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.