SPX based on what I am seeing.  

The put call ratios really dropped hard this week, and the ISEE call put index are now back to outsized call buys over puts.  Speculators are back to betting on upside via calls, which is an early warning sign that the uptrend is now vulnerable to sudden down moves, as showchased by today's big gap down.

The bond market is a popular topic these days.  I remember back from 2008 to 2020, lower bond yields were viewed as being negative for stocks as it supposedly signified economic weakness.  Yet stocks kept rising even as bond yields kept dropping.  Now the popular view is that higher bond yields are bad for stocks, because of what happened in 2022 and 2023.  Yet, stocks kept rising even as bond yields kept rising.   With economic weakness and labor market weakening more and more, I have a hard time believing that bond yields will go high enough to really hurt stocks.  People will forget about the tax bill after its passed, and inflation from tariffs is overhyped, as the energy deflation and shelter disinflation will counter a lot of the imported goods inflation.  And the economy is not as strong as many believe, as the withheld tax data from the Treasury is showing weakening income taxes withheld numbers in May.  

I expect the next big down move in stocks to come from recession fears, not inflation/higher bond yield fears.  It doesn't make me a bond bull, but I am definitely not bearish bonds at 10 year yields at 4.5%.  I would rather play economic weakness via short SPX than long Treasuries.  

Moody's came out after the Friday close to downgrade US sovereign debt, which is bad timing for those who have been waiting for the right time to strike on the short side.  I was looking to short this Monday if we were to trade above SPX 5950, near the closing levels on Friday.  Alas, it is not to be.   I will not chase shorts in the hole after such a fierce burst of upward momentum.  I expect the first dip to be bought, although I will not be buying it as I see the possibility of a dip going as low as 5700 before a strong bounce back.  If the market does shrug off this news and goes right back to 5950, which is very possible, I will be looking to short at those levels to play for a pullback down towards 5750-5800.  Right now, the news ruined the post opex short play.  I will be waiting for the next rally to short.  

Mr. Caveman

The Art of the Cave.  Back to the status quo, with China doing nothing to get the deal done.  Deep down, Trump just doesn't want to take the pain necessary to decouple from China.  Those who thought Trump wanted tariffs badly despite economic pain were wrong.  China called Trump's bluff, and will end up winning the pot.  Now that Xi sees Trump as being weak and stock market focused, he will keep pushing his limits, probably invading Taiwan during Trump's term, when he'll meet the least resistance from the US.  

Fundamentally, the market is now back to pre-Liberation Day conditions, which are not good, but also not disastrous.  With these mini-me tariffs, there will be a slight negative fiscal impulse, which will likely be offset by coming tax cuts.  

There remains the elephant in the room.  The ever growing US budget deficit.  Even with big capital gains from 2024 increasing taxes paid, you still had the budget deficit increase year over year.  Keeping Fed funds rate at 4.33% is a budget buster for the US government.  Ironically, a Fed cutting cycle could prove to be useless as the reduced interest income to the private sector from lowering short end rates would offset any kind of stimulus to the part of the housing market that finances off of SOFR.  These giant budget deficits are keeping long end yields elevated, near 5%, even as the economy is weakening.  The Fed's worst nightmare would be to cut short rates and see long end yields not budge, or even go up.  That would kill any kind of housing stimulus from Fed cuts as mortgages are priced off of the 30 year, and just end up reducing Treasury interest income to the private sector via lower Fed funds rates.  

With the giant budget deficit, the upcoming tax cuts and Trump's caving on Liberation Day tariffs, we are setting up a scenario where the economy goes into stagflation:  maintaining low growth, with higher inflation.  The inflation will come from higher prices on imported goods, and less immigration, leading to higher manual labor costs.  Going from Biden to Trump has drastically cut down on illegal border crossings, reducing the flow of immigrant labor.  

Less population growth = lower economic growth.  The Covid stimulus has basically run out, and states and local governments will now have to balance budgets again without the Covid largesse to fall back on.  That means less state and local stimulus than during the Biden years.  

On a technical basis, the SPX has kept its bullish pattern of higher highs and higher lows.  You still have a big wall of worry over tariffs, which is obvious when you go on Twitter and see all the bears out there.  With Trump caving on tariffs, the bears are running out of excuses to sell this market.  Especially if we blast past 5800.  Systematic funds and CTAs still have low equity exposure, and the biggest trend following ETF, DBMF, is actually short SPX futures, which is uncommon.  I expect that to change to a long position within the coming weeks.  So you have low positioning among systematic funds which will keep buying as the VIX goes lower and the SPX goes higher.  That will provide a bid under this market for the next few weeks.  

The COT data as of last Tuesday didn't show much of a change in positioning.  Asset managers are slow to add back to equity longs after purging a lot of their long positions in the 1st quarter.  They are still at historically high net long levels, but not high enough that would provide a short term edge.  What I find more interesting than the SPX data is the VIX COT positioning.  Commercials are now net short VIX futures, which is rare.  They are usually on the right side of the long term moves in VIX.   Commercials are at historically low levels, which means the long term move in VIX is likely lower, not higher.  This gives me some pause when I am thinking about putting on bearish SPX positions.  

We finally have seen more bullish flows in options, especially single stocks, as the equity put call ratios have been lower the last few trading days.  There is still a lot of put buying in the index options, but its being balanced out by a lot of call buying and speculation in high beta names like TSLA.  

Overall, it doesn't look like a good spot to be short.  I am long term bearish, based on the historically high equity exposure of households, high valuations, and the large inflows into US equity funds over the past 12 months.  In the short to intermediate term, we could see fast money and systematics chase this market higher and squeeze the bears.  I am waiting on the sidelines looking for higher prices to enter short positions.  

With the good news coming out of the US - China trade talks, we are getting closer to the end of this rally.  But I don't expect an immediate reversal and resumption of the downtrend.  With Trump likely to pump tax cuts in the coming months, we'll likely chop around in a range around these levels for a few weeks before we get the next downside surprise.  I would not be married to any bullish or bearish views at the moment.  I will be looking to fade any extended moves in the coming weeks, both up and down.  

That De-Escalated Quickly

The trade war.  It escalated quickly.  And de-escalated quickly.  It was good for the counter trend trader there for a bit, then the last week happened.  The all-in, all-out nature of the modern markets seems to be designed to screw the majority of investors.  It wouldn't surprise me to see this market continue to squeeze higher for another week or two and then make a big reversal.   It looks like shorts are too early here and need to be patient to avoid further squeezes.  

Fund flows, futures positioning, and fundamental data support the view that this is a bear market rally.  However, the price action has been much stronger than expected, surprising many, which has to be respected.  Whenever the market does something that surprises the majority, it gets my attention.  You never want to just brush it off as if its nothing.  It does tell me that the next 1-2 weeks will be difficult to predict.  So far, a further move higher looks more likely than a reversal back lower for the next 2 weeks.   

Fundamentally, you don't have much fiscal or monetary support.  From a capital flows perspective, foreigners, who are heavily overweight US equities, are now going in the other direction.  That is after several years of piling into US equities.  That will weight on the SPX in the long term.  I see some compare this period to 2020, and some to 2022, but I am more pessimistic on this market than both.  2020 is no comparison.  The fiscal and monetary support are polar opposites to what is happening now.  As for 2022, the monetary tightening was coming in heavy, but the fiscal spigots were still flowing like crazy. 2022 fiscal policy was quite expansive and loose.  Nothing like now.  

One factor that I neglected in my analysis before putting on shorts in late April was the amount of time since the start of the downtrend (February 20).  Its been 75 days since that top, which means we are still early in the bear market (assuming its a bear market).  Most SPX downtrends have vicious counter trend moves in the first 3 months of the move.  Since we're still within that 3 month window, there is still time for this rally to continue to confound bears and squeeze even higher.   Some examples from past waterfall declines and recoveries:

SPX 2000

In 2000, you topped out in late March/early April, with an immediate vicious decline, which was retraced 100% by mid July.  From top to 2nd top, it was about 90 days.  But you even had a slightly higher high from that point in late August, to form a 3rd top.  The  countertrend move lasted from late May to late August, over 3 months.  The current move in 2025 is less than 1 month old from the April lows.  So in a worst case scenario for bears, if it follows the 2000 template, you could see another 2 months of higher highs and higher lows.  

SPX 2007

You had a shorter consolidation and countertrend move at the top in 2007.  It could be because the bull market that topped out in 2000 was much longer than the bull market that topped out in 2007.  Or it could be because the economy was weaker in the fall of 2007 vs fall of 2000.  The consolidation from the first top to the second top lasted ~90 days.  This is more typical for your average bull market top.

SPX 2022

In January 2022, the bull market was technically 21 months old, but in reality, the Covid bear market was more like a flash crash of a bear market.  Just as the bull market was not that long, the consolidation at the top was also not long.  You topped out in January, and length of the first down leg, and the first real countertrend move lasted less than 90 days, until late March.  After that, it was basically lights out for the bulls as you entered a steep decline from April to June.  I see similarities to the current market with 2022, but the big difference is the market was much less certain about the path of inflation and bond yields, something it was unfamiliar with for over 40 years since the stagflation of the 1970s and early 1980s.  So that level of uncertainty is definitely greater than these Trump tariffs which look like they will be toned down over the next several weeks, as he's already caved a few times to market pressure.  

Nothing notable in the put/call activity last week, or the COT data.  You had a slight increase in SPX longs after the rally, but not really a big move.  Similar to the lack of decrease in SPX longs in the prior week when it went down.  Seems like the weakest hands have already pared their positions down, so you're not getting big positioning changes despite the extreme volatility.  Open interest went down across the major index futures, so traders and fund managers appear to be reducing risk.  

Still stuck in underwater SPX shorts.  Looking to exit gracefully within the next 2 days.  Last Friday's move appears to be a lot of short covering and delta hedging as the IVs went down quite a lot after the NFPs and into the weekend.  I don't expect longs to be chasing this kind of a move going into the FOMC meeting on Wednesday, where Powell will likely stay firm and not hint at any moves.  The bond weakness is a small positive for bears that comes from the stronger than expected NFP number.  

Pullback or no pullback, will be out of shorts by Wednesday.  The main reason I do not want to stay short is the price action.  When I entered shorts several days ago, I was only expecting a marginal move higher from my short entries.  The fact that you got up to SPX 5700 so quickly reveals the underlying strength of this move.  Even as there is no real progress in the trade talks.  It appears that equities positioning (non futures related) got too light in April, and hedgies and underinvested funds are scrambling to increase net exposure to keep up with the averages.  That can go on for longer than people think.  These hedge funds are notorious for chasing moves to keep up with the indexes to protect their jobs.  So this could last for several weeks if they take their time adding back longs.  

The Game Taught Me the Game

"The game taught me the game.  And it didn't spare me the rod while teaching." - Jesse Livermore, Reminiscences of a Stock Operator  

Speculation is tricky.  Its not like anything that you learn in school or in a how to book.  There are tens of thousands of books on trading and investing that are overflowing with advice on how to make money.  From experience, most of those books are useless.  Unlike most other skills, people who teach trading/investing are usually the ones who failed at making money in their supposed field of expertise.  That's why so many aspiring traders look for mentors, someone who will teach them the tricks of the trade.  Those tricks of the trade are eerily absent inside the thousands of books sold by the so-called trading and investing experts.  

Trading is a competitive game, where edges get diminished the more that they become known.  So most successful traders are loathe to write a book teaching everyone how they made money.  Or even starting a subscription service.  Or mentoring someone, who could become a future competitor.  That's why you are left with a landscape in the trading education community of a bunch of overconfident, low edge/no edge techniques that permeate and misteach a bunch of eager traders looking for shortcuts.  

As Jesse Livermore said, the game taught me the game.  The best way to learn is to get in the game.  Paper trading won't do it.  Real live trading and putting meaningful money on the line is the fastest way to learn.  Nothing focuses the mind better than having a bunch of money at stake.  I learned the most from my losses, although I don't recommend losing just for the sake of learning.  You have to learn from those losses, and not be hard headed.  You have to manage risk, to stay in the game and to keep learning.  It sounds trite, but risk management is the most fundamental, important, and necessary skill required in this game.  

If my view on this market are correct, the current environment will favor those who have experienced multiple bear markets, and have a less bullish view of the US stock market.  A lot of newer traders, and those with short memories, will be caught off guard.  Too many are positioned aggressively in equities, especially retail investors who are probably the most long on an asset % basis since 2000.  The household equity allocation tells a lot.  This was as of December 31, 2024, when the SPX was around 5900.  But even if you account for the correction, the equity allocation is still historically very high.  

These high equity allocations are facing extremely high valuations, on a forward P/E basis, which are likely overinflated considering the probable economic weakness coming over the next 12 months.  

Fundamentally, you have a Fed led by Powell that is not eager to save Trump and the stock market.  Trump while caving on a lot of the tariffs, is unlikely to completely give up and settle for the status quo, likely wanting some tariffs just to show that all this angst wasn't for naught.  So tariffs will still be a drag on the US economy even if you get trade deals.  

And fiscal stimulus is likely to come only in the form of tax cuts which will only be effective if they are large enough, which will come in 2026 at the earliest.  Its also possible that large tax cuts could spook the bond market and be counterproductive without a Fed that is willing to play nice and help absorb the extra Treasury supply coming from bigger deficits.  You could get a big rise in 10 year yields if the Fed doesn't restart QE if deficits get even bigger.   Powell is around till May 2026, so that's a long time for the stock market to deal with an uncooperative Fed.  

The recent rally has also resulted in higher short selling activity in the dark pools, tracked by the DIX index at Squeeze Metrics.  As you can see, over the past several months, a spike in the DIX has led to pullbacks.  

The COT data, which covered the down move from Tuesday April 15 to April 22, surprisingly showed a small increase in SPX net longs among asset managers.  The overall levels of net longs is still quite high, although well off the highs earlier in the year.  

Its looking like one of the worst environments to be long SPX.  The bulls have enjoyed a lot of success since 2008, and the down swings have not lasted long. The longest downtrend over the past 17 years is in 2022, when we had a 26% drawdown from top to bottom over 9 months.  That's mild for bear market standards.  And what's more important, was that bear market was followed by a huge move higher, from SPX 3500 to 6140 over 2.5 years.  That's a 75% move in 2.5 years.  No wonder the bulls feel invincible about the long term prospects for US stocks.  The HODLers are not in bitcoin, they are in the US equity market.  

I put on a short position late last week and look to add some more early this week to get to a full position.   The risk/reward looks favorable for short positions for the intermediate term.  There is renewed optimism coming from headlines showing Trump caving on tariffs and talking about trade deals.  The talk about the breadth thrust last week was pervasive, showing that technical traders are now bullish with SPX above 5500.  But we are just back to previous support levels which was the local bottom in March.  

There are factors that the bulls have in their favor.   There is relatively low net equity exposure among vol control funds and hedge funds overall with a lot of bearish sentiment showing in the surveys.  If you add the bullish and bearish factors, it appears that the bears have the edge.  If the SPX doesn't pullback within the next 2 weeks, I will reassess my view.  If I am correct, the SPX should start moving lower within 1 week.  

Dumping Dollars

US assets are being dumped.  They are dumping US stocks.  They are dumping Treasuries.  The last 2 months have been a massive reversal of global capital flows which have gone from the rest of the world into the US for the past 15 years.  There are a lot of foreign investors overweight US assets and they are feeling the pain.  Not only are they losing money on the dollar weakening vs the local currency, they are also losing as the SPX goes lower along with long term Treasuries.  

This is a huge problem for the US government and for those with big allocations to US stocks and bonds.  Dollars are weakening despite the Fed remaining hawkish amidst Trump's trade war.  I am no Trump fan, but Powell is definitely playing politics.  How do you suddenly go from dovish and overcutting in a red hot stock market and easy financial conditions in the fall of 2024, to being hawkish and watching and waiting as the US economy weakens rapidly.  Powell should be fired.  He's the most political Fed chair in modern history.  He only cares about maintaining power, and he's taking out his grievance against Trump who won't reappoint him with hawkish policy while the US economy weakens.  Sure, Trump's tariffs are the main reason for the economic weakness.  But the Fed's job is to focus on the economy, not on fiscal policy.  

Here's a look at fund flows into US stocks:

Cross border inflows into US assets has been skyrocketing since the beginning of 2022.  There is a lot of foreign hot money in US stocks.  

YTD inflows into equities is ~$250B, that's in less than 4 months, approximately 2/3 of which is going into US equities, while the SPX has been going sideways and then down.  A lot of investors are caught offside here.  Not a  good sign for the rest of the year for bulls.  

The most risk-taking of investors are pumping huge amounts into leveraged long ETFs, with the biggest weekly inflows on record happening in the past week.  There are still a ton of dip buyers, especially among retail investors.  The buy the dip mentality is still going strong.  This mentality is not what durable bottoms are made of.  

Lastly, let's take a big picture look at the call/put ratio, or the ISEE index of opening calls to opening puts ratio.  This shows that we are at a historically elevated ratio for the index, still showing lots of call speculation.  

The long term fund flow and positioning data are all negative for the SPX.  In the short term, you can get counter-trend moves that get bulls excited again thinking the worst is over.  But the long term factors such as valuations, positioning, and speculative activity are all showing that we are in the early innings of this downtrend, not the late innings.  

I haven't even gotten into the fundamentals of the market, which are on shaky ground with Trump's infatuation with tariffs, and animosity towards trade with China.  China has the upper hand in this trade war, as Trump's pain threshold is much lower than Xi's.  Wall St. is already breathing down Trump's neck, along with his group of trade hawks in Navarro and Lutnick.  Wait till Main St. gets upset when the effects of the tariffs really hit home, and prices for imported Chinese goods skyrocket and/or are just unavailable due to lack of inventories.  

These tariffs will be so painful for the US economy that they won't ever gain traction, and Trump will backtrack quickly, or be forced to give up his tariff powers as Congress takes away his keys to the tariff controls with a 2/3 vote if he remains intransigent.  

Covered the short last week, as I was wary of holding shorts over the long weekend.  Unfortunately, I covered too early as we are getting a big gap down this morning, along with the long end of the Treasury curve selling off hard.  This is a terrible market to be a long term long in US stocks.  I believe we will be chopping around in a range between SPX 5150 to 5450 for the rest of the month, so we are closer to the lower end of that range at the moment.  I may nibble on SPX longs if we get some further selling after the cash open.  Will not chase longs higher.   Eventually after the chop for the next 2 weeks or so, I expect another sharp move lower towards SPX 4800-4850 in May/June.  

From Trump Premium to Trump Discount

The US stock market is in transition.  From a raging bull market, to what is likely to be a raging bear market.   From a market that is pricing in a Trump premium, to one that is pricing in a Trump discount.  

The initial euphoria after the Trump election victory is a distant memory.   Hopes for big tax cuts, deregulation, and a repeat of the 2016 to 2020 up move in the stock market was consensus.  It was perhaps the most bullish I've seen investors on US stocks since early 2000.  It doesn't take much to push investors towards a less optimistic view when they are that bulled up.  This time, it wasn't just a small little catalyst, but a big bomb going off with the Liberation Day tariff announcement.  

It was commonly viewed that tariffs were just used as a negotiating tactic to make better trade deals with foreign countries.  But it underestimates the desire for Trump to have the US go back to the old days, where it was one of the manufacturing hubs of the world, with a smaller trade deficit, and when high paying factory jobs were commonplace.  Of course, for those with any kind of insight into the world of manufacturing and production, the US just can't be cost competitive with China unless it jacks up the tariffs several hundred percent, and thus raising prices on almost all goods by huge amounts.  That's just not going to happen.  The market would break far before it even got close to that situation.  And if the market breaks hard enough, next thing you know, Congress will be taking the keys from Trump and taking away his tariff powers.   

This past weekend, Trump caved to Apple and the mega cap tech companies that rely heavily on Chinese outsourcing.  It was Trump showing that he reached his pain threshold, and was feeling the heat.  It also gives China more leverage, as it shows that Trump is a caver, and while crazy, will back down if the stock and bond markets start panicking like they did last week.  Which forced Trump to both delay tariffs by 90 days, and then backtrack even further with more tariff exemptions.  

Of course, Trump didn't want to sound weak, so he tried to talk back his exemption, saying it wasn't an exemption, but a reclassification to another bucket of tariffs which are at a lower rate.  Howard Lutnick came out on the TV circuit to try to tamp down the enthusiasm, saying that tariff exemptions were temporary.  For those that know Lutnick, he is probably the biggest brown noser in the business.  What he's saying is what Trump wants to hear, and what Trump believes.  The stock market doesn't want to believe in that reality, instead hoping that Trump fires Lutnick and Navarro, so the stock market can go higher.  Trump is far closer to Lutnick's view than Bessent's view.  While the market seems to love Scott Bessent, as he tries to placate the market  every chance he gets, its not what Trump's really thinking.  Trump wants tariffs, and wants to keep using the threat of tariffs to exert his Presidential powers.  That's not going away.  

With the gap up today, investors are assuming that Trump has showed his hand, and his mettle, and its a weak hand.   He's clearly not willing to stand up to the stock and bond markets to push his trade agenda when they are having a tantrum.  As much as he wants to reduce trade deficits and bring back manufacturing jobs to the US, he doesn't want to experience the pain and pressure of being responsible for a big decline in stocks, with growing anger from his corporate base.  

While Trump caving means that markets are less worried about big tariffs, he's stubborn and so obsessed with being at the center of the action, that I expect another tariff tantrum just so he can be the center of attention again.  He enjoys being both the arsonist and the firefighter who puts out the fires that he starts.  

Last week's panic move lower, and subsequent huge rally higher on the 90 day tariff delay was a classic waterfall decline, followed by the strong reflexive bounce.  You saw similar action in August 2011 and August 2015.  The current situation is worse than both.  Not only are investors more complacent than back then, they are also much more heavily exposed to equities, making it likely that last week's move lower was a prelude to a new bear market, rather than the starting point for a re-newed bull market.   

The COT data released Friday showed a significant, but not overwhelmingly big reduction in asset manager long positions in SPX.  If you zoom out on a 5 year time frame, the current asset manager net positions in SPX is still on the high side, but no long extreme.  It is still way higher than most of 2022 and 2023.  

SPX Asset Manager Net Position

The commercial net position is still relative neutral, despite the big selloff, and way off the highs that you saw from mid 2022 to late 2023.  

SPX Commercial Net Position

Last week, you saw the stock guys on CNBC start talking about bonds.  They only talk about bonds when something bad is happening in that market.  Once again, we witnessed long term Treasuries fail to provide a hedge to equity market weakness.  Its now the 3rd time in a row, the first in 2022, the second in late 2023, and now where Treasuries sold off hard as equities sold off hard.  Instead of acting as a hedge, long term Treasuries have acted as piece that adds more downside volatility in the portfolio in times of stress.  The golden days of Treasuries providing a positive yielding hedge to equities are long gone.  That's bad news for financial asset investors that could use the diversifying benefits of a negative correlating asset that provides positive returns like bonds did from 1981 to 2020.  That era appears to be over, as we now live in an era of fiscal dominance.  

I believe that for the rest of the year, you will be transitioning to pricing in a Trump discount, a much bigger one than what happened post Liberation Day.  Trump has only a few cards that he can play when trying to push around the stock market.  Its either big tax cuts or big tariffs.  Despite him caving on tariffs over the past few days, he won't want to give up on that card, not when it gives him so much power.  And he loves being the center of the chaos, where he seemingly controls the outcome.  Its a power trip for him.  He's not going to give that up in order to placate investors and CEOs. 

Anecdotally, I still see a lot of investors eager to try to catch the rebound, expecting a continued rally when tariffs are out of the headlines.  You have seen a huge amount of retail dip buying this year, and  that has continued into the waterfall decline.  With the Fed unwilling to bail out Trump on his tariff mess, and with big tax cuts and deregulation a more distant and uncertain catalyst, there doesn't seem to be the fundamental backdrop for a sustained uptrend.  We will see bounces and big bear market rallies, but the damage has been done.  Its looking more like the fall/winter of 2000, the spring of 2022.  The beginning of a bear market.  

I entered a starter short position after the 90 day tariff announcement rally, and remain short.  I am looking to play for a 2/3 retrace of this rebound off the panic lows, expecting more volatile chop in the coming weeks.  Not looking to put on any big positions in this volatile market, especially on the long side.  Playing small ball until I see a fatter pitch.  I do think you will get a magnificent shorting opportunity sometime this summer.  Until then, looking to just stay in the game, and trying to hit singles.