Tariff TACO Rally

Here we go again.  Another round of TACOs.  Another gap up.  The SPX looks unstoppable.  We had a VIX spike on a tariff crisis that went away after 2 weeks, and a private credit crunch, that went away after 2 days.  Add to that a below consensus CPI number, and suddenly the SPX has blasted through to new all time highs.  Something just didn't smell right when the VIX spiked up to 28 on less than 3% dip in stocks.  That speaks to speculators being too short in VIX, rather than an omen of bad things to come.  I heard too many people mention that a rising VIX with a flat SPX is a bad sign for stocks.  It was for 1 day, on Friday October 10.  Since then, its been a great sign for stocks.  You cannot get obsessed with one indicator that shows bearishness.  Especially when many on Twitter are mentioning it.  Its the punch that you don't see that hurts you, not the punch that you can see from a mile away.  

Retail investors are winning, and hedge funds are losing.  The most shorted names have squeezed a lot of hedge funds, who are keeping large gross exposures.  Meaning they have lots of longs and shorts.  But the net exposure for fundamental based hedge funds is low on a 5 year historical basis.  When hedge funds are neutral to slightly underweight equities while the SPX is hovering at all time highs in a clear uptrend, being short is hazardous for your wealth.   While retail investors are usually a fade, so are hedge funds.  Especially when hedge funds are fighting the tape.  From GS Prime broker data, US fundamental hedge funds long/short ratio is actually lower now than in the bottom of the bear market in 2022!  BofA flow of funds data confirms that hedge funds have been selling into strength for the past several weeks.  Hedge funds are very skeptical of this bull market.  

Its eye-opening to see a group of fast money investors like fundamental hedge funds fight the bull market like this.  They usually follow the trend.  It gives me pause when I think about shorting this monster.  

In the bond market, the action has been stale.  With Treasuries hanging around 4% 10 year yields, I see little edge either way.  4% 10 year yields seem about right for this market, where you have the real economy slowing hurting the lower to middle class, with fewer jobs, but the stock market and AI economy on fire, boosting the upper class.  The consensus seems about right on the economy, which means the bond market has little to no opportunity here.  

Without COT data, its harder to figure out the positioning on the Street.   Flows data seems to show that retail has been buying while hedge funds have been selling.  Just looking at the price action in retail favorites shows that retail investors have been quite active in this market, and are positioned heavily long.  The put/call ratios have shown heavy call buying since early September, except for the past 2 weeks.  It appears that call buyers have taken a breather, and gotten less bullish after that October 10 tariff scare from Trump.  That now appears to be over, with another TACO delivered via international air mail by  brown noser Bessent.  

Closed out the SPX short and single stock shorts last week into the brief dip that we saw on Wednesday, to exit shorts as gracefully as one can hope for in this bull market.  A couple of weeks ago, I was regretting not being short before the big one day drop on October 10.  Now, I am actually regretting not buying the dip during the VIX spikes, to play for a November rally.  Of course, the market never really gave you much time to buy dips as they went away even quicker than they came, so I am not the only one feeling that way.  

Its fighting an uphill battle to short now, with positive seasonal forces and the return of stock buybacks.  It appears that the brief dip we saw earlier in the month was the BTFD moment, and its clear skies above for at least the next 2 weeks.  

As the SPX hits new all time highs, I will be paying attention to the retail speculative favorites that have already peaked out.  I see plenty among the  quantum, nuclear, space, crypto, and AI data center names.  Those will be prime targets for shorting when the SPX uptrend begins to flatten out, probably sometime in mid to late November.  You have to give the bulls room to run this bubble higher,  to not get run over.  I may not even short SPX, instead focusing on shorting the more volatile and speculative names.  I see much better risk/reward in those than in the overall market.  

Bubble Recognition

They are finally beginning to recognize the bubble.  The AI bubble.  The circular financing.  The Open AI circle jerk.  But they still don't recognize that there are other bubbles.  The bubbles in super speculative, highly shorted stocks.  The bubbles in crypto and gold.  The bubble is far more expansive than just AI.  

Ironically, the weakest performer during this small pullback in risk assets is crypto.  Even though crypto has gone up way more than stocks since 2020, you hear very little talk about there being a crypto bubble.   But the past several days has shown that the weakest hands are in crypto.  When you see bitcoin go from 125K to 102K in a few days when the SPX just has a 3% pullback, you see where the paper hands are.  Of all the bubbles out there in the market, crypto has the least inherent value.  It is the ultimate meme asset.  With meme assets, investor sentiment is the only driver.  There are no buybacks in crypto like you have in stocks.  Crypto treasury companies can only issue stock to buy cryptos if there is bullish sentiment.  There are no value investors in crypto.  They are get rich quick assets.  They attract young investors looking for fast gains.  Many high leveraged, trying to juice up a very volatile instrument.  

It is sad to see so many young investors get duped into buying alt coins, buying into the hype drummed up by the Administration, by crypto pump and dumpers, by those looking to sell their bags to the greater fool.  These crypto exchanges are not real exchanges.  They are not there just to match buyers and sellers.  They are looking to profit off of forced liquidations, taking the other side of the forced selling.  The crypto exchanges had a field day on Friday, October 10, when you had mass liquidations in all the cryptos, especially the alt coins, many of them dropping 99% during the liquidation drive.  Straight out of the late 1800s.  Bucket shop drives.  These crypto exchanges are modern day bucket shops.  

Outside of AI, you also have loads of speculation in quantum computing, space-related names, and nuclear stocks.  It was odd to see mega cap tech stocks trading weaker than these highly shorted spec names during the early part of this pullback.  But then most shorts must have covered as you saw the opposite later in the week.  The price action has been wild, and the VIX continues to be inflated.  You are seeing a lot of intraday and overnight volatility in the SPX but limited day to day volatility.  The dip buyers are very active and aggressive.  They are not letting the SPX stay down.  When they sense that the market is making a short term bottom, they rush in to buy.  Its FOMO + BTFD.  

It doesn't help that you have hedge funds actively shorting this market.  I usually don't like to stay on the same side of the hedge funds when they are fighting a bull market.  It probably means we have new all time highs in the near future, although I don't expect a "blowoff".  

I hear many investors now, parroting Paul Tudor Jones, calling for a blow off top in this AI bubble.  But when investors start to recognize that stocks are in a bubble, they lose conviction, not gain conviction.  Investors are heavily allocated to stocks but with declining conviction.  That is a not a situation conducive to blow off tops.  Besides, blow off tops are rare in the stock market.  It happened once in the Nasdaq in 2000, but the SPX during the same time didn't have a blow off top.   When investors are heavily allocated to stocks with declining conviction, you are much more likely to get a flattening, choppy top.  I believe we have started the topping process, which could be quite extended.  Given the supportive monetary policy, as well as fiscal goodies from the OBBB in 2026, this thing won't roll over quickly.  I expect marginal new highs to come over the coming months.  I could see this process extending out into the middle of 2026.  Perhaps we get a good news top right after the new Fed chair comes in and coos dovish in June 2026.  

For the next 8 months, I expect a market similar to the first half of 2015, where the market was choppy, but grinding very slowly higher, with declining bullishness as the year went on.  Then the bottom fell out in Q3 of 2015.  That would be my base case for this market.  Of course, this time, I would expect a much bigger drop than in 2015.  

We got the macro bears on the prowl late last week, having a field day talking about credit crunches in private credit, SOFR anomalies, and inadequate bank reserves.  They made a mountain out of a molehill.  While I am short, it is not because of some two-bit regional banks having some bad loans to private credits.  Back in the day, when Jesse Livermore was short something he wanted to get out of, he would rapidly sell a small, illiiquid market like oats to scare the crowd, using it as bear bait, in order to cover his underwater shorts in a bigger market like corn.  In fact, if I were a hedge fund with a big short position, I would do what Livermore did in the past and sell a closely watched small, illiquid market like the regional bank ETF, KRE, and watch the crowd go into a tizzy and start talking credit crunch, Silicon Valley Bank part 2, etc.  That would give the hedge fund the liquidity to get out gracefully from their underwater short positions.

The more you observe the markets, the more you realize that speculation is as old as the hills.  So many parallels to Livermore's trading days and today.  

Trump caved on Friday, trying to talk down the China tariff tough talk.  TACO is alive and well.  Still think investors are too complacent here, despite the "credit crunch" fears whipped up on Thursday.  Have a small short position entered in the middle of last week.  Will give it a few days to see if we get one more dip, hoping for some classic post opex weakness.  Will not be overstaying my welcome, as the stock buyback window begins to open up at the end of the month, and positive seasonal forces will be at work soon.  

The Straw and the Camel

The Friday Trump tweet was the straw that broke the camel's back.  Its easy to forget about all the other straws that were added onto the camel, but they had much more to do with the big drop than the tweet.  Lots of excesses were building up in the system, one straw at a time.  The massive inflows into equity and crypto ETFs, the rampant call buying, the lack of realized volatility.  People were talking bubble, but with the view that the blowoff top was ahead of us, not behind us. These straws already were placing a lot of stress on the camel.  It just took a Trump tweet to collapse the camel's back.  

Now all the Monday Morning QBs will say that Trump took the market down, and that the TACO will bring the market right back up to where it was before.  That's unlikely.  This move down wasn't about tariffs but a return of volatility.  We could get a 1-2 day bounce, but I think this will last until more puts are bought and investors are more protected.  After that, we could have a reflexive rally later this month.  I would guess this pullback is at least 5 days in length, although I don't expect it to be very deep because investors will likely see through the tariffs, and there is still a lot of greed in this market that will remain until you get more signs of weakness in AI + high beta spec names.  Those stocks are still very strong relative to the market vs. where it was the last time SPX was under 6600.   

While there are still some tariff bears out there, a lot have been taken out and shot, with much less in their pockets.  And the remaining ones aren't so loud and proud.  Tariffs are a paper tiger.  They won't last.  The Supreme Court starts arguments on Trump's tariffs in early November, and should come out with a decision before year end.  All the lower courts have rescinded the tariffs by wide margins.  That already signals that odds heavily favor Trump's tariffs being ruled illegal.  The Supreme Court has a conservative majority, but these judges definitely care more about their equity portfolios than Trump's ego.  Besides their selfish desires, they have legal reasons to rule against tariffs.  Many of these conservative judges tightly follow what's stated in the US Constitution.  There is nothing in the Constitution that gives the President the right to tax.  Tariffs are a tax.  That's the power of Congress.  

On Kalshi, odds are at 38% that Trump's tariffs remain.  I would say the actual odds are much lower.  You have to realize that lots of these bettors have a political bias, and many Trump fans/Republicans will vote that Trump's tariffs are going to stay.  That's the reason a lot of these 80/20 scenarios on politics end up being 60/40, or 55/45 like the Trump/Harris election odds in 2024.  A lot of people vote their political bias when it comes to political betting.  That skews the odds closer to 50/50, which is the approximate ratio of Dems and Repubs in the US.  

If I had a Kalshi or Polymarket account, I would bet heavy on the Supreme court ruling against Trump's tariffs.  I view it as almost a slam dunk, similar to Trump's victory last November.  If the Supreme Court upholds the lower court rulings and rule against Trump's tariffs, that makes Trump's tariff tweets toothless.  And all of that tariff money has to be refunded, which would end up being a huge corporate tax refund that would be stimulative for stocks.  This is the one bullish catalyst I don't want to be short ahead of.  Its also why I think this trade war is basically over.  Yes, Trump can use other legal sections to put on tariffs, but they will be limited in duration and scope.  So basically future tariff tweets will be nothing burgers.  And I bet corporations will sue immediately to get future Trump tariffs repealed and outlawed.  

The one force that is more powerful than the US President is the corporate lobby, which rules over Washington DC.  Corporations are the main financial engine for politicians and their campaigns.  Politicians will not bite the hand that feeds them, especially when it would also hurt the stock market.  

Friday did show where the weak hands were in this market.  Clearly, the weak hands are in the crypto space.  Bitcoin flash crashed down almost 20% at the end of Friday.  Lots of alt coins went down over 50%.   It was a massacre for those leveraged long cryptos.  The insiders at the crypto exchanges must have had a field day picking off retail traders and buying the liquidations at fire sale levels.  Crypto exchanges are modern day bucket shops.  When there is no inherent value, volatility can rise quickly.  Because there are no value buyers.  

Its disappointing to miss the index short waiting for the perfect setup but that's the price for being selective.  Missing trades is part of the game.  We have a big gap up on the TACO trade.  I see very little upside from this gap up, but I will not fade it.  I may put on a small short later in the day if we get a gap and go scenario after the cash open, perhaps around SPX 6660 to 6680.  

Speculative Fire

They are going out on the risk curve.  Its not enough to just hold high beta stocks like NVDA, TSLA, or PLTR.  They need to dial it up and trade call options on those names.  And if they don't want to trade options, they just go to even more speculative names like a LAC, IONQ, RGTI, or down to low dollar stocks like PLUG.  Bitcoin is back near all time highs.  It took just a week to go from 109K to 124K.  

This reminds me of November 2021, which was the 2nd wave of speculation in the Covid bubble after the 1st wave happened in January/February 2021.  The 1st wave of the AI /debasement/Trump bubble happened in November/December 2024.  We are getting the 2nd wave now in October 2025.  You can judge these speculative waves by watching the Russell 2000, which really only comes alive and bursts higher when speculation is hot.  The Russell 2000  is filled with speculative, nonprofitable, high beta names that only catch fire when the gamblers are on the prowl.  And they are definitely on the prowl.

The bearish catalyst that popped the Covid bubble in 2022 was inflation and Fed rate hikes.  Inflation was rising but the Fed remained dovish in 2021 which encouraged speculators to chase after speculative names that are prevalent in the Russell 2000.  

Now, the Fed is tilting dovish and will likely get more dovish with a Trump appointed Fed chair in May 2026.  So what will be the bearish catalyst this time?  It has to be the popping of the AI bubble as reality sinks in that a lot of overbuilding and malinvestment has taken place.  The first signal of that will happen when stocks stop going up on announcements of more AI capex.  We may be seeing the beginnings of that as ORCL and META are not trading as well as the SPX in recent weeks.  Its still early, and you need to see more signs of AI fatigue before the rats jump ship.  But you can't wait too long or you will miss the first big drop from this bubble.  The first drop is always the quickest and most vicious.  

What makes picking this top so difficult is seeing the hedge funds not actively playing this bubble.  Leveraged funds are holding large short positions in SPX futures, as well as not increasing net leverage.  In fact, Goldman prime broker data shows fundamental L/S funds sharply reducing net leverage in late September.  This makes it less likely that you see hedge funds mass liquidate on weakness like they usually do when they are fully long.

While systematic funds are near max levels for equity exposure, the fundamental funds are closer to neutral.  It's much better to fade a market when both systematic and fundamental funds are maxed out for equity exposure.  Tough.

On the other hand, retail investors are piling into equity funds as well as call options.  Call volumes have soared recently.  This can be an early warning sign that a market top is coming around the corner.  It was way too early in January 2021, when the first wave of call speculation hit the market.  The SPX kept rallying for several more months.  It was spot on though in nailing the top of the 2nd wave in November 2021.  It was also a bit early in December 2024, but if you shorted in early December 2024, you would have been able to cash in on a brief, but sharp dip later that month.

These type of 5+ month rallies without at least a 4-5% correction are not common.  You did see one in 2021, and almost saw one in early 2024, but they are unusual.  Usually the stock market is choppier than this.  But this uptrend has been quite smooth, with small dips being voraciously bought, giving bears little time to monetize shorts or put positions.  Usually these type of lengthy rallies end with a sharp selloff.  They aren't always deep, but they tend to be sharp enough that you get a notable VIX spike.  

But the rally in recent days has been accompanied by a rise in the VIX, which is puzzling.  Usually you don't see this kind of persistent bid for VIX when the SPX keeps going higher, in a non-volatile manner.  The realized vol has been very low, but the implied vol keeps going up.  It makes no sense.  And its not as if there is a big future event that is feared keeping IV elevated.  No, the government shutdown is not a feared event.  It could be buyers of VIX ETFs and ETNs which are keeping the VIX well bid.  There has been a lot of buying in VXX, UVIX, and UVXY ever since the market bottomed in April.  But the amount of buying, which is nearly $2B combined over 6 months, is just not enough to distort such a big market.  Usually a rising VIX with a rising SPX is bearish, but there are so many other signals that are flashing bullish right now.  

The market is just too strong to fade here.  Too many risk on signals are firing which make the rally more durable.  I prefer to short a market when SPX is flat to rising while bitcoin and other speculative favorites have topped out and are going down for several days to weeks.  I also prefer to see Nasdaq weaker relative to SPX and RUT. That isn't happening.  And you still have the government shutdown, which keeps a fair number of chicken little investors on the sidelines.  This means when the government shutdown ends, you have chicken little money coming in to lift the market.  So the government shutdown is actually a future bullish catalyst.  And I don't like shorting ahead of bullish catalysts.  Perhaps the market tops despite all the strength in speculative tech and bitcoin.  But to survive as a short seller in a raging bull market, you have to wait for perfect setups to short.  And the current setup is far from perfect.  Watching and waiting, probably on the sidelines until the government shutdown ends.