It was the Best of Times....

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

― Charles Dickens, A Tale of Two Cities

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

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

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

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

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

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

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

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

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

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

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

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

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

Phase Transition

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

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

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

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

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

Top ETF Flows as of Nov. 5 2025

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

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

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

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

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

Aging Bull

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

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

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

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

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

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

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

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

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

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

Tariff TACO Rally

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

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

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

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

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

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

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

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

Bubble Recognition

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

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

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

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

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

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

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

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

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

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

The Straw and the Camel

The Friday Trump tweet was the straw that broke the camel's back.  Its easy to forget about all the other straws that were added onto the camel, but they had much more to do with the big drop than the tweet.  Lots of excesses were building up in the system, one straw at a time.  The massive inflows into equity and crypto ETFs, the rampant call buying, the lack of realized volatility.  People were talking bubble, but with the view that the blowoff top was ahead of us, not behind us. These straws already were placing a lot of stress on the camel.  It just took a Trump tweet to collapse the camel's back.  

Now all the Monday Morning QBs will say that Trump took the market down, and that the TACO will bring the market right back up to where it was before.  That's unlikely.  This move down wasn't about tariffs but a return of volatility.  We could get a 1-2 day bounce, but I think this will last until more puts are bought and investors are more protected.  After that, we could have a reflexive rally later this month.  I would guess this pullback is at least 5 days in length, although I don't expect it to be very deep because investors will likely see through the tariffs, and there is still a lot of greed in this market that will remain until you get more signs of weakness in AI + high beta spec names.  Those stocks are still very strong relative to the market vs. where it was the last time SPX was under 6600.   

While there are still some tariff bears out there, a lot have been taken out and shot, with much less in their pockets.  And the remaining ones aren't so loud and proud.  Tariffs are a paper tiger.  They won't last.  The Supreme Court starts arguments on Trump's tariffs in early November, and should come out with a decision before year end.  All the lower courts have rescinded the tariffs by wide margins.  That already signals that odds heavily favor Trump's tariffs being ruled illegal.  The Supreme Court has a conservative majority, but these judges definitely care more about their equity portfolios than Trump's ego.  Besides their selfish desires, they have legal reasons to rule against tariffs.  Many of these conservative judges tightly follow what's stated in the US Constitution.  There is nothing in the Constitution that gives the President the right to tax.  Tariffs are a tax.  That's the power of Congress.  

On Kalshi, odds are at 38% that Trump's tariffs remain.  I would say the actual odds are much lower.  You have to realize that lots of these bettors have a political bias, and many Trump fans/Republicans will vote that Trump's tariffs are going to stay.  That's the reason a lot of these 80/20 scenarios on politics end up being 60/40, or 55/45 like the Trump/Harris election odds in 2024.  A lot of people vote their political bias when it comes to political betting.  That skews the odds closer to 50/50, which is the approximate ratio of Dems and Repubs in the US.  

If I had a Kalshi or Polymarket account, I would bet heavy on the Supreme court ruling against Trump's tariffs.  I view it as almost a slam dunk, similar to Trump's victory last November.  If the Supreme Court upholds the lower court rulings and rule against Trump's tariffs, that makes Trump's tariff tweets toothless.  And all of that tariff money has to be refunded, which would end up being a huge corporate tax refund that would be stimulative for stocks.  This is the one bullish catalyst I don't want to be short ahead of.  Its also why I think this trade war is basically over.  Yes, Trump can use other legal sections to put on tariffs, but they will be limited in duration and scope.  So basically future tariff tweets will be nothing burgers.  And I bet corporations will sue immediately to get future Trump tariffs repealed and outlawed.  

The one force that is more powerful than the US President is the corporate lobby, which rules over Washington DC.  Corporations are the main financial engine for politicians and their campaigns.  Politicians will not bite the hand that feeds them, especially when it would also hurt the stock market.  

Friday did show where the weak hands were in this market.  Clearly, the weak hands are in the crypto space.  Bitcoin flash crashed down almost 20% at the end of Friday.  Lots of alt coins went down over 50%.   It was a massacre for those leveraged long cryptos.  The insiders at the crypto exchanges must have had a field day picking off retail traders and buying the liquidations at fire sale levels.  Crypto exchanges are modern day bucket shops.  When there is no inherent value, volatility can rise quickly.  Because there are no value buyers.  

Its disappointing to miss the index short waiting for the perfect setup but that's the price for being selective.  Missing trades is part of the game.  We have a big gap up on the TACO trade.  I see very little upside from this gap up, but I will not fade it.  I may put on a small short later in the day if we get a gap and go scenario after the cash open, perhaps around SPX 6660 to 6680.  

Speculative Fire

They are going out on the risk curve.  Its not enough to just hold high beta stocks like NVDA, TSLA, or PLTR.  They need to dial it up and trade call options on those names.  And if they don't want to trade options, they just go to even more speculative names like a LAC, IONQ, RGTI, or down to low dollar stocks like PLUG.  Bitcoin is back near all time highs.  It took just a week to go from 109K to 124K.  

This reminds me of November 2021, which was the 2nd wave of speculation in the Covid bubble after the 1st wave happened in January/February 2021.  The 1st wave of the AI /debasement/Trump bubble happened in November/December 2024.  We are getting the 2nd wave now in October 2025.  You can judge these speculative waves by watching the Russell 2000, which really only comes alive and bursts higher when speculation is hot.  The Russell 2000  is filled with speculative, nonprofitable, high beta names that only catch fire when the gamblers are on the prowl.  And they are definitely on the prowl.

The bearish catalyst that popped the Covid bubble in 2022 was inflation and Fed rate hikes.  Inflation was rising but the Fed remained dovish in 2021 which encouraged speculators to chase after speculative names that are prevalent in the Russell 2000.  

Now, the Fed is tilting dovish and will likely get more dovish with a Trump appointed Fed chair in May 2026.  So what will be the bearish catalyst this time?  It has to be the popping of the AI bubble as reality sinks in that a lot of overbuilding and malinvestment has taken place.  The first signal of that will happen when stocks stop going up on announcements of more AI capex.  We may be seeing the beginnings of that as ORCL and META are not trading as well as the SPX in recent weeks.  Its still early, and you need to see more signs of AI fatigue before the rats jump ship.  But you can't wait too long or you will miss the first big drop from this bubble.  The first drop is always the quickest and most vicious.  

What makes picking this top so difficult is seeing the hedge funds not actively playing this bubble.  Leveraged funds are holding large short positions in SPX futures, as well as not increasing net leverage.  In fact, Goldman prime broker data shows fundamental L/S funds sharply reducing net leverage in late September.  This makes it less likely that you see hedge funds mass liquidate on weakness like they usually do when they are fully long.

While systematic funds are near max levels for equity exposure, the fundamental funds are closer to neutral.  It's much better to fade a market when both systematic and fundamental funds are maxed out for equity exposure.  Tough.

On the other hand, retail investors are piling into equity funds as well as call options.  Call volumes have soared recently.  This can be an early warning sign that a market top is coming around the corner.  It was way too early in January 2021, when the first wave of call speculation hit the market.  The SPX kept rallying for several more months.  It was spot on though in nailing the top of the 2nd wave in November 2021.  It was also a bit early in December 2024, but if you shorted in early December 2024, you would have been able to cash in on a brief, but sharp dip later that month.

These type of 5+ month rallies without at least a 4-5% correction are not common.  You did see one in 2021, and almost saw one in early 2024, but they are unusual.  Usually the stock market is choppier than this.  But this uptrend has been quite smooth, with small dips being voraciously bought, giving bears little time to monetize shorts or put positions.  Usually these type of lengthy rallies end with a sharp selloff.  They aren't always deep, but they tend to be sharp enough that you get a notable VIX spike.  

But the rally in recent days has been accompanied by a rise in the VIX, which is puzzling.  Usually you don't see this kind of persistent bid for VIX when the SPX keeps going higher, in a non-volatile manner.  The realized vol has been very low, but the implied vol keeps going up.  It makes no sense.  And its not as if there is a big future event that is feared keeping IV elevated.  No, the government shutdown is not a feared event.  It could be buyers of VIX ETFs and ETNs which are keeping the VIX well bid.  There has been a lot of buying in VXX, UVIX, and UVXY ever since the market bottomed in April.  But the amount of buying, which is nearly $2B combined over 6 months, is just not enough to distort such a big market.  Usually a rising VIX with a rising SPX is bearish, but there are so many other signals that are flashing bullish right now.  

The market is just too strong to fade here.  Too many risk on signals are firing which make the rally more durable.  I prefer to short a market when SPX is flat to rising while bitcoin and other speculative favorites have topped out and are going down for several days to weeks.  I also prefer to see Nasdaq weaker relative to SPX and RUT. That isn't happening.  And you still have the government shutdown, which keeps a fair number of chicken little investors on the sidelines.  This means when the government shutdown ends, you have chicken little money coming in to lift the market.  So the government shutdown is actually a future bullish catalyst.  And I don't like shorting ahead of bullish catalysts.  Perhaps the market tops despite all the strength in speculative tech and bitcoin.  But to survive as a short seller in a raging bull market, you have to wait for perfect setups to short.  And the current setup is far from perfect.  Watching and waiting, probably on the sidelines until the government shutdown ends.  

Ninth Inning of a Blowout

There is a widespread belief that the stock market tops on euphoria.  In practice, that’s usually not the case.  Most of the time, investors are more bullish in the 6th inning of a bull market than in the 8th or 9th inning.  If you want to compare this bull market to a baseball game, it starts in October 2022, which is the 1st inning.  This bull market is 36 months old.  The peak of bullishness for this bull market happened in late November/early December 2024, when the euphoria of a Trump victory and hopes of a repeat of 2016 to 2020, as well as tax cuts and deregulation got everyone bulled up.  That was about the 6th inning of this bull market.  Back then, the SPX was trading around 6050.  Now, about 600 points higher, and investors are less bullish now than back then.  

I would say we are in the 8th or 9th inning of this bull market.  It is a blowout.  The bears have shown only a few short moments (October 2023, August 2024, April 2025) of glory, while getting pummelled the rest of the time.  But the game is almost over, and the winning team is no longer as enthusiastic about the game.  

You can look at the AAII, NAAIM, and other sentiment surveys which show less bullishness than late 2024.  Some use this as a reason that this bull market has more to go because investors aren't super bullish. If you look at the 2020-2021 bull market, investors were the most bullish in early 2021 when all the Covid stimmies were being passed and you had the re-opening optimism. By late 2021, despite a much higher SPX, investors were less enthusiastic as there was no new catalyst to look forward to.  It appears we are at the same point now as in late 2021.  The latest catalyst, Fed rate cuts, is well known, and just not that potent when it fails to bring down 10 year yields.  

In order for a bull market to make an extended run, it needs to keep the bullish psychology going with fundamental catalysts, not just higher prices.  The Trump tax cut/deregulation catalyst was used up in late 2024.  The Fed easing catalyst started in the fall of 2024 with the 50 bps cut last September, stopped in December, and has restarted again just recently.  This catalyst is very weak, as inflation is still high, and sticky, and with minimal effect on long end yields.  

The AI boom catalyst is still ongoing, but it is aging and very well known.  There are cracks that are forming in the hyped up AI theme.  NVDA's earnings report in August was a beat, but not as big as many expected, and the stock traded down afterwards for several days.  NVDA has lagged the SPX ever since that report.  You are seeing AI deal announcements which are quite circular.   A deal based on hopes that OpenAI can get financing to pay for AI infrastructure from ORCL.  A deal based on vendor financing (NVDA making an equity investment in OpenAI so they can keep buying NVDA chips).  Perhaps NVDA is seeing that the hyper scalers are nearing their threshold for AI capex spending, and need OpenAI to buy even more chips.  

The OpenAI - ORCL deal boosted ORCL by over $100 from the $241 September 9 close to the top at $345 on September 10.  Two weeks later, with the SPX higher than it was on September 10, ORCL closed at $283 on September 26, giving back more than half the gains on the announcement.  The OpenAI - NVDA boosted NVDA from $176 to $184, to only give it all back in the following 2 days.  The price action in AI stocks is not quite matching the enthusiasm of all these Wall St. analysts.  

It's quite clear that the SPX bull market is dependent on the AI capex boom continuing in perpetuity.  That is the dominant driver of corporate investment, which feeds into the earnings for the most important stock in the SPX: NVDA, as well other huge names like AVGO and ORCL.  The combined market cap of those 3 stocks is nearly $7 trillion.  When the hyper scalers cut back on AI capex and the AI bubble pops, it will have huge ramifactions for both US GDP as well as the earnings for NVDA, AVGO, and ORCL.  Not just that, all the high flying utility stocks that are banking on huge electricity demand from all the AI data centers would be in for a huge disappointment.  As NVDA goes, so goes the SPX.  

Why would the hyperscalers cut back on AI capex?  The main reason would be because they are not getting a return on investment.  Another reason could be because they have enough GPUs and AI data centers to do their LLM training and fulfill their inference needs.  Remember back in 2021 and 2022 when Facebook changed their name to Meta because they were going to spend tens of billions on the metaverse?  Well, they stopped spending when their stock kept getting pummelled as Wall St. realized META was rapidly burning money in a bonfire.  When Wall St. starts to punish big cap tech for burning tens of billions on AI capex with no ROI in sight, that's when the CEOs will listen and start cutting back.  Not there yet, but when it happens, that will be a game changer.  

We continue to see massive inflows into equities.  The so-called most hated rally has managed to pull in huge amounts into stocks.  From the BofA flows report, $88B has gone into global equities in the past 2 weeks, the 3rd highest ever for a 2 week period.  

Now that September is almost over and up almost 3% for the month, the seasonality bears have quieted down.  I still hear some say the markets will be "choppy" over the next few weeks, which is toned down from saying they will pullback over the next few weeks, like they did in early September.  So their confidence in seasonal patterns is definitely lower, but not fully shattered and embracing the bull train.  Another few days of strength into early October should force most of these seasonality bears to throw in the towel, which would be a welcome sight.  

Last week, we got an unusual surge in COT SPX net long positioning among commercial traders, which I suspected was triple witching opex related.  And with Friday's release, those suspicions were confirmed.  The commercials are now back to similar positioning from 2 weeks ago.  

COT SPX Commercial Positions

More importantly, asset managers are now the most net long in SPX futures since late March.  

COT SPX Asset Manager Positions

In the options market, the put/call ratios have been trending lower and are now at extremes on a 10 day MA basis.  Investors are getting complacent and trading few puts and more calls.  

Covered shorts last week.  Still not seeing enough in the price action to justify a longer term short position.  But this market is getting very stretched and it feels as if investors are not as enthusiastic as they were earlier in the rally.  This along with the large inflows into equities is puzzling, and means that you probably have weaker handed buyers coming in over the past few weeks.  Those late buyers as well as the max positioned systematic funds are the potential sellers into any October weakness.  

Considering how extended the SPX is without any meaningful catalyst on the horizon, you could see a sharp correction soon.  But there are still little walls of worry that the market can climb:  government shutdown, econ. reports, and bearish seasonality (still!).  If the market continues to climb this week to another all time high with lots of complacency, that could be a spot to put on shorts.  You cannot short in the hole vs. this monster.  Can only short rallies and into strength.  The SPX is a monster that is still on a mission to crush all short sellers.  That needs to be respected, so only exquisite short setups will be taken.  

Air Pockets

The FOMC meeting where many feared a sell the news reaction picked the wrong asset class.  It was bonds that sold the news, not stocks.  We got a continuation of the equity squeeze higher, led by the most speculative quantum and nuclear stocks.  Shorts are getting punished again.  They are being targeted and focus fired by retail and hedge funds looking to squeeze out other hedge funds.  Shorts are in a world of pain.  The market is on a mission to squeeze out as many shorts as possible, leaving behind only the most well capitalized and stubborn shorts.  Only the shorts who can survive this barrage and stick around will be rewarded on the other side of the hill.  

The realized vol remains low, but VIX remains sticky with a floor around 15.  This kind of realized vol doesn’t merit a VIX at 15.  This kind of dull price action would normally cause VIX to trade around 12 to 13.  Yet options markets are not willing to price put options with such a low IV.  The options market doesn’t believe this low volatility grind higher can continue for long.  I agree.  Even with IV high relative to realized vol, I would not be selling options here.  Those looking to continue to collect premium by selling puts or selling covered calls are picking up quarters in front of a bulldozer. 

Relentless rallies like the past 5 months set up corrections that plunge through air pockets.   Air pockets form when the index rallies to all time highs and blast higher without much time / volume spent at each level.  Three examples include January 2018, November 2021/January 2022, and July 2024.  The crash in October 1987 is a classic example of an extremely overbought market forming big air pockets along the way, setting up an environment susceptible to a waterfall decline.   

January 2018 top

November 2021/January 2022 top

July 2024 top

SPX 6 month chart

The move from 6100 to 6670 happened in less than 3 months, with little time spent at each new all time high.  That's where the air pocket has formed.  Based on how big this air pocket is, the next correction should prove to be violent.  

The COT data was interesting for the SPX as of September 16.  Into the Fed meeting and after a 90 point rally in a week, leveraged funds went heavily short SPX and dealers took the other side.  Its not unusual for leveraged funds to fade moves, but it is unusual for dealers to follow the trend and reduce shorts into a rally.  This positioning might have gotten unwound into triple witching opex.  There was a big expansion in open interest so it seems to be triple witching related, but we'll have to see the COT this coming Friday to confirm.  But initial thoughts are that its not a good sign for bears.  If you are a bear, you want to see dealers add to shorts when it rallies, not reduce.  

Disaggregated COT data which show asset managers, leveraged funds, and dealers seperately is most useful when looking at SPX data.  The legacy COT data does have some uses.  Unusually, commercial traders have maintained a large long position since April as the market has continued to rally.  They are usually trend faders.  The last time commercials were very long as the SPX was rallying and making new all time highs amidst hedge fund skepticism was the summer and fall of 2007.  In the short term, this is a bullish factor for the SPX.  But long term, fundamentals, valuations, and investor positions in stocks are more important than futures postioning.

Its insanity out there.  The stocks with the worst fundamentals are performing the best.  Its a meme stock bubble riding on top of a US stock market bubble.  Intuitively, this feels like a blowoff top thats near the apex, which makes it dangerous for both longs and shorts.  The most shorted stocks are ripping, as well as retail favorites.  There is some overlap between the two, as some of the retail favorites are heavily shorted.  

For longs, they are taking on massive left tail risk once the insanity ends.  For shorts, if the insanity continues for even a few more weeks, it can be quite painful as shorts get squeezed even harder.  Based on the COT data, I am scared that this thing squeezes out the shorts even more before violently reversing.   It is hard picking tops in an irrational bubble, you cannot stay short for long if prices are going against you.  That’s the position that shorts are in right now. As a short seller, you have to be nimble.   Only when prices are going down and staying down can you maintain shorts for more than a few days.  

The price action in bitcoin and ethereum is interesting.  You had a huge wave of euphoria in crypto in July and August, and a lot of these crypto treasury ponzi schemes used the liquidity to unload loads of new shares on the public to buy cryptos.  Now all that stock issuance is coming home to roost.  There just isn't much more demand to buy these crypto treasury stocks or the cryptos themselves.  MSTR has been trading very weak vs. bitcoin since July.  Bitcoin has been trading weak vs SPX since July.  You would figure that a Fed cutting cycle would be favorable for cryptos, but that market seems saturated with retail bagholders who don't have an appetite or the ability to buy more.  

As the quantum and nuclear plays skyrocket, the crypto names have been left behind and trade very heavy.  They used to all go up at the same time (like in July), but that's not happening despite SPX squeezing to new all time highs almost every day.  This shows that there are limits to the retail traders' capital that prevent all boats from rising.  Its not like 2021.  There is no massive fiscal stimulus helping to fund all the insanity.  The job market is weakening.  The fiscal juice is just not the same as it was a few years ago.  It means that stocks can jump, but they can't fly.  And when they jump, its hard for them to all jump up together.  There just isn't enough retail trader ammo to pump all the speculative stocks together. 

As for the SPX and NDX, those are another story.  They are dependent on institutional flows, not retail flows, which only help a bit at the margin.  Institutions are still believers in the AI theme, and are still bullish based on Fed easing.  But I think that's a fragile bullishness that's based on looking at the rear view mirror on AI, and orthodox thinking that Fed easing is always bullish for stocks.  

This time, the Fed is not the one in charge.  Its the White House and Congress, and they are mostly on the sidelines after the OBBB passed.  The fiscal largesse is not what it used to be.  Yet almost everyone on finance TV and in podcasts talk dollar debasement, and giant fiscal deficits as if 2025 is like 2021.  Its not.  There isn't a bottomless well of money looking to go into the stock market.  In fact, the cash balances are near record lows at mutual funds.  At SPX 6205, percentage of financial assets in equities was 45.4%. Based on current SPX of 6664, the percentage of financial assets in equities among US households is nearing 50%(roughly 47-48%).  For comparison, during the dotcom bubble, it only got up 38%.  And during the 2021 everything bubble, it got up to 42.4% at the top.  

American households are heavily positioned in stocks, which makes the US economy extremely dependent on the stock market to keep it going.  If you do get a bear market, it will have big ramifications for the US economy as the wealth effect is bigger than ever.  The US economy is completely financialized, meaning the stock market has a huge effect on the economy.  

Holding large postions short in SPX and heavily short/ meme stocks.  I will be looking to reduce those positions this week, hopefully into seasonal post Sept. opex weakness.  I have a gut feeling that only after the seasonality bears and macro short sellers throw in the towel can you get a final top for SPX.  I do expect the meme stocks and retail favorites to top out before the SPX.  If we don’t selloff within the next 2 weeks, I expect seasonality bears to give up, and also macro bears after the next NFP report on October 3.  I want to hold on for a long term short but can't be stubborn when the price action is going against me.  Will look to get out sometime this week to reload at a later date.  It still feels like we could have a bit more of a rally, as absurd as its been. 

Great Expectations

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

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

August 1: bad NFP number

August 12: feared CPI number

August 22: feared hawkish Powell at Jackson Hole

Early September: feared bearish seasonality in September

September 5:  bad NFP number

September 9:  bad NFP revisions number

September 11: feared CPI number

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

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

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

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

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

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

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

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

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

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

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

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

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