These are the subtle signs of a weakening bull, when the momentum names are no longer leading and are getting punished on dips. You can rationalize these moves as being driven by news such as Citron Research's short report on PLTR, which wasn't anything revolutionary (just a dig at the absurb valuation of PLTR compared to another overvalued company, Open AI). Or META talking down future AI hiring plans. These aren't significant news drivers, yet they caused quite a bit of damage to PLTR, META, and NVDA. Those 3 names, probably the 3 most popular AI names out there in the US stock market have all underperformed during this pullback vs the sharper pullback on August 1.
Another difference is the length of the pullback starting from August opex. It was a 5 day pullback that was slow and grinding, not a sudden fear induced selloff that quickly recovered like August 1. A technical sign of saturation. Also, put/call ratios were quite low for the first 3 days of the pullback, before finally getting to a bit more elevated levels last Wednesday and Thursday. If you look at the big picture, the cash holdings at equity mutual funds are very low. There is almost no dry powder among mutual funds, and very little dry powder at hedge funds who also have above average net exposure vs. history.
Last Friday, we got the much awaited Powell Jackson Hole speech. Going into the speech, I noticed quite a few "experts" on CNBC, Bloomberg, Twitter talking about how hawkish Powell will be at Jackson Hole. It probably explains the slow drip selloff going into the big event. Expectations for Powell were low, so when he did tee up a September cut with some job market weakness excuses, it launched off a FOMO rocket. Those fund managers who wanted to lighten up on longs did so ahead of J-Hole, which caused them to panic back into their longs when they realized that this rally wasn't done. They have to keep up. Its not a choice. Its a career decision.
Long term, whether Powell is dovish or hawkish doesn't matter. The Fed is no longer the driver of markets. The econ nerds will always focus on the Fed, but economists don't move markets, investors do. The Fed can move the markets for a day or two, but they don't move it for months and years like they did in the monetary dominance era.
We are now in a new era of fiscal dominance, where fiscal policy drives the market, not monetary policy. Monetary policy becomes toothless when lowering rates actually lowers interest income for the private sector (due to the huge national debt levels, high percentage of T-bill issuance) more than it reduces interest expense for them. The mortgage refi channel via lower long end rates is broken, as the long end has stubbornly stayed high during this cutting cycle. In addition, most home owners are already locked in to mortgage rates much lower than current levels, greatly reducing refi demand even if long end rates go lower. Only if/when the Fed does QE will that have a meaningful effect on the stock market. That may come sometime in 2026 after Trump installs a dovish puppet as Fed chair.
Over the past 2 weeks, as momentum has weakened, the Russell 2000 has instead strengthened. On Friday, while SPX went up 1.5%, the RUT went up 3.9%. We haven't seen that kind of RUT outperformance in a while. It is eerily reminiscent of July 2024, right before the SPX had a 10% pullback and a vicious VIX spike over 50. I do not expect that to happen this time around, but I expect a similar bearish response to RUT outperformance over Nasdaq.
Before 2022, Russell 2000 underperformance vs SPX and NDX during a rally was a warning sign of a pending correction (2014, 2015, 2018, 2019, 2021). That was why so many investors became obsessed with breadth as a indicator of the health of the market. Everyone thought strong breadth is a good sign for the stock market. Since 2022, as we've entered the fiscal dominance/higher rate regime, Russell 2000 outperformance vs SPX and NDX was a sign of short covering/excessive optimism, proving to be an urgent warning sign that a correction was coming. You saw this in July 2024, before a sharp 10% correction, and December 2024, before a sharp 5% correction. And it appears that is happening again in August 2025.
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| IWM:QQQ price ratio |
No significant changes in the SPX COT data. The VIX positioning is getting more interesting. Commercial traders keeping adding to an already big VIX long position, meaning speculators are getting short VIX. This has happened ahead of some explosive moves higher in VIX in recent years, such as November 2021, August 2022, July 2024, and February 2025.
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| COT VIX Positions |
The big event of the week is NVDA earnings. Its a quiet week where many are on vacation, and already squared up without much desire to put on big positions. There appears to be a bit of caution ahead of NVDA earnings, more than last time, due to some recent headlines and relative AI weakness, but that's offset by most people's expectations that they will beat earnings and pump their stock like they always do. So expecting NVDA earnings to be a nothing burger. With the cracks in momentum, the sudden outperformance in Russell 2000, and upcoming seasonal weakness, the odds are now favorable for the shorts. Will be looking to put on shorts in SPX and individual stocks this week. Looking for a big down move that could last several weeks in September/October.
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8 comments:
This was a really fascinating read. I've gone through several of your posts, and I have to ask, do you ever wonder if your lens on these indicators might be influenced by a bearish bias? I say that as someone who is a bear myself, but in this kind of market, it's been driving me insane.
I shorted around 6300 not too long ago and took a ~$30K loss. Sometimes it feels like this market will keep going up until the U.S. collapses like Rome under endless money printing. Do you ever get that feeling?
The past couple of weeks felt a bit weaker, sure, but the last few months have been brutal. People around me are worshipping SPX like it's a god and honestly, I completely agree with your take on that. The human sentiment indicator is screaming.
But still... the market keeps proving me wrong, and I can’t shake the thought that maybe I’m the one who’s wrong. Do you ever feel the same?
I realize that I have a bearish bias, but I am aware of that, so I try to be picky when entering shorts, especially in a strong uptrend.
Stock prices are determined at the margin, by the most aggressive participants. Small changes in supply and demand among those price takers can have huge effects on prices. When you have greedy, fearless investors being the most aggressive participants, you can get huge rallies. The flipside of that effect is when investors start losing lots of money as the demand wanes and fundamentals don't support prices due to overvaluation, you get air pockets.
April was an example of such an air pocket. I actually don't get the feeling like the US market will keep going until it collapses like Rome, because I actually look at M2 money supply, bank credit, loans/leases, and Treasury supply. They are up much less than the SPX over the past 5 years, in a time of high inflation, lots of money printing, and Treasury issuance.
So based on a SPX to M2 money supply ratio, the market is priced very high.
The human sentiment indicator is screaming, and its something that I put a lot of value on. After all, stocks are a voting machine, but its a fickle one that can turn on a dime. When most are leaning to one side of the boat, it sets up a huge potential for a big move that hurts that majority, who are positioned for up, not down.
This is a bear site with bear traders. But you can't just trade short all the time. Stocks are made to go up unless we get hit by a meteor or get struck by some Satan 2 missiles from Russia. Because stocks go up more than they go down.
Interesting price action in BTC. Trading very weak relative to the SPX. It is the best indicator of risk appetite among the most greedy and speculative. Makes me more eager to short the next up day. Still waiting.
I’ve read your comment over and over again. I think you must have been trading since before 2008, and from the way you write, I can sense that in terms of trading volume and skill, you’re operating at the highest level an individual can reach.
I truly resonated with what you said, and it took me some time to write this reply because I wanted to look up the evidence you mentioned myself.
In the end, I just want to thank you for sharing credible evidence, and also for taking the time to write such a long and detailed reply to what might have seemed like the whining of a small fry who lost just a bit of pocket change to you.
I respect you. Mr. Market Owl.
Today was an up day. Did u short or waiting until Thursday? If thu up big on nvda, would u have the courage or will push out the top and the short couple weeks out?
Haven't shorted yet. Looking to fire my first bullet today, and then another on Thursday. I actually want to see NVDA go up on earnings so I can add higher.
If NVDA beats, just for the fcuk of it, they can easily take the QQQ to 598, SPY 560. I doubt they will do that but if they do that should be TFT
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