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.