Entering Stall Speed

This high flying airplane of my market is showing signs of entering stall speed.  Momentum is a self perpetuating phenomena where strength induces more fund inflows and more strength, until you reach a saturation point.  At that saturation point, the inflows are not sufficient to maintain the high altitude, and the stocks get dumped, with weakness feeding further weakness.  During this process, there are some wild down moves that match the steepness of the up moves. 

Reddit WSB favorites PLTR and HIMS, along with many other momentum favorites made spectacular tops this week.  It is not coincidence that this happened during an options expiration week.  Some of the other large cap momentum blowoff tops include RDDT, CVNA, NET, and WMT. WMT even became a momentum favorite this year.  Its valuation reached overvalued extremes that reminded me of the way it traded during 2000, in the midst of the dotcom bubble.  

What is more meaningful about this blowoff top is that most of them are not just from one sector being dumped.  These stocks cover everything from internet, retail, AI/government related, and autos.  

These momentum stocks are the fuel that feeds the animal spirits in the stock market.  When these momentum stocks are strong, it signals a robust overall stock market.  When these momentum stocks make blowoff tops, then the overall stock market is showing its weakness underneath the surface.  This weakness will not manifest into a downtrend right away.  The momentum stocks act as a canary in the coal mine, sending out warning signs of an impending end to uptrend.  

The longer the trend that these momentum stocks have enjoyed, the longer it takes for these warning signs to show up in sustained SPX weakness.  Since we've only recently witnessed a big top in these momentum names, there is a still time for the weakness to spread to the overall market.  Those with long term bullish views will view it as a healthy consolidation of the uptrend.  Those with long term bearish views will view it as a broad, choppy top that will lead to a bear market.  

I lean towards the long term bearish view, based on bubble valuations, bubble mentality (greater fool theory), and increasingly bearish macro headwinds.  These bearish macro headwinds involve lower fiscal deficits (tariffs, DOGE, and big capital gains taxes coming due this April) and tighter immigration policy.  The stubbornly high long term bond yields also add to this, as it makes home buying more expensive, reducing housing demand.  This is all happening as investors are still quite bullish about the US economy, thinking Trump's tax cut and deregulation promises will outweigh the above headwinds.  But these tax cuts and deregulation measures are still very abstract and would mostly just be a maintenance of a low tax regime.  US taxes are low for developed world standards.  This doesn't match the high government spending and interest expenses, thus you have huge fiscal deficits that are much higher than in Europe and Asia.  That was one of the factors in US exceptionalism, which has been conveniently ignored to  cheerlead the stock market.  

Even just a small downshift towards less government spending from minor cuts from DOGE and more taxes from tariffs is enough to put this high flying plane into stall speed.  The market started to sniff out this growing fiscal contraction with a Fed on the sidelines, prompting a recent rarity:  rising bond prices and dropping stock prices.  This happens when the market starts to place less importance on inflation and more importance on growth.  If this is the new regime, which looks likely, then you will see more negative correlation between stocks and bonds.  

The latest COT data shows a continuation of the same pattern of reluctant bullishness, as elevated asset manager long positioning doesn't increase much even during market rallies.  It appears we are entering a similar pattern as late 2021, as asset managers pare back extreme long positioning, even into market strength.  In hindsight, we now know that we reached the saturation point for asset manager positioning in late 2024.  This, along with the recent reversal in a number of momentum stocks, and the choppy and high intraday vol environment are reminiscent of early 2000 and late 2021.  History doesn't repeat, but it does rhyme.  

We got a nasty selloff on no news on Friday.  Those are the more bearish type of selloffs.  I would give it more meaning if it didn't happen on opex Friday.  But its just another sign that this market is now going to be a two way market, with both vicious rallies and vicious selloffs.  I did enter into a small SPX long position into the afternoon weakness (a bit early) on Friday, but I will be conservative and wait for more weakness to add to the position.  Playing small ball in this environment, until I see bigger opportunities.  Will now be looking to be more aggressive and earlier in entering short positions as the probability of extended rallies goes down in this chop environment.