Retail Saturation and the Big Picture

A sign of retail investor saturation: investors are bullish but price action is not.  Let's first identify what's been driving this bull market.  It has been tech stocks, in particular AI related stocks.  Next, what type of investors have been the most bullish and putting the most money into those stocks.  Its retail investors.  Let's look at the stocks that retail investors have been buying the most over the past couple of years.  Its bitcoin/ether, AI names, robotics names, quantum, nuclear, and space.  We can then look at the stocks in those groups that retail is most heavily invested in.  Bitcoin, ether, NVDA, TSLA, PLTR, META, MSTR, BMNR, RGTI, IONQ, OKLO, NBIS, IREN, ASTS, RKLB.  There are a few more names out there, but the above list covers a big portion of retail investor long exposure.  

Looking at the list of retail favorites and comparing them vs. the SPX since late October, you can see the retail pain, which is masked by the index.  While the SPX is down only 1% from the October highs, most of the retail favorites are down double digit percentages.  The most damage has happened in crypto, AI data center, and quantum names.  The crypto pump in 2025 and the subsequent equity issuance from the bitcoin/ether treasury companies have sucked up a huge chunk of retail cash, leaving those investors both heavily invested in speculative stocks, and deep underwater.  Those investors also happen to hold other speculative names which are also down big.  Yet, most investors remain bullish, and some groups, like those surveyed by AAII, have gotten even more bullish since the October highs.  

The bears in the AAII survey are now down to early 2025 levels, before Liberation Day.  

Another weekly investor survey from Helene Meisler shows investors are stubbornly bullish while the index goes sideways, even more bullish than when it was trending higher from the spring to the fall.  

More importantly, retail investors have continued to pile into stocks, with various measures showing heavy inflows.

Ever since 2020, retail investors have poured into US stocks.  And by a couple of measures, that retail inflow accelerated in 2025.  In particular, foreign retail investors, the most fickle investors out there, have a knack for buying the most at tops, have bought massively over the past 12 months.  

It is one thing to keep buying and be rewarded for risk taking, but its another thing to keep buying and be punished for it.  Buying that takes prices higher is self-reinforcing, especially as it gives retail investors more margin buying power.  But when that buying no longer is rewarded, and is being punished, then margin buying power decreases.  Retail has managed to take up these speculative stocks to such high levels that in order to sustain these nosebleed valuations, even more money has to be pumped in to keep the Ponzi scheme going.  At these valuations, fundamentals don’t support buying.  Only FOMO does.  

This is scary because 2026 will likely bring on 2 gigantic IPOs in SpaceX and Anthropic, with opening day valuations likely around $1.5 trillion for SpaceX, and $300 billion for Anthropic.  OpenAI is not too far behind with their IPO, which likely happens in 2027.  The float will be small at first, but you can bet within 6 months of the IPO, insiders will dump en masse huge chunks of stock.  SpaceX, in particular, will be a game changer.  It is the hottest space name out there, and with its huge market cap, will be sucking up enormous amounts of capital from Musk fan boys, space loons, and speculative zealots out there.  That is bad news for the current group of retail favorites, which will have to share in the trough with a couple more giants trying to get fed by retail.   Eventually, stock supply will overwhelm demand and prices should crater for the retail favorite names.

The CFTC has finally caught up to the delay in COT reports, and as of December 23, we have data for equity index futures positioning.  As its a new year, let’s take a big picture view of where we sit in 2026. Below is the positioning for ES and NQ for the past 5 years for small speculators, asset managers, and dealers.  

E-mini S&P 500 Small Speculator Net Position

E-mini Nasdaq 100 Small Speculator Net Position

 

We can see that small speculators are near their 5 year highs for both ES and NQ net positioning.  Also, it has been steadily increasing for the past few months. 

E-mini S&P 500 Asset Managers Net Position

E-mini Nasdaq 100 Asset Managers Net Position

We can see that asset managers are also near their 5 year highs for both ES and NQ net positioning.  
 

E-mini S&P 500 Dealers Net Position

E-mini Nasdaq 100 Dealers Net Position

We can see that dealers are near their 5 year lows for both ES and NQ net positioning.  

Open interest in the ES and NQ contracts has been declining over the last 5 years.  After December 2020 opex, the OI in ES was 2.46M contracts.  After December 2025 opex, the OI in ES was 1.91M contracts.  So the net % positioning is actually higher for small specs and asset mgrs.  On a net % positioning basis, we are around all time highs for small specs and asset managers, and around all time lows for dealers.   Futures positioning doesn't tell you where the market is going, but it shows you which way they are leaning.  Right now, we are at historically bullish positioning among small speculators and asset managers.  There is not much more room for investors to get even more bullish, while there is a lot of room for investors to get less bullish or even bearish.

Options flows also show a similar picture.  The ISEE index measures the ratio of opening long call volume vs, long put volume.  A ISEE number of 150 would equal a ratio of 150 long call contracts opened for every 100 long put contracts.  The fall of 2025 reached levels that are the highest in ISEE index history, which goes back to 2006.  Even higher than the bubbly days of 2021.  It has fallen down some, but still at very high levels.  

When investor flows and positioning get this bullish, as the trend flattens out and speculative stocks weaken, you are sitting on a powder keg.  There is a long term cycle in the stock market that has repeated since 2008.  You have 3 to 4 positive years of up trending markets followed by a sharp drawdown that leads to a flat or down year.  2011, 2015, 2018, 2022 were the 4 flat to down years since 2008.  Its been over 3 years since the last real washout in US stocks.  If the pattern of the past 17 years holds, 2026 should be a flat to down year.  Given how heavily invested retail is, the potential downside is huge.

The same thing that happened to investors from 1991 to 2000 has been repeated from 2016 to 2025.  Investors got used to double digit returns with short drawdowns as investor inflows kept the party going.  When the market peaked in 2000, foreign investors were pouring money into the US market, and retail investors were heavily invested in the most speculative stocks of the time.  The internet was AI.  CSCO was NVDA.  Semiconductors were semiconductors.  History is not only rhyming, its nearly a carbon copy.  Some knee jerk contrarians say that its not a bubble if so many say its a bubble.  Well there were tons of people in 1999 and 2000 who were saying that there was an internet bubble.  And that bubble popped.  We underestimate the intelligence of people in the past.  Humans haven’t gotten smarter.  Technology improvements does not equal human intelligence improvements. 

The beginning of the year is a time to reflect on the previous year and to look at the big picture,  Looking back, I was too bearish and tried to pick too many tops.  As someone whose formative years covered the dotcom bubble and GFC, I became conditioned for a volatile stock market with lots of ups and downs.  Not a grinding bull market with brief, shallow pullbacks and continuous new all time highs.  There have been some valuable lessons about fighting a strong bull market.  Its better to either go with the flow or trade as little as possible.  Even though I traded the least out of the past 10 years, still took some hits.  

But if as expected the market goes into a choppy range with marginal new highs, I will be more active.  It should be a good market for counter trend traders in the first few months, which should be mostly range bound.  After that, starting from April/May, I expect volatility to pick up and the SPX enter into a downtrend.  

We got some news over the weekend, as Trump attacked Venezuela and took out Maduro.  Now, suddenly everyone is a 15 minute expert on Venezuelan oil.  Short term, it doesn’t matter.  Long term, it opens up the potential for a massive increase in Venezuelan oil production.  It will take several years to happen.  It may not happen if there is no political change.  It would somewhat reduce my long term view on oil stocks.  Overall, its a nothingburger that has gotten precious metals investors even more excited, while the rest of the market doesn't really seem to care much.  

Entered into shorts last week, looking for a pullback this month, perhaps down towards SPX 6700.  I expect the pullback to be bought.  Market should ping pong back and forth between around 6700 to 6900.  Will look to play that range for the month.