Bitcoin Led Market

Bitcoin is the talk of the town.  Saylor is still pumping bitcoin.  Its probably been the most hyped up thing since Trump got elected, so you know there are a ton of bagholders in it right now. A ton.  That explains why its trading so heavy even with the SPX down less than 5% from all time highs.  Bitcoin has dropped 30% from its all time highs.  It underperformance vs Nasdaq YTD continues.  

BTCUSD vs Nasdaq

When the market is going up, all they do is talk about the big cap stocks that are going up the most. When the market is going down, all they do is talk about the big cap stocks that are going down the most.  Bitcoin has joined the pantheon of the Mag7 stocks in terms of most talked about financial asset.

Now that bitcoin ETFs have gathered a ton of assets under management, it starts to act more like a highly volatile, big cap stock.  It also increases its correlation to the stock market, which was already high to begin with.  Its only gone higher since IBIT came out.  You can put bitcoin in the meme asset bucket along with the meme stocks.  It has no intrinsic value, like the meme stocks.  The reason meme stocks seem to always be overvalued with bad fundamentals is because stocks with reasonable valuations are usually not volatile.  That is the number 1 requirement to become a meme stock.  Volatility.  The number 2 requirement is strong historical performance.  This is necessary because retail investors are great at extrapolating past performance into the future.  So anything that's volatile and performed well over the past 3 to 5 years could become a meme stock/asset.  The most recent members of the meme asset family are gold and silver.  That means that 1. gold and silver will remain volatile until it loses it meme status.  2. gold and silver are likely to underperform a 60/40 stock bond portfolio over the next 5 years.  

The investors that are getting hurt the most right now are retail investors.  Institutions aren't doing great lately, with their overweight to the Mag 7, but they hold relatively little bitcoin, or meme stocks so they are not doing too bad.  Retail investors are the ones that are enamored with bitcoin.  Its retail investors who have the get rich quick mentality, buying bitcoin, ether, crypto treasury stocks, meme stocks, and call options on big cap AI names and their favorite meme assets.  Those have all gotten crushed.  

 

Institutional investors on the other hand have a keep my job mentality, which means being closet indexers, sticking with megacap tech, and holding little cash in a bull market so that they don't underperform.  Cash balances are now down to 1.2% of total assets at mutual funds.  

Here is the latest look at performance of stocks with most call volume vs Russell 3000.  This is a window into how retail investors are performing vs the SPX.  As you can see, its been straight down since the spike higher in October, now down towards the tariff tantrum lows in April.  Easy come, easy go.  Most retail investors are hurting right now.  They are in a similar position to the immediate aftermath of the blowoff top in March 2000.  So they are probably feeling similar to retail investors back in April 2000.  

 

Retail investors are driving this ship.  It is quite the change from post GFC environment, when retail investors were absent, and only institutions were relevant.  Now its institutions that are reacting to the moves caused by retail.  Its the tail wagging the dog.  

You have to put yourself in retail investors' shoes to understand the movements of this market.  As a whole, retail investors like buying dips, and it has worked over the past few years. But they also like selling the rips.  But they don't like selling for a loss.  This makes it likely that the first few dips get bought, as retail deploys the free cash they have left, like they have been during this selloff.  But with dips becoming more frequent, they run out of that dry powder to keep buying the dip.  I don't believe they've completely run out of dry powder, but they are running low on ammo.  

With so much retail underwater and looking to bail out on rallies and at break even, previous support levels, high volume nodes where lots of retail investors were buying the dip, are where they will sell the rips.  Previous dip buying support levels are now sell the rip resistance levels.  Right now around SPX 6690-6720.  

 

Hedge funds have been much less bullish than retail during the April to October rally.  They haven't bought into the bullish story lines about AI.  In this month's selloff, CTAs and discretionary funds have been reducing equity exposure, putting them towards neutral to slightly underweight.  Unlike 2022, it won't be the hedge funds panic selling into the weakness in the next bear market.  They are playing it conservatively this time around.  The next bear market will be led by retail investors selling.

We've seen a dramatic reduction in call volumes relative to puts.  The ISEE index has gone down a lot over the past few weeks.  Put/call ratios are getting towards levels where you see intermediate term lows in a bull market.  If its a bear market, it can get much higher than this.  But the base case is we're in a sideways market that is neither bull or bear.  

 

There has been extremely elevated insider selling activity over the past few months, higher than we've seen over the past 25 years, according to the below data.  This confirms my suspicions that retail is absorbing supply from smart money investors that are selling into the high prices.  

 

All the bearish talk about the Hindenburg Omens in late October/early November were correct.  Its usually not the case that when a lot of investors point out a bearish technical indicator, it actually follows through on the downside.  Hindenburg Omens don't always preclude bear markets, but there were a large cluster of Hindenburg Omens in November 2021, a couple of months before the start of a bear market.  And there was a huge mass of Hindenburg Omen signals that showed up in 1999 and 2000.  The internal divergence signals are carrying some weight this time, meaning that it could be a signal of a more vicious down move in a few months.  

 

It was quite a roller coaster ride last week.  NVDA earnings were a huge fake out, something that your rarely see of that magnitude.  This market is no longer that boring market that you saw from July to October.  There are a lot of weak hands out there and they have been exposed.  However, we've had a tremendously strong rally from the April lows to the October highs, with very little opportunity for dip buyers to buy.  That means that you have a fair number of investors who are looking to buy weakness that they didn't see for most of the past 6 months.  Those dip buyers should provide a floor for the time being.  But with each successive dip, it will get more dangerous to keep going back to that well of buying weakness.  

Bought the dips on Wednesday and Friday.  These are just trading longs which I intend to sell on any rips towards SPX 6700.  Initially, the plan was to play for a bigger move higher, but I would rather play for more choppy conditions and free up capital to buy the dip again if we go right back down.  It was notable that the rally on Friday was concentrated in the Russell 2000, which easily outperformed the Nasdaq and SPX.  The Nasdaq was the weakest of the 3 indices, which is not a good sign for a long term bottom.  Instead of a V bottom, we may get a U bottom this time around.  Based on the high volume selling and opex related weakness, it does appear that Friday was the low of this move, but it wouldn't surprise me if we revisit that support zone soon.  

I continue to believe that its a choppy range bound market, which favors fading moves at the edges of the range.  The bottom end of the range looks to have been set on Friday, around SPX 6530.  The top end of the range looks to be around 6900, set post tariff deal in late October.  That range will provide a rough guide to navigating the remainder of the year.  Its too early and not enough dips have happened to start a bear market.  If we get some more chop for the rest of the year, that could set up a nasty January when traders look forward to what happens in 2026.  

It was the Best of Times....

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

― Charles Dickens, A Tale of Two Cities

Just a few weeks ago, retail investors felt like they were on top of the world.  NVDA was hitting all time highs above 200, TSLA was above 450, PLTR was strong, and the quantum, nuclear, AI data center, and space names were all close to all time highs.  Now, there is absolute wreckage in the retail speculative favorites.  Retail investor hell.  And SPX is barely down 2% from all time highs.  

When we look back at this bubble, the story will be of how retail investors once again piled into the most overvalued companies and the most worthless assets, buying the most at the top, and riding it all the way down to the bottom years later.  History doesn't repeat, but it does rhyme very well.  This is 2000 all over again.  Back then, it was also retail investors who drove tech stocks to nosebleed levels, feeling FOMO, talking about stocks all the time, getting NASDAQ vanity license plates, only to see the market crash over the next 2 1/2 years.  

They say it takes a new generation for investors to forget, to get tricked by the market all over again.  Well 25 years is a generation.  Most of these retail investors who are piling into bitcoin, ether, quantum, AI, nuclear, space stocks were in diapers when the dotcom bubble burst.  They have no clue what's coming.   Now they have been conditioned to BTFD.  They believe that anytime the speculative garbage goes down, it will pop right back up, like it did from the bottom in April, all the way up to the top in October.  Or if there is a real bear market, then it will pop back up in a year or two, to much higher highs like from 2022 to 2025.  They haven't experienced a true gut wrenching bear market like 2000-2002, when the market went down for months at a time, with weak bounces that only led to more selling down the line.  

Retail investors have replaced hedge funds as the marginal source of supply and demand in the stock market.  It is clear as day that retail investors were driving the huge up move in speculative stocks and cryptos from May to October, and now that their powder is no longer dry, the demand for these names have disappeared.  Institutions don't want to buy their bags.  The only people even thinking about buying this speculative junk are retail, and they are already all-in.  

Now that retail has already bought up all these stocks and cryptos, they have less capital to actually put to work.  Therefore they've tried to get the most bang for their buck by moving from stocks to options.  Most of these speculative stocks are money losing companies in the Russell 2000.  The call volume has skyrocketed for these speculative names.  

I thought we wouldn't see the retail call frenzy like 2020 and 2021 again for decades, but its already happening, and even to a greater scale in 2025.  This is not sustainable.  In fact, the selloff in the past 2 weeks has been led by the Russell 2000, which is filled with these money losers that retail investors love.  The MEME stock ETF, which debuted a month ago, has basically gone straight down, losing 35% in a month.  During the same time period, the SPX is basically flat.  35% underperformance.  

Similar underperformance for bitcoin, which is getting pounded almost every day, now under 100K.  This so-called store of value, with all the "good" news pumping out from the White House, has managed to suck in a lot of late comer, me too investors who provided the exit liquidity for OG whales who have been dumping en masse for the past 5 months.  

Wall Street was not designed to enrich the retail investor.  It was designed to enrich the insiders, the sellers of stocks, the promoters, the investment banks and HFTs.  Almost all of the speculative garbage that peaked out in October had heavy insider selling.  Since that October peak, it has been straight down for the quantum, AI, nuclear, and space names.  

There are a lot of ugly charts out there.  A lot of blowoff tops.  My mistake during this latest pump and dump of these speculative stocks was to get in too early and get out too early, after making just a small amount.  I was still thinking that these stocks would stay afloat longer, and follow the Nasdaq more closely.  That was a completely wrong view.  Now its clear that these speculative stocks are trading on another planet, that is vaguely tied to the Nasdaq.  Its more like an on/off switch for these stocks.  Its either continuous buying, or continuous selling.  There are very few counter-trends that are worth playing.  You have to be a trend follower for these stocks.  I'm sure they'll be a dead cat bounce eventually, but probably from a lower price point.  

We got the relief rally on the government shutdown ending and then when the vote passed, we got the selloff.  Just a classic buy the rumor, sell the fact situation.  The market is no longer in an uptrend.  It doesn't mean we are in a downtrend.  Its a trendless market now.  The supply demand is much closer to equilibrium.  Which means that both rallies and selloffs will be shorter, and choppier.  You continue to hear more angst about AI, and its boondoggle nature which is starting to become more apparent with bears like Michael Burry screaming about it.  Its ironic that he's getting loud again right after he closed his fund, which probably incinerated a lot of investor capital by buying puts on high flying tech stocks for the past 2 years.  He probably didn't want to work for just a management fee while he tried to dig himself out of a massive hole to get back to his high water mark.  Better to just take his money and run, collect 100% of the profits for himself rather than sharing it with his investors when the bubble pops.  

We got some gyrations with Fed speakers coming out hawkish, putting the December rate cut into question.  It doesn't matter if the Fed cuts or not, as monetary policy without QE is toothless.  Rate cuts don't really matter now.  The short end is much less important than the long end of the yield curve.  With all the T-bill issuance and supply, you are probably taking away more interest income from investors than providing interest relief for borrowers by cutting rates.  Anything that would reduce the fiscal deficit (rate cuts will reduce the deficit) is a net negative for the economy.  Its the long end that matters.  And the Fed under Powell won't be doing QE, so it has no serious weapons to use for the next 6 months.

There are a couple of bullish catalysts for the next few months:  Supreme Court tariff decision and OBBB money coming.  I expect a short term bump up in the US economy for Q1 and Q2 when the tariffs are removed and the tax refunds hit peoples' bank accounts.  It could be enough to keep the market afloat even as the AI momentum weakens.  That would draw out the potential top to 2nd quarter of 2026, which would coincide with a potential good news top with the installation of a dovish Trump puppet Fed chair.  2026 should finally be the year that the long term bears get to feast.  

Still think this market will be choppy until November opex.  I doubt you get back to last week's highs this week.  Its possible that you do undercut last week's lows.  But I would think that any drop down towards SPX 6600-6620 would be buyable for a trade.  Nothing to do here, I need to see the market get to the edges of the 6600-6850 range to put on trades.  

Phase Transition

The relentless uptrend off the April lows is transitioning to a more volatile, choppy sideways rangebound market.  For aging bull markets, these choppy markets are part of the topping process before the start of a bear market. 

Its like water that's slowly heating up, you are starting to see the bubbles form at the bottom of the pot, as we reach the boiling point.  This time, lots of people are seeing the bubbles, the AI bubbles.  Its only with the passage of time and more cooking before you start to see the water evaporate, akin to wealth evaporating after the bubbles pop.  

Tops and bottoms in the stock market are quite different in their behavior.  Bottoms are sharper points in time, and there is a lot less time spent trading at the bottoms than at the tops.  The market will often have V bottoms, but not upside down V tops.  

Tops are usually extended processes that can take several months to complete before the downtrend begins.  The stock market tends to give you more time to buy/sell at elevated price levels, to inflict the maximum amount of pain on as many bulls as possible.  During this topping process, as the market goes sideways, investors get less bullish, even if the market makes marginal new highs.  Usually bullish sentiment peaks several months before the final peak in price.  Based purely on the news flow and the excitement post election in December 2024 (peak of bullish sentiment during this cycle), we have not gotten close to that level of bullishness during this latest run up.  And that's with the SPX up 15% on the year.   Knee jerk contrarians will say that less bulls is better for stocks.  That's usually not how it works.  For example, in 2021, sentiment was definitely more bullish in the first half of 2021 than at the end of 2021, even though the SPX was much higher.  Less bullish sentiment at the end of 2021 was a foreshadow of a weaker market in 2022.  

We are getting mixed flows, with heavy inflows into ETFs for the past week and past month, while flows from BofA clients show heavy outflows from institutions, especially tech stocks for the week of Oct. 27 to Oct 31.  I suspect there were more outflows last week during the weakness.  

Top ETF Flows as of Nov. 5 2025

The weakness starting from the traditionally bullish November has caught quite a few investors off guard.  But there has also been a growing number of short term bears who have cited weak breadth, Hindenburg Omens, a more hawkish Powell, and the AI bubble.  Its a muddy picture where you haven't really gotten enough of a washout for the bulls to run wild again, but you also don't have that complacency that is ideal for putting on short positions near the highs.  With the big gap up, we are in a bit of no man's land, in the middle of a range from the late October highs to last Friday's lows.  

Last week, the market did not give a good entry point to short the super speculative names in quantum, nuclear, and space names.  Instead, the heavily shorted names and the crap that was flying in October got killed.  At current levels, its not such a great opportunity to short these retail favorites in the short term.  

As has been the case for the past several weeks, bitcoin is massively underperforming the SPX and Nasdaq during this dip.  What's even more ominous is that the long time OG Bitcoin whales have been dumping aggressively over the past few months.  Bitcoin now looks like the dirtiest shirt in the laundry basket.  You have created a huge number of crypto bagholders not only in bitcoin, but in ethereum, all the alt coins, and in bitcoin treasury companies like MSTR, BMNR, etc.  That overhead supply will not be easy to get through in the coming months.  Considering all the "positive" catalysts bitcoin had this year, with the Administration pumping it, passing bitcoin friendly legislation, and Wall St. finally joining the bandwagon, it appears that you've created a massive good news top that will last for years.  

We got some positive headlines as the dreaded government shutdown looks to be heading to an end, with Democrats caving in and reducing their demands while the Republicans held tough.  Once again, its Democrats who are scared to offend, to upset the masses, while the Republicans play hardball, expecting the Dems to cave in like they usually do.  That abomination, which is Obamacare, is desperately being kept alive by Democrats, who are getting handsomely paid by the health care and insurance lobbies, to keep funneling hundreds of billions of government cheese into their pockets.  The Republicans are not innocent bystanders in creating the fiscal mess.  The OBBB is another unnecessary bill that just increases the deficit by lowering taxes without decreasing spending, while gifting more corporate welfare into the tax code.  

Not much to do here, gut feeling is that the market will chop around between SPX 6600 to 6850 for the next couple of weeks.  Bigger picture, we have probably entered the topping process, which could last from 3 to 9 months, before the start of the next bear market.  As many of you can guess, this feels a lot like 2000, but with less volatility.  With so much money in the US stock market compared to 2000, with more mature companies dominating the top of the market cap lists in the SPX, its harder to generate the same kind of volatility.  But I do expect many more spastic and random 1% up and down days, with less cash flows going to stock buybacks and more going into AI capex.  It will take a bit more time for the AI bubble to burst, as these big tech firms seem hell bent on continuing their FOMO AI spend.  The big drop post earnings in META is the first shot across the bow that Wall St. will not just cheer blindly for ever growing AI Capex.  The honeymoon period for AI stocks is in the rear view mirror.  Things will get real in 2026 when more investors realize that these big tech companies are just burning money in an endless boondoggle.  

Aging Bull

The real economy is getting stagnant.  Ex-AI, there is not much investment.  The little bit of real growth that is out there is just underreported inflation.  It is a bit scary to see such a weak real economy when there is a $2 trillion fiscal deficit with stocks going up 20% a year for the last 3 years.  It is clear now that the private equity bubble has popped, and the ramifications are starting to be felt.  Private credit growth will be going down, as there was a lot of misallocated capital in private equity.  With big cap tech collecting their rents on the rest of the economy, there is a huge number of smaller companies fighting for leftovers from the fiscal largesse, and struggling.  

But the uptrend in large cap US stocks remains strong.  Yes, you are seeing some cracks in a big chunk of non Mag 7 stocks.  In particular, we got a much touted Hindenburg Omen in the middle of last week, with really bad breadth for an up day.  While those are symptoms of a weakening market, its not an all-clear sign to short the SPX.  You want to see more HOs and the uptrend flatten out a bit more to set up a potential playable pullback.  

The pullback in mid October made investors less bullish, with talks of credit crunch, tariff fears again, and of course October seasonality fears.  But the market gave investors very little time to buy the lows, showing underlying strength.  If you didn't have resting buy orders before the dips, you probably missed the BTFD opportunity.  It is now November.  The seasonality bears will now be quiet.  Stock buybacks return.  It is not a time to overthink it.  The odds favor the bulls.  It won't last for long, but it probably lasts until we get close to November opex.  

With the market at such high levels, the upside from here doesn't look great.   You are seeing more demand for Mag 7 call options, with put-call skew for the group at very low levels.  Historically, forward returns during those periods have been way below average.  This environment arises from both complacency and a FOMO performance chase.  This bid for Mag7 call options after an extended run higher is reminiscent of late 2021 and late 2024.  Both instances preceded big drops in the market.  

Retail investors are aggressively positioned for more upside.  BofA private client asset allocations show clients holding the highest equity allocations in its recorded history, matching levels seen in late 2021.  

There are some bullish catalysts on the horizon.  The fiscal package passed earlier this year (OBBB) provides a lot of economic pump for Q1 and Q2 of 2026, which will help US growth.  This doesn't include potential reduction in tariffs which are likely, in my view, after the Supreme Court makes their decision on the Trump tariffs later this year.   The Supreme Court decision is an underrated event coming up.  A lot of investors aren't even thinking about it, but it is almost like a free call option for US stocks.  If the tariffs remain, then its the status quo.  But in the more likely case that the tariffs are ruled illegal, that is an immediate shot in the arm for the corporate sector in the US, with immediate tariff refunds, and a drastic reduction in future tariff expenses.  And that is not priced in here.  That would be a big boost to the already positive fiscal impulse lined up for 2026.  

With both the fiscal juice from the OBBB and no more Trump tariffs, you could be looking at an environment where investors get excited and push stocks even higher.  I don't think you see a blowoff top due to positioning, but you could see a grind higher in the first few months of 2026.  

If we do get that grind higher in the 1st half of 2026, that would take the market to truly nosebleed levels, just as the fiscal juice starts waning in the 2nd half of 2026.  That would set up a brutal 2nd half of 2026 for the markets.  

We are in the late stage of the bull market.  Its going to get choppier, and the uptrend will flatten out.  But its going to be a minefield for those blindly shorting betting on a burst of this bubble.  I see particular weak spots in retail heavy names and sectors, such as the highly speculative quantum, nuclear, AI data center, and space names.  In addition, I particularly see that the crypto space is saturated with bagholders now and will be trading heavy relative to Nasdaq/SPX.  For index shorts, its going to be tricky.  Betting against retail, who are up to their eyeballs in risk exposure, will be easier than betting against the foundation of the bull market, which is the SPX/NDX.  

Mostly in cash, looking to short speculative names on a rally in the coming weeks.