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.