Meme Mania

It appears that we have reached the top for meme stocks.  While many traders like to compare this to 2021, the breadth and firepower of this meme mania is far less than that crazy period.  Since 2021, retail investors have been sheared through numerous pump and dumps.  The HFTs, market makers, and pro traders got their pound of flesh taking the other side of these stock gambling addicts.  

The free capital available for the meme stock chasers is much smaller now.  There is no crazy Covid stimulus gravy train driving these moves.  The firepower is just not the same now vs when the government was handing out stimmies and fat weekly unemployment checks.  What capital is available for speculation is mainly getting sucked up by crypto treasury companies issuing overvalued shares to buy cryptos.  According to the WSJ, $86B has been raised for crypto treasuries so far in 2025.

Its amazing how much demand there is from investors who are trying to catch the next MSTR by paying 2-3x mNAV in companies that continuously dilute equity to buy cryptos.  Just the sheer audacity of these promoters and hucksters is amazing to watch.  They continue to hype such an obvious Ponzi scheme.  And its working, so far.  But the price action of bitcoin in recent days signals that we are at a local top, if not a final long term top.  The scam is just too obvious to sustain for long.  

The current mania in meme stocks and cryptos is almost as bad as the tulip mania several hundred years ago.  At least the internet bubble had a foundation of plausibility due to how revolutionary it was.   Now these companies aren't even pretending to try to grow revenues and be profitable.  Its just about pumping stock, sucking in the sheep, and feeding the ducks when they quack.  The veneer of legitimacy is getting thinner as the market trades more on memes and technicals than on fundamentals.  

We have the AI bubble, but its mostly confined to NVDA, AVGO, TSM, CRWV, and a few other smaller beneficiaries.  The lack of breadth in the AI names is quite telling.  There just aren't many companies that are using AI to make a profit.  Only those that are selling infrastructure that AI runs on is making money.  Even back during the dotcom bubble in the late 1990s, there were several profitable internet companies that weren't infrastructure related (YHOO, AOL, etc.).  Productivity gains from AI is heavily hyped, but its hard to measure.  Since so much energy is required to train and run these LLMs, you will need to have a lot of productivity gains to match the huge amounts of electricity consumption from all the AI data centers.

Investors and traders are running out of good small cap companies to invest in, so bad ones are getting pumped.  Even with all the pumping in heavily shorted names, the Russell 2000 continues to trade terrible vs the SPX.  Investors have now mostly given up on breadth as a bull/bear indicator, because the Russell 2000 has been lagging for so long.

Since the April bottom, there has been a huge short squeeze targeting cookie cutter long/short hedge funds.  They were all crowded in the same names, for good reason, but they put a target on their backs by doing so.  Traders have realized that its a lot easier to spook short sellers into covering stock and creating a short squeeze than to convince investors to buy stocks based on fundamentals.  High short interest stocks have massively outperformed low short interest stocks over the past 3 months.  You have to go back to late 2020, early 2021 to see a bigger divergence.  

The systematic long short HFs have gotten crushed as the SPX has gone higher.  

When hedge funds lose money, they reduce risk and close out positions not because they want to, but because they have to.  That's what causing these short squeezes in highly shorted stocks.  But once the weak hands have covered, there is no further buying demand because no one who actually looks at fundamentals would want to buy these names.  The price action this week in heavily shorted names and meme stocks is quite telling.   While the SPX has grinded higher all week, the heavily shorted stocks have lagged all week.  The chart for meme stock OPEN, the AMC of this recent meme mania, tells all. 

 The peak in excitement for these meme stocks was a week ago.  Since OPEN, sympathy meme plays like DNUT, KSS, and GPRO have had recent pumps but died out quickly.  The meme stock bagholders are beginning to pile up, and that dead weight of overhead supply will be weighing on future pump attempts.  

The COT data for SPX and NDX futures as of July 22, 2025 shows asset managers selling into the rally.  Asset managers have been reluctant to add to their big net long position into the furious rally off the April lows. This is not what you want to see if you are short the indices.  

Surprisingly, the put/call ratios have not been that low during the grind higher this week.  It appears that we are still seeing put buyers looking to hedge ahead of tariff announcements on August 1.  You probably need to get past that deadline and have the uncertainty go away before you can find a reliable top.  We did get some more trade deal optimism over the weekend.  But we've squeezed about as much juice as you can from these announcements.  I want to see the VIX go a bit lower and for more call volume to get back into index shorts.  

It has been a tough times for short sellers.  This is about as bad as it gets, although 2021 was pretty bad for shorts as well.  But there was a good reason to avoid shorting back then:  the overflowing Covid stimulus and liquidity.  This time its not liquidity that's driving the move, its pure animal spirits and FOMO.  The 2020-2021 everything bubble ended with a 25% bear market when M2 money supply growth and liquidity exploded higher.  This bubble doesn't have the same ammunition.  Considering how overvalued and overextended this market is, it would not surprise me to see a worse bear market after this bubble bursts than the last one in 2021.  But we need to get to the top first.  Its tough to time the top so it may take multiple attempts on the short side before success.  For short sellers, its important to keep losses contained to be able to capitalize when the worm turns.  

Covered my SPX short for a loss late last week.  Still maintaining most of my single stock shorts which have been trading much weaker than the overall market.  The strength, lack of pullbacks, and resilience of this market is surprising, but it sets up better opportunities for the fall  These relentless, one way grind up moves often peak about 5 months, after the bottom, or start of the move.  The market bottomed on April 7.  5 months from April 7 is in September.  If there are some better indications of a top from options or COT data, I will consider putting on an index short before then.   If not, will probably just focus on single stock names with bad fundamentals.  

Crypto Treasury Ponzi

Financial nihilism seems to have reached a permanently high plateau.  In 2020 and 2021, it was the endless wave of SPACs allowing grifters like Chamath to get huge chunks of equity for taking two bit companies public to sell to unsuspecting investors.   The trillions in Covid stimulus effectively went from the government money printer to the grifters and corporate insiders who sold stock to the public.  Then there was payback in 2022 for all the printed money chasing the same number of goods and services.  High inflation, higher rates, and a much less forgiving bond market.  

Those side effects linger, but the speculative fire remains.  The liquidity is no longer as flush as 2021, but it still flows in the form of massive fiscal deficits, although without the money printing coming from the Fed.  Thus, bond yields remain high, the real estate market remains soft, and small caps lose out to large caps.  Outside of the oligopolies and anointed large caps, earnings growth is stagnant.  Private equity has picked over every non-listed corporation with a fine toothed comb, and are running out of businesses to buy.  Leveraged buyouts don't work as well with 10 yr yields at 4.5% than when there was ZIRP and 10 yr yields traded with a 1 handle.   The real economy is definitely slowing.

So when investing in real businesses don't work anymore, but the SPX keeps hitting new all time highs, there is a simple solution for the investment banks and the grifters.  Profit off selling stocks.  In 2020 and 2021, SPACs were the vehicle to suck up investor capital.  In 2025, its crypto treasury companies sucking up capital through PIPEs: buying BTC, ETH, SOL, etc. and then selling more stock through ATMs to buy more cryptos.  Money is now flowing into stocks, which then goes into cryptos.  Crypto treasuries are now the vehicle sucking up dumb money.  In order to be able to sell as much stock as possible through ATMs, lots of famous, and promotional finance figureheads are used to increase liquidity and the amount able to be sold thorough these ATM offerings.  

Theoretically, selling overvalued stock to buy cryptos allow for the book value of the stock to rise at the expense of the sheep buying the overvalued stock, who are of course hoping to sell at a higher price to the greater fool.  Its also a Ponzi scheme.  The earliest investors, the ones who get in on the PIPE, get in at the lowest price.  Then,  wild, greedy speculators chase the price higher after the PR announcement, allowing the crypto treasury company to sell bloated, overvalued shares to buy the crypto asset that they are linked to, increasing the price of their stock which is linked to the asset that they buy.  Into the strength and liquidity provided by the late comer speculators, the initial investors can cash out a fat profit.  

It works as long as you get a steady flow of greedy speculators willing to buy overvalued stock, which creates a steady buy demand for cryptos.  When the demand drops, the realities of all that supply sold to the public will then weigh on the stock price, which makes it harder to sell enough stock without crushing the stock price to below mNAV.  Without selling stock, there is no more money to buy cryptos, chopping off one of the big sources of demand.   And this scheme only works when you have the greater fool willing to pay above mNAV for these crypto ponzis.  When those fools run out, then there is no ability to pump up the price of cryptos with capital coming from the greater fools.  Then the price of cryptos collapses, as well as the crypto treasury stocks.  Who knows when we get to that point, but it doesn't feel that far away.  This kind of hot and heavy speculation doesn't last for long.  I suspect the floor on this will fall fast and hard, as the underlying asset has no real value other than for speculation.

The speculative mania has lifted a lot of boats in July, as you are seeing big moves higher in nonprofitable tech stocks, with the corresponding large call speculation.  

The last time you saw this kind of call buying frenzy in low profit, highly speculative stocks was in December 2024, and before that, February 2021.  Unlike February 2021, you don't have several trillion in helicopter money in the form of Covid stimulus being dropped on the heads of everyone in a developed country.  

The difference between December and now is that you've had a lot more time for retail investors to load up on these speculative stocks, making these markets that much more saturated with retail money.  The thing about retail money is that its a much more fickle source of  capital flows vs institutions.  A large population of retail investors are in stocks to get rich quick, thus the demand for the highest beta, most speculative stocks.  20%/year, what the SPX has delivered for the last couple of years, is not enough.  They want more.  Fundamentals are an afterthought.  Its all about what's hot, trending, and meme worthy that can lead to fast moves higher.  

Listening to finance and investing podcasts, its clear that the zeitgeist of the moment is huge fiscal deficits leading to dollar debasement.  This is the rationale to overpay for US stocks.  Not much talk about tariffs anymore.  And when tariffs are brought up, its no big deal, because of TACO.  The complacency is real.  The herd has gotten super greedy, going beyond bitcoin, to the more speculative ethereum and other alt coins.  This rampant buying in crypto has been rationalized by laws passed in Congress that are favorable for crypto.  The value of crypto currencies are in the eye of the beholder.  There is no cash flow, no fundamental need for it.  Unlike gold, it has no secondary uses like jewelry.  There is a short history and the "brand" has not stood the test of time like gold.  But it has a lot of buzz, and hype behind it.  Its the symbolic asset of this era.  

Unlike AI, which has to eventually prove itself by providing value beyond the cost of capex, bitcoin has nothing to prove because it doesn't promise anything, or provide anything of value.  Bitcoin and cryptos just exist, for speculation, and for theoretically providing a store of value against dollar debasement.  That's a low bar to climb over.  Lots of assets provide a store of value against dollar debasement, which actually have real world value.  The most obvious one is real estate.  Its funny how so many people are negative on the US real estate market, yet positive on cryptocurrencies.  Aren't they both theoretical hedges against dollar debasement?  Of course, one asset hardly trades, and is no longer in the good graces of the get rich hucksters out there.  While the other trades 24 hours, with lots of volume and lots of get rich quick hucksters.  Its like we're back in 1999, when beanie babies were the hot alternative investment.  Or 2021, when NFTs were hyped up.  

On a different note, recently, Morgan Stanley's Mike Wilson, who was bearish most of the time from 2021 to 2024, finally became bullish on the market in the past few months.   After a nearly 1000% move higher in SPX since March 2009, saying this looks like a new bull market?  LOL.  The guy who used to always talk about high valuations and P/E ratios no longer mentions them, when they are even higher now.  When analysts with a bearish lean like Wilson are suddenly bulls, its a sign that most bears have been slaughtered, or just thrown in the towel.  

Last week, I put on index shorts as well as shorts on some speculative stocks which have squeezed higher.  The speculative call activity and overextended market is setting the market up for a 5% pullback.  Looking for the pullback in the next 1-2 weeks, ahead of a potential negative catalyst on August 1 from tariff announcements, as well as weaker seasonal tendencies.  With this amount of wild speculation, it takes a few weeks to cool off, for dip buyers to get satiated.  So not expecting a sharp drop here.   But a pullback in the coming weeks would set up the market for a final move higher which would then probably top out in September, and lead to a bigger correction and possibly the start of a bear market in the fall.  

Speculative Fire vs Tariff Extinguisher

Speculation in bitcoin and AI is flaming hot.  But tariff headlines are making a comeback, and starting to act as a fire extinguisher.  Investors still view these tariffs as TACO material, which is encouraging for those looking to put on short positions.  You want to see complacency out there as the news flow gets worse.  But the outperformance of the high beta sectors and speculative names reveal some subtle clues for the short and long term.  

At the start of the month, my initial thesis was that we could see a meaningful, long term top in July, based on the slowing economy, huge amounts of equity fund inflows, and retail investor overconfidence.  There were signs that bitcoin was starting to lag vs. SPX.  To confirm a long term top, you want to see Nasdaq underperform vs. SPX, and the SPX underperform vs. Russell 2000.  That has not happened.  Bitcoin has surged higher and is again a leader in this market.  You are seeing strength in AI names, and big cap tech continues to trade strong vs. the overall market.  

This is not what a final top feels like.  You are not seeing a big chase for the Russell 2000, which you often see late in a rally.  In the past, the Russell 2000 used to be a leading indicator for the SPX.  Now its a leading indicator in the contrarian sense, where Russell 2000 outperforms right before a big downside reversal.  

However, it feels like the beginning of the topping phase.  The highest beta, most speculative stocks in the market are outperforming the market, and have even gone up when the SPX has gone down.  AI bubble is getting bigger.   Bitcoin is on fire.  You are seeing a very active pump and dump market, which can happen around local tops, but usually not around final tops.  These are signs of a rally in the late stages, with long positioning getting saturated.  When retail investors are this active and confident, bad things happen in the long term.  

If we are to make a comparison, this feels more like December 2024 than February 2025.  Remember, the speculators were much more active and bullish in December 2024, enjoying the Trump victory afterglow, than in February 2024, when the SPX made marginal new all time highs with AI names and bitcoin lagging.  

Big picture, there is limited upside and lots of potential downside.  Equity allocations among BofA private clients is now the highest since early 2022.  

We are seeing the CTAs rapidly increase their equity exposure as the longer term moving averages and trend indicators turn technically bullish.  The DBMF trendfollowing ETF has been increasing SPX longs considerably for the past few weeks.  The vol control funds have been rapidly increasing long equity exposure as the 3 month vol window starts to replace early April vol with early July vol.  When the systematic funds start piling in, after a huge up move,  that's a warning sign that a trend reversal is near.

There was nothing noteworthy in the CFTC COT report for index futures.  The ISEE index is showing lots of call buying in July, as speculation is rampant out there.  

The market has been shakier since July 4.  This is not what was expected, as the seasonal strength is for the SPX to continue to rise into the middle of the month.  And usually July opex week is a bullish time for the market.  But the tariff threats are starting to wear down this market, slowly but surely.  The plan was to put on shorts into strength on July opex week, and we may get that.  But if we do not, I will not be chasing weakness and looking to put on shorts into a down market.  The Nasdaq and big cap tech are just too strong for me to short into the hole.  If we get an up move towards SPX 6300 this week, I will look to put on a short position.  If we grind lower, I'll wait on the sidelines.  

Retail Investor Frenzy

Retail investors feel invincible.  The meme stocks (except TSLA) are all doing well, the high beta speculative stocks are rallying, and the most popular big cap tech stock among retail, NVDA is the best performing Mag 7 since the April lows.  They have bought more stocks and ETFs so far in 2025 than in 2021, when the everything bubble running on Covid stimulus was at its peak.  

The 2022 bear market didn't do anything to discourage them.  Instead it has emboldened them into thinking that every correction serves as a springboard to a quick move to new all time highs, like what happened in 2020, in 2023-2024, and now in 2025.  

The stocks with the most net call volume are outperforming, another sign of heavy speculation on more upside.  

The ISEE index of calls to puts is now hovering around levels that led to pullbacks in 2024 and earlier in 2025.  

The bull/bear surveys, which are less important, but are also showing signs of complacency and high optimism.  The NAAIM survey number is now above the highs from mid February, and around the post Trump election euphoria levels.  

Technically, the market is looking overextended as its shooting straight up for almost 2 weeks since the Israel/Iran ceasefire.   You had a beat in the NFP number an a big rally ahead of July 4 weekend.  Over the weekend, you had more can kicking / TACO on tariffs as the deadline moves from July 9 to August 1, according to Lutnick.  You had the BBB pork bill get jammed through Congress so that's another bit of "good" news for the market.  So much "good" news in the market lately!  

As the call open interest accumulates and call volume rises, you build up a gamma squeeze higher as we get closer to monthly opex.  This can result in an overshoot which present good shorting opportunities.  We are 1-2 weeks away.  Expecting the "wait till after July 9 tariff deadline to buy" chicken little bulls to start quacking and buying the strength this week.  Sitting on the sidelines, letting the bulls take this as high as they can before taking the other side.