Santa Rally

People are looking for a Santa Claus rally.  All it took was a quick bounce off a 2% pullback for the bulls to come out and say I told you so.  But we are seeing chinks in the AI armor and Nasdaq has been lagging for the past 2 months.  The long term sustainability of this bull market depends on Nasdaq continuing to lead the market higher.  Whatever BS you hear from CNBC regulars about a broadening market being healthy are just Wall St. cliches.  When investors are looking to add more equity exposure, it is to capture upside, not to protect downside.  A broadening market that goes from big cap tech into defensive sectors like health care and consumer staples is not a sustainable formula for a continued uptrend.  That is what has been happening since the late October top.  Going into defensive sectors out of offensive sectors is what fund managers do to lower beta but stay fully invested.  

Last week, you saw Blue Owl pull the plug on ORCL, refusing to fund another AI data center boondoggle.  We are getting closer and closer to the point where all the AI capex needs to start showing some real tangible results.  Open AI no longer has a free pass to unlimited capital raising.  META got punished for their bloated AI spend.  They must be getting metaverse vibes after the post earnings reaction in October.  With the hyperscalers less able to raise debt to build AI data centers, it will make it that much harder to meet the lofty AI capex expectations for 2026 and beyond.   That hurts NVDA, AVGO, and the semiconductors, as well as all the AI data center/utility plays.  It could get ugly once the Street starts to price in this new reality.  

It is also not a good sign to see so much investor optimism while the AI names lag the index.  The NAAIM poll of investor positioning is above 100%.  Past readings above 100% were near short term tops.  

You also have very high bullish readings from other investor surveys, including II and AAII.  A popular Twitter poll by Helene Meisler shows most looking for more upside.  

 Investor flows into equities confirms that investors are still piling in:  

According to BofA, there was a $78B inflow into US stocks last week, which is the 2nd biggest ever.  Just as the uptrend in the Nasdaq is looking tired, you are getting heavy inflows into the stock market.   

It has been an extremely frustrating time for bears and fundamentally based investors, as valuations don't seem to matter.  Numerous attempts on the short side have either resulted in quick losses, or drawn out battles without much to show for it.   But it appears that we are close to an inflection point.  In addition to the above signs of very high optimism, you are seeing high beta themes like bitcoin, quantum computing, AI data centers, nuclear, and AI power related names showing weakness.  These are the conditions that you want to see before getting short.   

The AI story is going from the view of can't do anything wrong to show me results.  That transition will put greater scrutiny on companies blindly pouring capital into AI, which will likely result in less AI capex spending than many expect.  That would be a game changer, something that would really put the market to the test, as AI spending is the main reason this market is so overvalued.  

Seasonality has not played out as many expected.  Investors were cautious about August, September, and October, and those were 3 very strong up months.  The typical seasonal rally in November and December didn't happen.  Now there are only 7 trading days left in 2025, and we are starting to front run the Santa Claus rally.  It would not surprise me to see this Santa Claus rally stall out before the end of the year.  With so many expecting this year end rally, and with Nasdaq lagging the SPX, we are getting a similar setup to the end of 2021.  January could bring market weakness from delayed capital gains tax related selling, stock buyback blackout period, and more skepticism on AI capex.  

Holding off on putting shorts due to low volume, thin holiday trading for the next few days.  Starting next week, if we are above SPX 6900, I will be looking to put on shorts for January.