Ninth Inning of a Blowout

There is a widespread belief that the stock market tops on euphoria.  In practice, that’s usually not the case.  Most of the time, investors are more bullish in the 6th inning of a bull market than in the 8th or 9th inning.  If you want to compare this bull market to a baseball game, it starts in October 2022, which is the 1st inning.  This bull market is 36 months old.  The peak of bullishness for this bull market happened in late November/early December 2024, when the euphoria of a Trump victory and hopes of a repeat of 2016 to 2020, as well as tax cuts and deregulation got everyone bulled up.  That was about the 6th inning of this bull market.  Back then, the SPX was trading around 6050.  Now, about 600 points higher, and investors are less bullish now than back then.  

I would say we are in the 8th or 9th inning of this bull market.  It is a blowout.  The bears have shown only a few short moments (October 2023, August 2024, April 2025) of glory, while getting pummelled the rest of the time.  But the game is almost over, and the winning team is no longer as enthusiastic about the game.  

You can look at the AAII, NAAIM, and other sentiment surveys which show less bullishness than late 2024.  Some use this as a reason that this bull market has more to go because investors aren't super bullish. If you look at the 2020-2021 bull market, investors were the most bullish in early 2021 when all the Covid stimmies were being passed and you had the re-opening optimism. By late 2021, despite a much higher SPX, investors were less enthusiastic as there was no new catalyst to look forward to.  It appears we are at the same point now as in late 2021.  The latest catalyst, Fed rate cuts, is well known, and just not that potent when it fails to bring down 10 year yields.  

In order for a bull market to make an extended run, it needs to keep the bullish psychology going with fundamental catalysts, not just higher prices.  The Trump tax cut/deregulation catalyst was used up in late 2024.  The Fed easing catalyst started in the fall of 2024 with the 50 bps cut last September, stopped in December, and has restarted again just recently.  This catalyst is very weak, as inflation is still high, and sticky, and with minimal effect on long end yields.  

The AI boom catalyst is still ongoing, but it is aging and very well known.  There are cracks that are forming in the hyped up AI theme.  NVDA's earnings report in August was a beat, but not as big as many expected, and the stock traded down afterwards for several days.  NVDA has lagged the SPX ever since that report.  You are seeing AI deal announcements which are quite circular.   A deal based on hopes that OpenAI can get financing to pay for AI infrastructure from ORCL.  A deal based on vendor financing (NVDA making an equity investment in OpenAI so they can keep buying NVDA chips).  Perhaps NVDA is seeing that the hyper scalers are nearing their threshold for AI capex spending, and need OpenAI to buy even more chips.  

The OpenAI - ORCL deal boosted ORCL by over $100 from the $241 September 9 close to the top at $345 on September 10.  Two weeks later, with the SPX higher than it was on September 10, ORCL closed at $283 on September 26, giving back more than half the gains on the announcement.  The OpenAI - NVDA boosted NVDA from $176 to $184, to only give it all back in the following 2 days.  The price action in AI stocks is not quite matching the enthusiasm of all these Wall St. analysts.  

It's quite clear that the SPX bull market is dependent on the AI capex boom continuing in perpetuity.  That is the dominant driver of corporate investment, which feeds into the earnings for the most important stock in the SPX: NVDA, as well other huge names like AVGO and ORCL.  The combined market cap of those 3 stocks is nearly $7 trillion.  When the hyper scalers cut back on AI capex and the AI bubble pops, it will have huge ramifactions for both US GDP as well as the earnings for NVDA, AVGO, and ORCL.  Not just that, all the high flying utility stocks that are banking on huge electricity demand from all the AI data centers would be in for a huge disappointment.  As NVDA goes, so goes the SPX.  

Why would the hyperscalers cut back on AI capex?  The main reason would be because they are not getting a return on investment.  Another reason could be because they have enough GPUs and AI data centers to do their LLM training and fulfill their inference needs.  Remember back in 2021 and 2022 when Facebook changed their name to Meta because they were going to spend tens of billions on the metaverse?  Well, they stopped spending when their stock kept getting pummelled as Wall St. realized META was rapidly burning money in a bonfire.  When Wall St. starts to punish big cap tech for burning tens of billions on AI capex with no ROI in sight, that's when the CEOs will listen and start cutting back.  Not there yet, but when it happens, that will be a game changer.  

We continue to see massive inflows into equities.  The so-called most hated rally has managed to pull in huge amounts into stocks.  From the BofA flows report, $88B has gone into global equities in the past 2 weeks, the 3rd highest ever for a 2 week period.  

Now that September is almost over and up almost 3% for the month, the seasonality bears have quieted down.  I still hear some say the markets will be "choppy" over the next few weeks, which is toned down from saying they will pullback over the next few weeks, like they did in early September.  So their confidence in seasonal patterns is definitely lower, but not fully shattered and embracing the bull train.  Another few days of strength into early October should force most of these seasonality bears to throw in the towel, which would be a welcome sight.  

Last week, we got an unusual surge in COT SPX net long positioning among commercial traders, which I suspected was triple witching opex related.  And with Friday's release, those suspicions were confirmed.  The commercials are now back to similar positioning from 2 weeks ago.  

COT SPX Commercial Positions

More importantly, asset managers are now the most net long in SPX futures since late March.  

COT SPX Asset Manager Positions

In the options market, the put/call ratios have been trending lower and are now at extremes on a 10 day MA basis.  Investors are getting complacent and trading few puts and more calls.  

Covered shorts last week.  Still not seeing enough in the price action to justify a longer term short position.  But this market is getting very stretched and it feels as if investors are not as enthusiastic as they were earlier in the rally.  This along with the large inflows into equities is puzzling, and means that you probably have weaker handed buyers coming in over the past few weeks.  Those late buyers as well as the max positioned systematic funds are the potential sellers into any October weakness.  

Considering how extended the SPX is without any meaningful catalyst on the horizon, you could see a sharp correction soon.  But there are still little walls of worry that the market can climb:  government shutdown, econ. reports, and bearish seasonality (still!).  If the market continues to climb this week to another all time high with lots of complacency, that could be a spot to put on shorts.  You cannot short in the hole vs. this monster.  Can only short rallies and into strength.  The SPX is a monster that is still on a mission to crush all short sellers.  That needs to be respected, so only exquisite short setups will be taken.