Sturm und Drang

That elevated quickly.  One week ago, almost everyone was expecting tariffs to be limited, and not as bad as initially feared.  I heard too many fast money traders who were expecting a big pension fund quarterly rebalance from bonds to stocks.  But these pension funds are complete idiots.  They know that there are many that try to front run their rebalancing flows.  So they probably spread out their rebalancing over several days, way ahead of the end of the quarter.  It hardly ever seems like these quarterly rebalancing flows have much impact on the market. 

Fast forward one week to now, and 200 SPX handles lower, and the mood is quite different.  No talk of the quarterly rebalance at the end of the quarter, which is today.  Nothing much has changed.  Sure, Trump added some auto tariffs last week and threatened secondary tariffs on Russian oil this weekend because he was "pissed off" at Putin.  But overall, its the same picture.  

It continues to be amateur hour at the White House.  Through the sturm und drang of headlines good and bad, nothing much has changed.  You still have the same unaccomodative fiscal policy with a Powell that is just watching and waiting, probably hoping for Trump to make a bigger fool of himself with all the wax on, wax off on tariffs.  Powell is in no mood to help Trump with loose monetary policy, not with the convenient excuse of tariffs being potentially inflationary.  

Without supportive fiscal and monetary policy, the market is between a rock and a hard place.  That's why you have so little confidence in this market, with a bounce that took 8 trading days to go from low 5500s to high 5700s, but only took 3 trading days (including today) to go back towards the low 5500s.  It seems like it takes twice as much energy and effort to go up than to go down these days.  

The positioning is still bad, just not horribly bad like it was in mid February, before hedge funds started unwinding their big net long exposure in US stocks.  Hedge funds are back to more neutral positioning, but the slower moving institutions and real money are still in the concerned, but not selling yet stage.  And retail is just horribly positioned, basically all in on stocks, thinking that stocks only go up.  They have completely changed their thinking on stocks:  from thinking they are a horrible investment, from 2008 to 2016, to now stocks are always the best investment in 2025.  

If you look at the data from those that track retail investment flows, they have been heavy buyers of stocks over the past 12 months.  In particular, since the Trump election victory in November.  This high net long positioning is also seen in the CFTC COT futures data for SPX futures, showing small speculators at historically high levels.  

The COT data last Friday showed asset managers re-entering their large net long positioning, buying back what they sold in March.  Only to get rug pulled again in the last few trading days.  Its not healthy to see asset managers so eager to put back on such large net longs in this kind of market.  And the result of this offsides positioning is the nasty selloff you had on Friday.  

Throughout the volatility, the bond market has relatively calm.  You are not seeing a huge rally or a flight to quality that you saw in February when the SPX dropped 10% over 3 weeks.  Instead, you are seeing mild negative correlations with stocks and bonds, as bonds rally when stocks selloff, and bonds selloff when stocks rally.  Back in the old days, the 2010s, bonds would rally when stocks sold off, and would often not selloff or even rally when stocks went up.  Those were the golden times for bond investors, as supply demand dynamics were very favorable for bonds, with QE, lower budget deficits, and lower inflation.

With the vicious selling on Friday, spilling over into the overnight market Sunday and into Monday morning, I have started a long SPX position, as the selling has gotten extreme in the short term.  I am not super confident that 5500 will hold, but even if it does, I do expect 5400 to be strong support in the case of true panic this week.  At these levels, it is worth a shot to try to catch a bounce once the uncertainty clears after the tariff announcement on April 2, and after the feared to be bad nonfarm payrolls report on April 4.  Seasonally, we are in a very positive time of year, as April is usually one of the strongest months of the year, although last year didn't play out that way.  I am not a big believer in seasonality, so I don't put much weight on it.   Especially when you have a lot of capital gains taxes that are due April 15, with the big stock gains in 2024.  

Whatever happens in the short term this week, I expect it be to be a volatile range in April, from 5400 to 5700 (bad case scenario), or from 5500 to 5800 (good case scenario).  

From Bull Market to Something Else

We've gotten so used to being in a bull market that it's quite a shock to the system to see a market that drops big, and doesn't recover right away.  This is a different stock market.  Its no longer the market that spends most of the time placidly hanging out near all time highs, giving investors and traders plenty of time to sell near the highs.  This is a market that now gives you a shorter graceful exit window for longs, and a longer graceful exit window for shorts.  

Despite the news flow and the uncertainty around tariffs and US growth, traders still seem to be looking for that bounce off the 10% correction, like they've seen so many times before.  It should have happened convincingly last week, as we were deeply oversold, but the SPX only managed to retrace about 1/3 of the drop off the highs.  

The price action speaks quite loudly.  The US equity market is saturated with longs, many of them who just recently joined the US exceptionalism bandwagon.  Given how quickly the rug has been pulled, many are stuck with losing positions.  I would imagine many of those that chased the momentum names and the Mag 7 are a bit shocked.  Given how much retail and institutions piled into US equities in 2024, and even the first month of 2025, I can't imagine there being much cash on the sidelines looking to buy US stocks.  Not at these valuations with the current macro outlook.  

During this transition phase from bull market to what is probably the beginning of a bear market, you will get opportunities to trade the choppy price action.  Its likely we'll attempt a bigger bounce sometime in April once the dust settles on the Trump tariff policy.  But that will likely be a false dawn as valuations are very high, overall US equity positioning is too high, and fiscal policy is no longer a tailwind.  Add to that a Fed put that is much further out of the money than in the past, providing less investor protection when growth weakens.  

Its not a positive environment for US stocks.  There will be a stronger technical bounce once you get some of the uncertainty eliminated on tariffs.  That's when you can enter longer term short positions to capitalize on a resumption of the downtrend.  It would be surprising to see this market recover from this correction to make new all time highs given the circumstances.  Its looking like 2025 is a year that rhymes with 2000, the year of the dotcom bubble top.  I will be planning trades accordingly to my long term bearish views when the false dawn arrives. 

The COT data for SPX and NDX futures continue to show asset managers reducing their long positions, although now at a much slower pace.  Nothing noteworthy as the movement from March 11 to March 18 covering the futures positioning data only saw a small bounce in the SPX.  Based on the DBMF ETF positioning changes YTD, it is clear that they have completely sold out of their SPX longs, and transferred them to international developed markets (European equities) longs.  The CTAs are now slightly on the short side of the SPX, which is a big change. Its one of the few positives for those looking for a bounce.  The CTAs are often wrong on their index futures bets.   

We are getting some optimism this morning based on some news that tariffs will be less broad than expected.  With less than 2 weeks till the April 2 announcement of Trump's tariffs, there will be more headlines shaking the market in the coming days.  Do not get caught up being too bullish or bearish following any of these news related moves.  

Got out of the small SPX long late last week, and now on the sidelines just waiting.  If we get a bit more of a bounce, may enter a short position.  If we drop towards the 5400-5500 area with some panic, will be looking to buy that dip.  

Bubble has Popped

The bubble has popped sooner than expected.  Unlike 2000, when the bubble extended for several months after rabid enthusiasm had set in, this time, it didn't even last 2 months past the Trump election win before the indices started to falter.  

The market can give you the clues but you have to be willing to put money on the line if you want to cash in.  You have to risk being a bit early if you want to be sure that you catch the reversal.  The violent gap downs and volatile intraday price action were clues that the market was unstable at those high prices from mid December to early February.  But given the resilience of the market in late January to mid February, I expected a bit more of a thrust higher above previous highs.  To suck in more bulls.  But alas, the market was already too saturated with bulls and there were no more suckers looking to chase all time highs.  Instead, we got a very minor break of previous all time highs on February 19, and have been going down in a straight line since.  

The price action of the past 3 weeks clearly shows that investors are overinvested in US stocks, and underinvested in international stocks.  This is the first time since 2008 when you've seen such lopsided underperformance by US stock indices versus European and Asian indices.  That is a huge signal, because almost everyone has bought into the US exceptionalism theme.  That has led to the biggest ever household allocation to US stocks in history.  

After the carnage of the past 3 weeks, there are many now looking for a bounce off these oversold levels.  We got the beginning of that on Friday, and Nasdaq has been outperforming the SPX for the past 2 days.  It looks as if there is decent support at the the 5500 level, with March opex coming up soon.  In the past, there used to be a strong tendency to rally into the big quarterly options expirations of March, June, September, and December.  That tendency has disappeared in recent years, perhaps due to the prevalence of options speculation (especially calls) that is unprecedented in stock market history.  

You add to that the negative fiscal impulse of tariffs and DOGE.  Its not a pretty picture for US growth for the next several months.  You can already see the negativity from a weak stock market show up in the consumer confidence numbers.  The US is the most financialized economy in the world.  It has the greatest concentration of wealth tied to equities vs other assets.  The wealth effect is real.  This is just the appetizer.  The negative wealth effect of a bear market starting in 2025 would be even bigger than the one felt in the bear market starting in 2000.  

What can be assured is that this week's moves will be exacerbated by the triple witching opex forces at work.  They were super bearish on the downside for December.  This time, I doubt that repeats due to the already big down move that's happened since February monthly opex.  My crystal ball, which has been foggy over the past few weeks, would think that we get a choppy up and down price action, that ultimately goes higher into Friday morning.  But my conviction on the bull side has gone down with the continuous weak price action, and yet, you get surveys like this:

Sure, you can say that the big Friday rally was the reason for the sudden optimism.  And in an uptrend, the optimism is usually a sign that the market will keep going higher.  But we're not in an uptrend anymore.  That's a really lopsided ratio of short term bulls to bears, which is contrary to the price action of the past 3 weeks.  

Still holding a very small long SPX position, and looking to add on a dip this week.  Not looking for a huge bounce, but a move towards 5800 is possible within the next month.  On the downside, 5400 is about as low as I think this market goes before you get a multiweek move higher.  

Chopping Down

There has been a change in character of this market, which investors are just beginning to get adjusted to.  They are not completely adjusted, because if they were, you wouldn't see so much intraday volatility.  You are getting a correction, but the correction is much choppier than ones you saw in the past.  You are getting many more "fake" V bottoms, where you get huge intraday reversals, only to see them fade the next day.  You don't even get a day's follow through.  The sellers are already eager to dump the next day, and the V bottom chasers end up with longs at bad prices.  

The 2024 market was a forgiving market for the longs.  The dips didn't last long, and whatever pain came was short and brief.  It rewarded the stubborn bulls who refused to get scared and shaken out of their long positions.  This is what bulls have been conditioned for during the last 18 months.  But this market isn't acting like 2024.  Its not giving you much time to sell the highs, and its giving you much more time to sell the lows.

This is characteristic of a market where long positioning is saturated, and the sentiment has shifted from overly optimistic, to more realistic.  No matter what some of the sentiment surveys say, you are not at a pessimistic extreme.  You still see bulls eager to call bottom and chase V moves higher, leading to huge intraday rallies that fade hard the next day.  Investors don't suddenly adjust their positioning from risk on to risk off.  When you get such extreme long positioning in US stocks like you did late last year, it takes several months for investors to pare down their positions to match their market views.  During that process, you get lots of volatility as eager sellers are not met by such eager buyers.  But the memories of 2024 keep the longs from completely throwing in the towel, thus the frequent intraday rallies that end up failing.

Its the lingering hope that the market has hit bottom, and that it will make a V move higher back to the highs, like it always did in 2024, that keeps the buyers chasing these intraday rallies.  It keeps the market from getting washed out, as the hope keeps the bulls from throwing in the towel.  

To trade this market has required some adjustments.  You can't be eager to buy the dip now.  Its a mistake I made going in too early on the first dip lower in late February, which was just the start of this correction.  I overestimated the strength of this market, thinking SPX 5800 would be strong support and unlikely to be broken.  The ease with which it broke 5800 and then stayed under that level for most of last week was surprising.  

In trading, everyone comes in with a plan.  Of course, most expect their plan to be profitable, so they spend much more time figuring out what to do if the market goes in their favor rather than against them.  

If the market behaves differently than expected, you can choose to be stubborn or reactive.  There are pros and cons for both choices.  If you choose to be stubborn, you will not overreact during short term drops and fake outs, avoiding losses.  The downside of this is if the moves are not fake outs and keep going.  Then you have to eat bigger and bigger losses.  

If you choose to be reactive to market price action and reduce risk when the market behaves differently than expected, you will be selling during weakness and get stopped out, but limit losses and avoid big down moves.  The downside of this is the moves are just temporary overshoots and reverse immediately, giving you no opportunity to re-enter longs at lower prices.  

This market has favored longs that are reactive when it comes to losses, rewarding those that cut their losses rather than those that stay long.  Of course, being reactive to market dips was the wrong approach in 2024.  The market now is punishing stubborn longs that think a V bottom is just around the corner, like all those other times in 2024.  Its classic market psychology at work.  The market trades one way for a long time and then changes behavior, punishing those that don't adjust to the new market.  We are no longer in the raging bull market phase.  We are in a transition from raging bull to a range bound, but volatile market.   

I still believe that this market is range bound, the range just happened to be bigger than expected.  The initial view that we'd be trading mostly between 5850 and 6150 was wrong, as I thought the Trump optimism would last longer than it did.  Now many investors are realizing that Trump's policies are not growth friendly.  Reducing the federal budget, reducing immigration, and using tariffs is growth unfriendly.  Tax cuts and deregulation are still vague, far into the future catalysts that no one can quantify.  Its likely being overhyped by the optimists.  Regulations aren't holding back the US economy.  Tax cuts and deregulation are just your typical, parroted Wall St. talking point that was used to get investors bulled up.  

The COT data for the week ending Tuesday, March 4, which was a big down week but showed limited selling from asset managers.  The notable moves were leveraged funds adding a lot of longs, while dealers added a lot of shorts.  It looks as if hedge funds were buying the dip in SPX futures.  And those recent dip buys are deep in the red.  

As for the options market, you did see some decent volumes, but the put buying wasn't as much as one would expect given the extreme weakness.  The ISEE index of calls to puts went lower last week, but its not at extremes, and comparable to levels when you had milder dips in September/October 2024.  There  are very few signs of panic or fear in the options market.  

The bond market continued its rally last week, and is now looking like a legitimate risk-off hedge for equities.  I missed the dip buying opportunity in bonds last week on the equity bounce, expecting a stronger SPX bounce that never came.  I think you are looking at the start of a bull market for bonds which could last for the next couple of years as US growth disappoints and the SPX enters a bear market.  I will be keeping an eye on how 10 year yields trade when you get the next up move off this correction.  If you get to anywhere around 4.50%, that would be a good spot to get long Treasuries.  

Currently holding a very small long, looking to only add on weakness and a test of Friday's lows or a move towards 5625-5650.  I do expect a bounce this week, but it shouldn't last more than a few days, and then more chop lower.  I won't be looking for a V bottom, so will be taking profits on any moves higher towards 5850-5900 area.  

Jack in the Box

Retail investors are Jack.  The market is the box.  Its been a Jack in the Box market.  Retail got rugged hard last week.  Its been a brutal 10 days for retail investors, as the momentum crowd favorites got crushed and massively underperformed a weak market.  Unlike the January selloff where the selling in momentum and retail favorites was tame, this time the selloff was led by the momentum names.

This market is volatile, but directionless.  Its in a hurry to get to nowhere.  Its stuck in a big box. From Friday opex till last Friday, over a span of 1 week, the SPX dropped 290 points, almost 5% in a week.  That is fairly intense volatility, something unusual for a market that's lingering around all time highs.  It points to a market that is not normal, something where the past patterns are less common.  This market is giving you much less time to sell the highs than the markets you saw in 2023 and 2024.  Its been an adjustment period where I've been too patient waiting for the right spot to short, and missing the entries because they don't last for long.  

The last sweet spot entry was after the FOMC minutes on Wednesday, Feb. 19, when the SPX went above 6140.  It stayed there for about an hour and never sniffed those levels again.  Its a brutal market for those buying strength and expecting breakouts to keep going higher, like they did last year.  The character of the market has changed, and its our job to adjust to the new patterns.  

It seems pretty clear now that we are stuck in a range, although it can feel scary.  The movements are violent from the upper end to the lower end.  Roughly, we can define the current range as being between 5800 and 6150.  Eventually, more and more market participants will catch on to this being a range bound market.  When they show less fear and start getting bolder and nonchalant at the bottom of the range, that's when you need to get more concerned.  But we're not there yet, as I heard quite a few calls for a move towards 5600 and 5700 on CNBC as the market was hurtling lower last week.  We are still getting the fear at the bottom of the range, which means investors are not really believing that we're stuck in a box.  

The ISEE index of calls to puts opened shows that we reached mid January levels of put buying.  Investors started buying more put protection last week, and the volumes were above average.  We've rung out most of the post Trump election optimism from this market.  It makes it less likely that we get the rapid, deep down moves over the coming weeks.  With more put protection bought, there is less need to panic sell weakness.  

The COT data for SPX futures shows asset managers maintaining stable, but a bit lower net long positions than the 2nd half of 2024.  Bigger picture, its still a large net long position, but not egregiously so.  This is a similar pattern to what you saw in late 2021 as the asset managers didn't increase their net long position much even on rallies, and reduced them aggressively on selloffs.  This is late bull market positioning behavior.  

What's been interesting about the selloff last week was the immense strength in bonds, something that we haven't seen since last summer, as the market pulled back from mid July to early August.  Last year, the market was trying to front run rate cuts.   This time, its a bit of a growth scare and fears of fiscal contraction and tariffs reducing growth.  The expectations for lots of rate cuts are not there, which means this bond rally has been more about pure demand and under positioning by institutions.  I expect the bond market to continue to show strength throughout the year.  Although after this recently rally, I would wait to see if stocks bounce back up some more before looking to get long.  

Last week, I added to my small SPX long to build it up to a medium sized position.  Last Friday, we got the fear of being long into the weekend type of haphazard selling into mid day, and then the short squeeze into the close.  I usually dismiss these late Friday rallies as just short covering, but with my belief that this market is range bound, and we were in the lower end of the range, I will take more meaning from that Friday close.  It signals that sellers are mostly done, and we're likely to try to test the top end of the range sometime in the first half of March.  Remain long and will hold for at least a few more days.