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.