The Herd is Moving

The herd has found greener pastures and are moving.  US stocks have been the go to asset for risk taking and capital appreciation since 2009.  US stocks have consistently outperformed non-US stocks year after year.  That changed in 2025.  Non US stocks, in particular Asian stocks have handily outperformed the SPX and NDX over the past 12 months.  

Investors are starting to notice, and they are chasing performance.  In 2026, the vast majority of equity ETF flows are going to international stocks.

Part of this is the annual ritual of investors getting bullish on previously underperforming risk assets, such as small caps, European and emerging market stocks, non-tech, etc.  In the previous times, investors stopped going international, US stocks started to outperform, they all went right back into the old reliable Nasdaq and SPX.  This time feels different.  Maybe its because US outperformance has lasted for so long, and the valuation difference has gotten so big.  It seems US stock allocations have reached a saturation point, and investors don't seem eager to increase it.  Foreign investors are at record high allocations to US stocks as a percentage of US assets.  They are way higher than in 2000, the last time we had a similar technology based bubble.

Over the past 3 months, you have seen record breaking inflows into equity ETFs.  It is almost double the rate of inflows in 2021, when all the Covid stimmies were being piled into US stocks.  Investors are complacent and are piling in.  Anyone who says this is the most hated bull market is clueless.

The record breaking inflows still have not managed to push the Mag 7 higher over the past 3 months.  In fact, the Mag 7 has been doing quite poorly relatively to everything else.  Even as most investors still believe in AI and have not given up on the AI trade.  Its just that they already have a lot of AI exposure by being so long the NDX and SPX.  Retail investors are up to their eyeballs in NVDA, TSLA, etc.  Any additional AI exposure is now going towards more tertiary AI plays.  They are the memory and storage names, like MU, SNDK, STX, WDC, etc.  This is an even bigger bet on AI, as they extrapolate continued AI demand spilling into memory and storage, and continuing for a while.  That is why the Korean stock market is on fire.  Even as the Nasdaq lags, the belief in the AI capex boom remains.  

This is where as a speculator, you have to make a call.  You either believe in AI, or not.  If you are an AI optimist, you will believe that AI continues to expand, improve productivity enough to make AI investments profitable, which will fuel further growth in AI capex, benefitting both the hyperscalers and the hardware producers.  If you are an AI pessimist, you believe that AI investments will continue to be money losing, that AI doesn't improve productivity as much as its hyped to be, and all the AI capex ends up being malinvestments, causing future AI capex to shrink.  

If you are an AI optimist, you should be long the Mag 7, long AI tertiary names, long Nasdaq and SPX.  If AI proves to be quite profitable for big cap tech as well as the OpenAI and Anthropics of the world, then SPX will keep going up.

If you are an AI pessimist, you should either be short a bunch of AI names or be looking for a good spot to put on long term shorts in them, including the NDX and SPX.  Being an AI pessimist, I am looking for a good spot to put on long term shorts in the AI stocks as well as the SPX.

Last week, it was Greenland and Trump's TACO on Greenland.  It was a rather quick TACO.  Once we get the Supreme Court ruling on tariffs (waiting for Godot), that should take a lot of bite out of these Trump tariff threats.  The latest incident shook the confidence of some investors, but not retail.  Retail investors went on a buying spree on that small dip on Tuesday.  

Bigger picture, retail investors have been aggressively buying stocks over the past few months.  Their confidence is increasing, even while their largest holdings, which are big cap tech, continue to lag the overall market.  Given the price action, their aggressive buying is surprising.  

Systematic funds, which include CTAs, vol control, and risk parity, are hovering at high net long levels.  Systematic funds chase trends and like to load up when volatility is low.  With such high equity exposure, a higher vol regime in a downtrend will unleash a lot of systematic fund selling in equities.  

While retail and CTAs continue to buy aggressively, corporations are buying less, way down from their peak in mid 2024.  When so much more of their free cash flow is going towards AI capex, less is available for buybacks.  This is one of the reasons why aggressive retail buying hasn't been able to drive the market higher.  

Last week, Space X hired investment bankers and have entered a quiet period in preparation for an IPO.  This will probably be the biggest IPO in US stock market history, so it will suck up quite a bit of liquidity from the market.  I would imagine Musk fan boys will now be looking to either sell some TSLA to buy Space X, or just stop buying TSLA and buy Space X instead.  Just from a quick view of the fundamentals, Space X appears to be a much superior company to TSLA.  After Space X, Anthropic and Open AI are likely to follow not much farther behind.  All these mega sized IPOs, and the huge lockup expirations that follow will unleash a torrent of speculative tech supply onto the market.  At a time where investors will be looking for some profitability to show up for these AI names.  Higher supply, and waning demand is a deadly combination.  

Last week, you got a little scare from the JGB market, as their 30 year yields spiked higher, but went right back down as the BOJ seemed to go in there to support their long bonds.  Some investors are still fighting the last war, worried about a big rise in bond yields to cause the next bear market.  I don't see it coming.  Unlike 2022, you don't have a giant fiscal impulse causing an inflationary wave.  The OBBA is peanuts compared to the Covid stimulus.  The 2026 job market is much weaker than 2022.  Same goes for housing.  The next bear market will not be like the last one.  It probably will just be a classic bust cycle after a big investment boom, this time in AI.  

Precious metals continue to squeeze higher, as this is the biggest commodity short squeeze since 2008.  Silver in particular seems to be almost a pure short squeeze, as managed money has been selling into the rally over the past few months.  It seems like producers and swap dealers with big short positions are getting margin called, being forced to cover their shorts.  Add to that eager retail traders looking to short silver, and you keep getting shorts squeezes over and over.  But this one takes the cake.  The parabola is steeper, the social media buzz is the hottest since the start of this bull run.  With silver breaking the psychological $100 level, it looks like we are in the last leg of this parabolic rise.  Investors are much longer gold than silver, and its trading relatively weak compared to silver.  Its risky to short these kind of parabolic moves, but when they reverse, the down moves happen quickly and bigly.  Overnight, I put on short positions in gold and silver.  This is a short term play, I will be quick to exit, looking for a 1-2 day pullback.  I need to see some weakness and signs that the vicious short covering cycle is over before I put on longer term shorts in the metals.  

As for stocks, the trading is lackluster.  Not enough reward out there.  There just isn't enough range.  It doesn't incite FOMO, either long or short.  There is some nervousness about a possible government shutdown and upcoming big tech earnings. Its not a time where I want to be short.  There will be better spots to put on long term shorts than now.  Big picture, it is a bearish set up for the indices.  But if forced to trade, I would rather buy dips than sell rips for the next 2 weeks.  Most likely will just watch and wait.  

Trump Trolling Europe and Lagging Nasdaq

The market is starting to get nervous.  Last week, there was quite a bit of put buying as investors got nervous about an attack on Iran, which caused a small spike in oil prices, which gave back much of the move after Trump backed down.  Also the lingering uncertainty about the Supreme Court decision on tariffs is keeping VIX higher.  Plus, over the weekend, we got a Trump burger on Greenland.  That has pummeled the SPX futures lower.  

You can always count on the Europeans to overreact to Trump.  Its just the way it is.  From an amateur observer, this just looks like a classic Trump troll on Europe.  A nasty one, but still just a troll job.  Overnight, you saw a lot of chicken little selling from European investors as they fear Trump.  They are also likely selling ahead of Trump's upcoming Davos tape bombs, which have been foreshadowed earlier this month.  This actually makes the Supreme Court decision even more important, and bullish if they repeal the Trump tariffs.  It would essentially make Trump's tariff threats toothless, as he will have to use more obscure and less permanent measures to enact future tariffs, which will also likely be contested by corporations.  This Greenland bomb by Trump also puts more pressure on the Supreme Court to repeal the tariffs, as they were never intended to be used as threats against allies.  

Switching to market moves.  The NDX continues to lag the SPX amidst the broadening theme.  The signal is more meaningful during an uptrend.  And it gets more meaningful the longer this continues.  Since the October 29 top in NDX, it has lagged the SPX by 3.0%.  The difference is even bigger when you compare the Mag 7 vs. the SPX.  The Mag 7 is underperforming SPX by over 6% since October 29.  

Since 2008, the NDX has continuously outperformed the SPX, and this amount of underperformance in an uptrend is unprecedented.  This is happenening even though the AI bubble has not popped, and while you have semiconductors as one of the hottest sectors in the stock market.  This is happening while retail investors continue to pour in billions into stocks, at the fastest pace in the past 9 months.  

Despite retail continuing to pile into the market, it is unable to lift the NDX higher.  Amber flashing lights in the background as the SPX grinds slowly higher.  

Investors have been brainwashed by financial media and old data that a broadening market is bullish for stocks.  That is the case when the stock market and the economy were more closely related.  It doesn't apply to a stock market dominated by big cap tech stocks and AI hype.  

The lagging NDX vs SPX after a long, extended bull market is reminiscent of 2000.  In late March 2000, the NDX made a gigantic top that would last for years.  The dotcom bubble was on its final legs, but it didn't pop right there.  The SPX continued to trade in a volatile, sideways range for the next 5 months, even challenging the all time highs in early September 2000, as the NDX continued to lag.  From September 2000, the NDX and SPX both entered a long downtrend that would continue for 2 years.  

I believe we are in that window where NDX continues to underperform the SPX, while the market goes sideways.  There could be marginal new highs in the SPX, but a continued uptrend is unlikely.  Within a few months, it should turn into a bear market.  

Usually investor sentiment is noise, and it doesn't provide much value.  It is only useful when sentiment is opposite of the price action.  AAII investor survey shows investors the most bullish in the past 52 weeks, and way above the historical averages.

There is growing economic optimism as the OBBA stimulus hits the economy this year.  The bond market is starting to pay attention.  The 10 year yield, which has been in a tight 10 bps range from 4.1% to 4.2% since early December, finally broke out to the upside, closing at 4.23%.  Some of the stimulative effect of the OBBA and likely tariff repeal by the Supreme Court are being offset by higher bond yields.  You cannot underestimate the willingness of retail speculators to pump their tax refunds straight into stocks, so I don't expect a sharp down move during this stimulative window in February and March.  After this brief stimulus pump, we'll be back to more normal flows and a fundamentally driven market, one that is vulnerable to a weakening tech sector.  

The magnitude of the gap down does remind me a bit of the big Sunday night/Monday pre-market gap downs from early 2025 on the Deep Seek news and the downgrade of US government debt.  Both of those gap downs were bought, rallying straight from the US cash open on Monday.  And the market continued to rally for a 2-3 more days.  If we don't see that this time, it would be a change of character.  With the post Jan. opex environment, with a lot of options open interest coming off, we could see a bit further of a down move before a sharp reversal.  But, base case, I would expect the market to be higher by Friday than current levels, if past is prologue.  

With the coming tax refund wave, there will be ample liquidity for dip buyers to tap into.  I would not force short trades in this uncertain environment.  A drop on news headlines and uncertainty over upcoming events is a higher probability buy setup than a similar drop on no news.  After the news bomb over the weekend, and the big gap down, I am looking to buy the dip.  There will be a time to short again, but I will wait until the longs are more comfortable and the market close to all time highs before I pull the short trigger.  

The Dotcom vs. AI Bubble

The dotcom and AI bubbles are eerily similar.  Those bubbles were preceded by an extended bull market that convinced the crowd that stocks are much better investments than bonds and real estate.  From January 1991 to the start of the internet bubble in the beginning of 1998, the SPX went up from 330 to 970.  From the January 2019 to the start of AI bubble in the beginning of 2024, the SPX went up from 2450 to 4800.   Both of those run ups before the bubble phase involved massive outperformance of tech stocks.  

Unlike the AI bubble, the internet bubble started with the companies using the internet.  Instead of pumping up the internet infrastructure plays first, the market pumped up the companies using the internet first.  In the beginning, the hottest internet stocks were the companies online, YHOO, AMZN, EBAY, AOL, etc.  This was the time where stocks like the TheGlobe.com and numerous unprofitable companies were at the center of the action.  Eyeballs was the measure of attractiveness, not future profitability.

That was the first stage of the bubble, which started in 1998.  The frenzy was over B to C (business to consumer). The internet based companies doing business directly with consumers were going parabolic.  Even low barrier to entry companies like a Geocities (bought out by Yahoo), which was the MySpace of the time, and Broadcast.com (bought out by Yahoo and made Mark Cuban a billionaire) were deemed to be the internet winners.  Profitability was an afterthought, it was all about eyeballs and growth.  The parallel for AI is a bit difficult, because the AI pure plays using AI are OpenAI and Anthropic , which are both private.  But I would imagine that if OpenAI was public starting from 2022, it would have rocketed much higher than NVDA from 2023 to 2024, but would have likely peaked out by the beginning of 2025, way before NVDA and the semiconductor names.

The second stage of the bubble was much more broad based, starting in 1999, and it focused on B to B (business to business) and internet infrastructure.  Nortel, JDS Uniphase, Lucent, CSCO, JNPR, and various internet software plays (most which no longer exist).  This was when the dotcom bubble truly went into overdrive.  It was when online brokers sprouted up like weeds, and retail investors were pouring in to the market.   Jeff Bezos was Time Person of the Year for 1999.  The obvious parallel to the AI Bubble is the Time Person of the Year cover for 2025, showing the Architects of AI featuring CEOs of NVDA, AMD, META, OpenAI, xAI, etc.  

By early 2000, the B to C names like YHOO and AMZN had already peaked, and were going lower as the Nasdaq was going higher.  We entered the final stage of the bubble, where investors threw all caution to the wind, ignored fundamentals and looked to put money where they could have the most juice (quickest, most explosive moves higher).  This is when the OTCBB market heated up and you saw crazy moves in suspect, scammy names run by get rich quick stock peddlers starting internet based businesses just to sell stock.  

The parallel to this is the altcoin market in cryptos, as well as the quantum computing names.  The altcoin market, along with quantum names, were raging hot in late 2024, took a break during the tariff tantrum in the spring of 2025, and then heated up again in the summer and fall of 2025.  But its been straight downhill since that October 10 bucket shop drive at the crypto exchanges, when bitcoin flash crashed.  Liquidating retail buying cryptos on shoestring margins was like taking candy from a baby.  Just like they did at the bucket shops back in Livermore's day.  

One thing about the final stage of the bubble was that ordinary tech stocks, that weren't considered to be internet focused, exploded higher out of nowhere. In that final stage of the bubble, non-internet tech plays started to ramp up, like biotechs that were focused on genomics, which was a hot thing at the time.   That feels like the space sector now.  Some of the hottest names at the peak of the bubble were not pure internet plays, but semiconductor names.  These stocks were not thought of as internet boom beneficiaries until late in the bubble, as capex kept ramping higher.  The parallels to the AI bubble are the memory makers like MU, Samsung, SK Hynix, as well as the storage companies STX, WDC, and SNDK.  If you look at MU's chart in 2000, its eerily similar to what it did in the 2nd half of 2025.  

There are quite a few investors who recognize that we are in an AI bubble.  But I see very few investors, other than permabears like Michael Burry, preparing for an imminent popping of the bubble.  Most think its still at least a year away.  The common belief is that AI capex will be very strong for 2026, as orders are already booked, so the bubble won't pop this year.   They don't have any urgency in selling before the bubble pops.  The dotcom bubble popped in 2000 even though there were huge capex plans for all of 2000.  Investors don't appreciate how quickly corporations can change their investment plans.  

 

Comparing the stages of the dotcom bubble with the current AI bubble, it is clear that we are in the final stage of the AI bubble.  That final stage hit its zenith last October, and its been sideways since then.  The final stage of the dotcom bubble hit its zenith in March 2000, and the market went into a  volatile, choppy range for the next 5 months.  After that choppy sideways move, the bear market started, in September 2000.  If the AI bubble follows the internet bubble timeline, there is not much time left.  The AI capex growth expectations are sky high.  Investors have already been piling money into the supposed winners of the AI boom for over 2 years now.  But the practical use cases haven't kept up with the hype.  No one likes Microsoft Copilot.  Chat GPT and Gemini are popular, but not transformative.  There will be good uses for AI.  But given the huge power consumption of running these AI data centers, will the benefits outrun the costs?  

Unlike the internet infrastructure buildout, the AI buildout requires a lot more energy, and it seems like AI will be a net energy consumer rather than an energy saver.  For example, the internet drastically reduced the use of paper.  You replaced paper bills, confirmations, documents with electronic documents.  It reduced the need for transportation, the need to talk to a broker, etc.  It doesn't take much energy to run a network, and build out fiber compared to building and running AI data centers.  The internet is an energy saver.  AI is an energy consumer.  AI is supposed to make work more productive, but it seems to just be adept at copying content on the internet.  A lot of it is factually wrong.  Its not completely reliable.  

When the internet came out in the late 1990s, most could tell that it was revolutionary, how it would change everyone's lives.  Just from a trader or investor's perspective, online trading is infinitely better than putting in orders over the phone.  Same goes for sending an email vs. postal mail or fax.  It simplified the ability to get data in real-time.  You could check an up to the minute box score for a current game, with play by play summaries.  Before the internet, you had to watch ESPN for the highlights a few hours after it happened.  To get a box score, you would have to wait for the newspaper the next day.  And you wouldn't get any play by play summaries.  If you didn't use the internet in 2000, you were a dinosaur.  The quality of life difference from using the internet and not using it were huge.  Whether you use or don't use AI in 2026, its not going to make much of a difference.   Its just not comparable.  Its like comparing mass use of electricity to the smart phone.  Yet, you have prisoners of the moment stating that AI will be bigger than the internet.   

While the majority believe that AI will change the world and massively increase productivity, I think it will end up just being a niche product like Siri is for Apple.   Sure there will be more use cases for it in the coming years, but since AI just produces output based on a probabilistic algorithm from large data sets, its not using logic or doing any reasoning.  AI is good at generating cheap video/graphics, so it will replace a lot of graphic designers.  It will be good at replacing Google search results with a Cliffs Notes version that provides a quick summary of what one is looking for, with occasional hallucinations thrown in to keep the AI zombies honest.  

It could add productivity by automating some manual tasks, but we already have tons of software that do the same thing.  That's probably why software companies have been so weak during this AI bubble.  AI is a legitimate threat to overpriced software.  Companies saving money on software costs by using AI instead doesn't add value to the economy.  It just takes profits away from software companies and gives it to the current users of software.  

There are downsides to AI.  I am seeing an exponentially increasing amount of AI slop in Twitter and Youtube.  This is polluting the internet with more content and data that the LLMs will eventually be training on.  AI training on AI slop is like a snake eating its own tail.  I can see it in Twitter posts and replies, that are obviously LLM generated.  You can smell an LLM written post from a mile away.  Same goes for AI generated videos on Youtube.  Can't explain exactly what AI slop looks like, but from pure intuition I can tell its not created by a human. 

Recently, Citrini, a popular Fintwit / Substack subscription seller, has said that bullshit jobs are the ones that are in danger due to AI.  I agree somewhat.  Because AI is good at bullshitting.  AI can displace some white collar jobs, but it will be inferior because even the white collar bullshit artists add some value beyond the BS through basic reasoning and know-how gained from work experience.  It can replace some mediocre and low value workers, but the cost of running and using AI will probably actually be more expensive than just paying the low value workers, or offshoring the work.  

The incremental benefits from AI just don't match the hype or stock valuations.  It will soon be show me time for these AI related stocks.  The stock market will want to see better profitability from all that AI spend.  That could be a disaster.  Even as the SPX hits new all time highs, we are seeing cracks form in the AI data center builders.  ORCL is down 40% from its highs in September.  And its CDS spreads are much higher now than it was a year ago even though the stock price is higher.  Same story for CRWV, NBIS, IREN, and the other AI neoclouds.  Even so called beneficiaries of AI like META are now getting scrutiny over their huge AI capex spend.  META peaked in September at 790, when the SPX was trading at 6450.  The SPX is now almost 7000, and META last traded at 653.  

There is a huge disconnect between the hype around AI and its actual value to business and society.  Its a mass delusion of the crowd.  As a famous Nazi propagandist said, if you repeat a lie enough times, people start to believe it.  The repeated AI hype has convinced a lot of Wall St. that AI will change the world and make companies even more profitable.  

The government released the latest household allocation to equities as a percentage of financial assets.  This is as of September 30, when the SPX was at 6688.  SPX is a few percent higher today, so the equity allocation is even higher now.  At 47.07%, you are nearly 10% higher than at the top of the dotcom bubble, and nearly 5% higher than at the December 2021 market top, which preceded the 2022 bear market.  There is a lot of downside fuel for the next bear market.  

 

 

Start of year fund flows poured in last week, which was greater than the selling from delaying capital gains sellers.  The buying has been focused in small caps, and spread out more broadly towards non-tech stocks.  This broadening out of the market has been cheered on as a good sign by the financial "experts" at CNBC.  Nasdaq has been lagging the Russell 2000 since the late October highs.  Its been over 2 months of underperformance.  The prelude to the start of the dotcom bust was the Nasdaq underperforming the broader market.  

That is what's happening now.  In 2000, it took 5 months of Nasdaq underperformance to finally lead to a bear market.  So this can go on for a few months before you see the market really crack.  The interesting thing about last week was the relative weakness in NVDA and TSLA, the 2 most heavily owned stocks by retail investors.  If retail investor holdings continue to underperform, you are adding more and more pressure.  If this trend continues, which I expect (COT data shows small specs with large net long positions in SPX and NQ futures), the closer you get to the waterfall decline.  

Surprisingly, GS Prime broker data showed hedge funds going on a buying spree in info tech, the largest long buying in the last 5 years.  That buying wasn't enough to keep Nasdaq from lagging the SPX and Russell 2000.

 

Covered shorts on Thursday, as markets are trading stronger than expected and due to the likely bullish reaction to NFP and the Supreme Court tariff decision on last Friday.  Well, the Supreme Court delayed their decision, which briefly caused a dip around 10:00 AM ET, before rebounding and rocketing higher for most of the day to an all time high close.  This delay of the decision is probably a good thing for the bulls, as it will likely delay the top of this move for a few more days.  It is better to get short when prices are higher after the news events and uncertainties are behind us.  

Overnight, we got news of the DOJ going after the Powell Fed.  This is a tempest in a teapot, and I am surprised to see the SPX react so much to an inconsequential news item.  The independence of the Fed is treated like the holy grail, even though its obvious the Fed is politicized.  The Fed governors are picked by politicians.  Which make the Fed governors political, even if they try not to act like it.  Why else would Powell delay rate hikes when inflation was raging hot in 2021 before his term was renewed by Biden?  Its the reaction to the news that's more important than the news itself.  And the SPX dropping overnight on this shows that we have some weak hands in stocks.  It doesn't make me want to short right away, as I don't want to be short ahead of probable bull catalysts in CPI(will be manipulated lower) and the Supreme Court tariffs decision, which will make Trump's tariffs illegal.  But after those events clear, will be looking to short any relief rally.  

The next shorting chance for the bears is around January opex, which is this Friday.  January is the biggest non-triple witching expiration, with lots of LEAP open interest.  A lot of put protection in single stocks, especially big cap tech, will be expiring.  Seasonally, January post opex is a weaker time of year.  Will be looking to re-enter shorts later this week to play for post opex weakness.  

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.