Don't Look Down

It feels invincible. The pullbacks are brief, and the rallies keep going.  

It's a nightmare for the bears.  Yet, you still have a large group of investors that are worried about weak seasonality until September.   A recent AAII investor survey showed a huge increase in the number of bears and drop in number of bulls, showing the skepticism out there.   Shorts have gotten punished since the April bottom, with heavily shorted stocks rallying much more than the SPX.  Those who have focused on fundamentals have been left behind.  The most speculative stocks have massively outperformed the SPX.  

At the same time, the CTAs have gone from short to near max long.  A look at the trend following ETF, DBMF shows how things have changed over the past 4 months.  From net short S&P 500 futures in April to massively net long, the biggest long position in their portfolio now.  

DBMF Holdings August 15, 2025

DBMF April 8, 2025

CTA exposure to US equities is now in the 97% percentile historically.  

When you have systematics basically max long, with no more room to add, and plenty of room to sell, a selloff from here will be self-reinforcing and could get nasty.  Add to that the retail investor, who is super bullish and aggressively buying calls vs puts.  

One of the best indicators of speculative fever is cryptos.  The ETF market share of cryptocurrency ETFs is rocketing higher.  There is much broader crypto participation in 2025 than in 2021.  Bitcoin went from $68,700 to $15,700 after it topped in 2021.  There are a lot more assets in bitcoin which is a eye of the beholder zero yielding asset like gold, but without the history, jewelry demand, and central bank purchases.  These crypto ETF inflows + crypto treasuries sprouting up like weeds is another sign of the size of this bubble.  Just last week, a crypto stock called Bullish (BLSH) IPOed and sports a market cap of over $10 billion.  The Wall St operators are rushing in to feed the ducks who are quacking over crypto.  We all know how this ends.  This year's momentum buyers will be next year's bag holders.  

We are seeing a growing divergence between large cap and small cap tech stocks, which is 2000-esque.  So many things in 2025 are rhyming with 2000, its eerie.  

One would understand all this speculative euphoria if the economy was hot and jobs were plentiful.  But what's so unusual about this rally is that its happening as the US economy is weakening, with inflation sticky, and a fiscal drag in tariffs coming down the pike.  Its a financial nihilism rally, based on numbers go up and FOMO.  Signs point to a weakening jobs market in the coming months.  University of Michigan survey respondents are worried about the job market, and they are usually correct.  

You are seeing weak demand for C&I loans, according to bank senior officers.  

This is a dangerous market.  This uptrend is breeding a false sense of security.  These type of bubble markets end with a bang.  The first move down will be savage.  The first move down off the March 2000 bubble top was a waterfall decline of 13%, the first move down off the January 2022 bubble top was a waterfall decline of 14%.   But, you can't be too early, especially if buying short term puts.  The downside is big, and the move likely to happen fast, but you need to make a top first.  I am still not seeing enough call buying given how strong this market is.  

We released quite a bit of potential downside energy on that decline into August 1, which could fuel the rally into the end of the month.  I expect Powell to not be hawkish at Jackson Hole, as he will probably lay the foundations for a September rate cut, which is mostly priced in.  That probably gets bulls excited going into month end and NVDA earnings, where I may look to put on a longer term short position into strength.  Watching and waiting, but the time to strike on the short side is getting closer.