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.