For 4+ months, those who have sold have mostly regretted it. Either selling their longs or getting short. They say that the beatings will continue until morale improves. This market has beaten the bearishness out of the shorts and telling them to throw in the towel. Those with thoughts about tariffs, economic weakness, and the huge selloff earlier in the year have gotten punished. Morale doesn't usually change in a few weeks. It takes time for short sellers to feel enough pain to force them to cover. It takes time for uptrends to re-establish, for volatility to go back down. Which means it takes time for CTAs and vol control funds to get back to being heavily long after being flat to short in April. It appears that enough time has passed for investors to get off the sidelines and jump in. 
Recent allocations for the biggest trend following ETF, DBMF, show them massively long index futures, not only SPX, but also MSCI World developed and emerging markets. This was not the case as recently as a month ago. But the rip to new highs after the quick dip on August 1 got the CTAs near max long. As of August 21, CTAs are at the 94% percentile in net long exposure. This is actually higher than their net long position in late 2024, before all the rumblings from tariffs rattled the market.
From a technical timing perspective, the odds are favoring a 5% or more pullback within the next 2 months. That doesn't guarantee a pullback, but combined with other data and how investors are behaving, the odds look favorable on the short side. From a risk/reward view for the next 2 months, I see at most 100 points of upside for SPX, and anywhere from 300 to 800 points of downside. So while it may be a 50-50 coin flip of whether the market is up or down for the next 2 months, there is a lot of asymmetry between the two outcomes.
Seasonally, we are entering the weakest month of the year, which has been repeated a bit too much by the crowd for my liking. But most of that September weakness happens after September triple witching opex, which is September 19. Its very possible that we grind higher towards that September opex, frustrating the seasonality bears who are short just because its September, and then have a rug pull afterwards. September post opex also coincides with the start of the corporate buyback blackout period from late September to late October. During that window of smaller than normal buyback flows, a sudden risk off move can accelerate more quickly than usual.
Under the surface, there are divergences and signs of an upcoming trend change. One of those is the Russell 2000/Nasdaq ratio. We are seeing enthusiasm again for the small caps, which used to be a bullish sign back in the day, when there was ZIRP and endless QE. Now, its a sign of investor overexuberance and trend exhaustion. For the past few weeks, the RUT has continued to outperform the NDX. Unlike what the old school paper napkin chartists tell you, strong breadth after an extended rally with laggards rallying while leaders lag is bearish, not bullish.
Bitcoin is the best indicator for risk appetite among aggressive, speculative retail and institutional investors. These investors are a small minority of the total investor pool, but have a big effect on prices as they are active traders that are usually price takers, going with the flow. They are the ones that move markets. When they are saturated with stocks/crypto, that tells you their next move is likely to be to sell.
Another divergence I have noticed is the relative weakness of the NDX vs the SPX, in particular, momentum and large cap tech favorites like PLTR, MSTR, META, MSFT, and bitcoin have recently lagged badly. Bitcoin has now underperformed the NDX over the past 3 months. That underperformance has been particularly noticeable and sharp in the past 2 weeks. The top in bitcoin coincided with lots of euphoria over crypto this summer, which makes this bitcoin underperformance even more meaningful. There are lots of underwater, trapped longs in the crypto space now.
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| IBIT vs QQQ |
Last week, we saw some more signs that another piece of the momentum trade, AI, is getting tired. NVDA sold off after beating earnings on Thursday, and the selling accelerated on Friday.
As I write, we are getting a big gap down as the seasonality bears are on the prowl, fear mongering about seasonal weakness and historically the worst month for stocks, September. While I am short, I don't think its going to be straight down from here for all of September. Its possible that there is relief buying after the jobs number, as a weak number would raise expectations for the Fed to be dovish at the September meeting, while a strong number would alleviate fears of a weakening job market. There is still the much anticipated Fed rate cut at the FOMC meeting on September 17, along with triple witching opex on September 19. That provides a backstop for bulls, so not expecting a big decline just yet.
Entered into some SPX and single stock short positions last Wednesday and Thursday. I anticipate a bit of weakness ahead of nonfarm payrolls, which could be a spot to trim shorts. Depending on the price action this week, may trim some short positions ahead of NFP on Friday. We are likely to chop in a small range until September opex, so I wouldn't get too aggressive on the short side just yet.
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