Push Pop Bubble

If you've ever played around with push pop bubbles, you can push down on the bubbles, and they go down, but the slightest push back in the other direction makes the bubbles pop up again.  This feels like a push pop bubble market, where you can push the bubble down, but it eventually pops back up without much effort.  It feels so resilient, which is what the market is conditioning traders and investors.  Yet, the overall condition is dangerous, with rampant call speculation and theme stock chasing, high levels of equity holdings among households, and high levels of foreign ownership of US stocks.  

We are close to the end, maybe the end? of the up phase of the market.  You have the return of the retail speculators bidding up speculative theme stocks in  bitcoin and quantum computing (RGTI, QBTS, IONQ).  There is renewed excitement over AI stocks, such as CRWV.  Stocks with high short interest are being squeezed, as hedge funds hold large gross positions, meaning lots of longs and shorts on the books.  Those shorts are squeezing the crap out of their portfolios.  Once again, hedge funds have become the punching bag for the market.  They were the most beared up of all the major institutional groups this year.  

Retail has trounced the hedge funds this go around.  And you can see retail investors getting bold, buying aggressively in this market.  There was data coming out of JP Morgan showing retail investors buying the most stocks ever in the first hour of last Monday after the downgrade of US sovereign credit.  They were also aggressive dip buyers on the Deep Seek and tariff induced dips back in late January and early February.  They may be getting set up again here, with markets showing short term resilience to "bad news", only to see a much bigger down move a few weeks later on no news.  I think it will take a bit longer this time for the SPX to collapse, as we've already had one in April, so its likely to take several weeks for the complacency and positioning to set up for another waterfall decline.  Gut guess is sometime between mid July to late August for that waterfall decline to happen.    

Not much interesting happening on the COT front, as you have asset managers slowly adding long exposure, but nowhere near the highs of late last year.  You are seeing more call buying in the past 2 weeks, back to high levels, where the market is vulnerable to deep pullbacks.  

On a much longer term chart, you can see how extreme the call buying got in late 2024, and how high it still is at the current time.  Even during the everything bubble in 2021 you didn't see this level of call buying.  Retail is basically all in on US stocks.  In particular, the most speculative and highest beta names.  There are flashing amber lights in the background.  April was a big warning, that this market is fragile.  Yet investors have been so well rewarded buying the dip and hanging on to their longs, that they are bold and aggressive, and almost feel invincible.  This is what it felt like in 2000.  

Last week, we got a few scares, from rising bond yields, to Trump's tariff threat against Apple and the EU.  Within a few days, Trump has already retreated from his threats.  Proving that his threats are becoming more bark, and less bite.  Bond yields have quickly dropped back down from the lows seen last Wednesday.  As I suspected, the US economy is just not strong enough for bonds to really selloff and for 10 year yields to hit 5%.  I expect the next big down move to come from recession fears that are accompanied by yields going lower, not higher.  

After all the up and down last week, we're almost at the same spot as we were last Monday after the US credit downgrade.  Its been a tempest in a teapot, moving quickly up and down, but ending up back in the same place.  I expect more of these violent moves up and down in a SPX 200-250 point range, until the complacency builds up and the systematics are no longer in a low net equity position.  

Took a quick short last week and covered quickly, as I have little confidence in a big move lower yet.  The plan is to wait to put on a bigger short position as the weeks go by as we head closer to a more seasonally weak period for the markets(mid July to mid October), when the residual fears from April are further erased from traders' minds.  The exquisite short opportunity is still ahead of us, so I will not be rushing into any short positions.  Perhaps a little breakout above 6000 will get the CTAs long SPX again and induce latecomer bulls to buy the top.  

Chasers are Back

Its as if Liberation Day didn't happen, the trade wars are behind us, and its all blue sky ahead.  The market is moving on from the negative effects of tariffs, towards the positive effects of tax cuts and blowing out the federal budget to pump up the economy.  Trump was initially viewed as a huge boost for the US economy after getting elected, with excitement over tax cuts and deregulation.  Then the tariffs started coming out.  And it was as if Trump didn't care about the stock market and was hellbent on putting on tariffs no matter what.  And that ended up being the wrong thesis, with Trump caving amidst the heat.  Now we are back to pumping on tax cuts.  Life is a circle.  

Many remember how the markets kept going higher as the Trump tax cuts were initially passed in late 2017, eventually resulting in a parabolic blowoff top the following month.  I am sure some are expecting the same thing to happen this time.   But 2025 is not like 2018.   

In 2018, the fiscal deficit was in the low single digits.  The 10 year yield was in the high 2% range, not in the mid 4% range.  You had much less retail investor participation back then.  Now, almost every Joe Schmo is in the stock market.  No, this is more like 2000 than 2018.  Those who claim that this is the most "hated" bull market are laughable.  The retail trader flows data from JP Morgan are showing huge retail buy flows since last summer.   The fund inflows over the past year have been outsized, and much bigger than any year since 2008, with the sole exception of 2021, when the Covid money spew spilled out to all risk assets.  Speculators are heavy into this market.  There is still a lot of hot money in the US stock market.  

Last week, after the relief rally on the China trade talk news, the most speculative Mag7 names NVDA and TSLA rallied hard, along with various smaller cap spec names like RGTI, QUBT, HIMS, etc.  A lot of it was short covering, but there was also new long positions getting put on.  Its almost a reflexive reaction to an up market.  They flock towards the high beta spec favorites TSLA and NVDA.  It reveals the high risk appetite out there.  

Lot of fund flows have been going to leveraged Nasdaq 100 ETFs, mostly on the long side.  As you can see, these levels are back to the bubbly time period in late 2024.  

It late April, as the SPX was struggling to break above 5500, I saw many investors compare this market to 2022.  Now that we've V bottomed all the way back above 5900, there are now comparisons to 2020.  It shows you how quickly market views change in this market, and how bullish the crowd has become in such a short period of time.  

The COT data as of last Tuesday didn't reveal much, as the expected increase in asset manager longs happened, along with small specs.  What was a bit suprising was that dealers reduced their large short positions into the rally.  They are usually fading the big moves.  Big picture, it really doesn't change anything.  We could see a few more weeks of a grind higher in the SPX based on what I am seeing.  

The put call ratios really dropped hard this week, and the ISEE call put index are now back to outsized call buys over puts.  Speculators are back to betting on upside via calls, which is an early warning sign that the uptrend is now vulnerable to sudden down moves, as showchased by today's big gap down.

The bond market is a popular topic these days.  I remember back from 2008 to 2020, lower bond yields were viewed as being negative for stocks as it supposedly signified economic weakness.  Yet stocks kept rising even as bond yields kept dropping.  Now the popular view is that higher bond yields are bad for stocks, because of what happened in 2022 and 2023.  Yet, stocks kept rising even as bond yields kept rising.   With economic weakness and labor market weakening more and more, I have a hard time believing that bond yields will go high enough to really hurt stocks.  People will forget about the tax bill after its passed, and inflation from tariffs is overhyped, as the energy deflation and shelter disinflation will counter a lot of the imported goods inflation.  And the economy is not as strong as many believe, as the withheld tax data from the Treasury is showing weakening income taxes withheld numbers in May.  

I expect the next big down move in stocks to come from recession fears, not inflation/higher bond yield fears.  It doesn't make me a bond bull, but I am definitely not bearish bonds at 10 year yields at 4.5%.  I would rather play economic weakness via short SPX than long Treasuries.  

Moody's came out after the Friday close to downgrade US sovereign debt, which is bad timing for those who have been waiting for the right time to strike on the short side.  I was looking to short this Monday if we were to trade above SPX 5950, near the closing levels on Friday.  Alas, it is not to be.   I will not chase shorts in the hole after such a fierce burst of upward momentum.  I expect the first dip to be bought, although I will not be buying it as I see the possibility of a dip going as low as 5700 before a strong bounce back.  If the market does shrug off this news and goes right back to 5950, which is very possible, I will be looking to short at those levels to play for a pullback down towards 5750-5800.  Right now, the news ruined the post opex short play.  I will be waiting for the next rally to short.  

Mr. Caveman

The Art of the Cave.  Back to the status quo, with China doing nothing to get the deal done.  Deep down, Trump just doesn't want to take the pain necessary to decouple from China.  Those who thought Trump wanted tariffs badly despite economic pain were wrong.  China called Trump's bluff, and will end up winning the pot.  Now that Xi sees Trump as being weak and stock market focused, he will keep pushing his limits, probably invading Taiwan during Trump's term, when he'll meet the least resistance from the US.  

Fundamentally, the market is now back to pre-Liberation Day conditions, which are not good, but also not disastrous.  With these mini-me tariffs, there will be a slight negative fiscal impulse, which will likely be offset by coming tax cuts.  

There remains the elephant in the room.  The ever growing US budget deficit.  Even with big capital gains from 2024 increasing taxes paid, you still had the budget deficit increase year over year.  Keeping Fed funds rate at 4.33% is a budget buster for the US government.  Ironically, a Fed cutting cycle could prove to be useless as the reduced interest income to the private sector from lowering short end rates would offset any kind of stimulus to the part of the housing market that finances off of SOFR.  These giant budget deficits are keeping long end yields elevated, near 5%, even as the economy is weakening.  The Fed's worst nightmare would be to cut short rates and see long end yields not budge, or even go up.  That would kill any kind of housing stimulus from Fed cuts as mortgages are priced off of the 30 year, and just end up reducing Treasury interest income to the private sector via lower Fed funds rates.  

With the giant budget deficit, the upcoming tax cuts and Trump's caving on Liberation Day tariffs, we are setting up a scenario where the economy goes into stagflation:  maintaining low growth, with higher inflation.  The inflation will come from higher prices on imported goods, and less immigration, leading to higher manual labor costs.  Going from Biden to Trump has drastically cut down on illegal border crossings, reducing the flow of immigrant labor.  

Less population growth = lower economic growth.  The Covid stimulus has basically run out, and states and local governments will now have to balance budgets again without the Covid largesse to fall back on.  That means less state and local stimulus than during the Biden years.  

On a technical basis, the SPX has kept its bullish pattern of higher highs and higher lows.  You still have a big wall of worry over tariffs, which is obvious when you go on Twitter and see all the bears out there.  With Trump caving on tariffs, the bears are running out of excuses to sell this market.  Especially if we blast past 5800.  Systematic funds and CTAs still have low equity exposure, and the biggest trend following ETF, DBMF, is actually short SPX futures, which is uncommon.  I expect that to change to a long position within the coming weeks.  So you have low positioning among systematic funds which will keep buying as the VIX goes lower and the SPX goes higher.  That will provide a bid under this market for the next few weeks.  

The COT data as of last Tuesday didn't show much of a change in positioning.  Asset managers are slow to add back to equity longs after purging a lot of their long positions in the 1st quarter.  They are still at historically high net long levels, but not high enough that would provide a short term edge.  What I find more interesting than the SPX data is the VIX COT positioning.  Commercials are now net short VIX futures, which is rare.  They are usually on the right side of the long term moves in VIX.   Commercials are at historically low levels, which means the long term move in VIX is likely lower, not higher.  This gives me some pause when I am thinking about putting on bearish SPX positions.  

We finally have seen more bullish flows in options, especially single stocks, as the equity put call ratios have been lower the last few trading days.  There is still a lot of put buying in the index options, but its being balanced out by a lot of call buying and speculation in high beta names like TSLA.  

Overall, it doesn't look like a good spot to be short.  I am long term bearish, based on the historically high equity exposure of households, high valuations, and the large inflows into US equity funds over the past 12 months.  In the short to intermediate term, we could see fast money and systematics chase this market higher and squeeze the bears.  I am waiting on the sidelines looking for higher prices to enter short positions.  

With the good news coming out of the US - China trade talks, we are getting closer to the end of this rally.  But I don't expect an immediate reversal and resumption of the downtrend.  With Trump likely to pump tax cuts in the coming months, we'll likely chop around in a range around these levels for a few weeks before we get the next downside surprise.  I would not be married to any bullish or bearish views at the moment.  I will be looking to fade any extended moves in the coming weeks, both up and down.  

That De-Escalated Quickly

The trade war.  It escalated quickly.  And de-escalated quickly.  It was good for the counter trend trader there for a bit, then the last week happened.  The all-in, all-out nature of the modern markets seems to be designed to screw the majority of investors.  It wouldn't surprise me to see this market continue to squeeze higher for another week or two and then make a big reversal.   It looks like shorts are too early here and need to be patient to avoid further squeezes.  

Fund flows, futures positioning, and fundamental data support the view that this is a bear market rally.  However, the price action has been much stronger than expected, surprising many, which has to be respected.  Whenever the market does something that surprises the majority, it gets my attention.  You never want to just brush it off as if its nothing.  It does tell me that the next 1-2 weeks will be difficult to predict.  So far, a further move higher looks more likely than a reversal back lower for the next 2 weeks.   

Fundamentally, you don't have much fiscal or monetary support.  From a capital flows perspective, foreigners, who are heavily overweight US equities, are now going in the other direction.  That is after several years of piling into US equities.  That will weight on the SPX in the long term.  I see some compare this period to 2020, and some to 2022, but I am more pessimistic on this market than both.  2020 is no comparison.  The fiscal and monetary support are polar opposites to what is happening now.  As for 2022, the monetary tightening was coming in heavy, but the fiscal spigots were still flowing like crazy. 2022 fiscal policy was quite expansive and loose.  Nothing like now.  

One factor that I neglected in my analysis before putting on shorts in late April was the amount of time since the start of the downtrend (February 20).  Its been 75 days since that top, which means we are still early in the bear market (assuming its a bear market).  Most SPX downtrends have vicious counter trend moves in the first 3 months of the move.  Since we're still within that 3 month window, there is still time for this rally to continue to confound bears and squeeze even higher.   Some examples from past waterfall declines and recoveries:

SPX 2000

In 2000, you topped out in late March/early April, with an immediate vicious decline, which was retraced 100% by mid July.  From top to 2nd top, it was about 90 days.  But you even had a slightly higher high from that point in late August, to form a 3rd top.  The  countertrend move lasted from late May to late August, over 3 months.  The current move in 2025 is less than 1 month old from the April lows.  So in a worst case scenario for bears, if it follows the 2000 template, you could see another 2 months of higher highs and higher lows.  

SPX 2007

You had a shorter consolidation and countertrend move at the top in 2007.  It could be because the bull market that topped out in 2000 was much longer than the bull market that topped out in 2007.  Or it could be because the economy was weaker in the fall of 2007 vs fall of 2000.  The consolidation from the first top to the second top lasted ~90 days.  This is more typical for your average bull market top.

SPX 2022

In January 2022, the bull market was technically 21 months old, but in reality, the Covid bear market was more like a flash crash of a bear market.  Just as the bull market was not that long, the consolidation at the top was also not long.  You topped out in January, and length of the first down leg, and the first real countertrend move lasted less than 90 days, until late March.  After that, it was basically lights out for the bulls as you entered a steep decline from April to June.  I see similarities to the current market with 2022, but the big difference is the market was much less certain about the path of inflation and bond yields, something it was unfamiliar with for over 40 years since the stagflation of the 1970s and early 1980s.  So that level of uncertainty is definitely greater than these Trump tariffs which look like they will be toned down over the next several weeks, as he's already caved a few times to market pressure.  

Nothing notable in the put/call activity last week, or the COT data.  You had a slight increase in SPX longs after the rally, but not really a big move.  Similar to the lack of decrease in SPX longs in the prior week when it went down.  Seems like the weakest hands have already pared their positions down, so you're not getting big positioning changes despite the extreme volatility.  Open interest went down across the major index futures, so traders and fund managers appear to be reducing risk.  

Still stuck in underwater SPX shorts.  Looking to exit gracefully within the next 2 days.  Last Friday's move appears to be a lot of short covering and delta hedging as the IVs went down quite a lot after the NFPs and into the weekend.  I don't expect longs to be chasing this kind of a move going into the FOMC meeting on Wednesday, where Powell will likely stay firm and not hint at any moves.  The bond weakness is a small positive for bears that comes from the stronger than expected NFP number.  

Pullback or no pullback, will be out of shorts by Wednesday.  The main reason I do not want to stay short is the price action.  When I entered shorts several days ago, I was only expecting a marginal move higher from my short entries.  The fact that you got up to SPX 5700 so quickly reveals the underlying strength of this move.  Even as there is no real progress in the trade talks.  It appears that equities positioning (non futures related) got too light in April, and hedgies and underinvested funds are scrambling to increase net exposure to keep up with the averages.  That can go on for longer than people think.  These hedge funds are notorious for chasing moves to keep up with the indexes to protect their jobs.  So this could last for several weeks if they take their time adding back longs.