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.