Hormuz Selloff

The worst possible scenario for an Iran War was the closing of the Strait of Hormuz.  Its happening.  All eyes are on Hormuz.  With oil continuing to skyrocket, we have cracked the SPX 6700 level overnight.  It looks like the next strong support level is around the November lows of 6520.  We are now entering some pain territory.  Last week, the dip buyers kept coming back, even on Friday, there were some face ripper rallies intraday off the bottom.  VIX kept rising, but it didn't match the controlled price action in the SPX.  Now things are starting to move, with oil blasting through 100 with ease.

With the war, customers are accumulating puts, especially tail hedges.  Customer SPX put delta positioning reached the most negative in history, even more than the tariff panic in April.  This large put position should help buffer the downside, even with the parabolic moves in oil.  

This large put position also explains why you've seen the regular trading hours trade much more strongly than the overnight hours.  With options traded mostly during the cash session, it seems that customers monetizing their hedges last week have been responsible for some vicious intraday face rippers during US hours.  We could see more of that this week.  

 

So far in 2026, you've seen a big inflow into international stock ETFs, as well as emerging market ETFs.   Notable is the EWY, the South Korea ETF with a huge inflow relative to total AUM.  The outflows have come mainly from the fast money US passive equity ETFs:  SPY, QQQ, IWM.  It is probably hedge funds responsible for these outflows, as they reduce their US equity exposure, especially big cap tech.

 

On the other hand, retail trading data from Citadel seems to show retail investors are going hog wild buying stocks in 2026.  Especially on down days.  I am surprised to see them this aggressive when the market has been flat to down, and with most of their favorite names down big.  Long term, this is ominous.  

The dark pool data also shows retail buying the dip, as the DIX hasn't dropped meaningfully over the past several days of weakness.  Usually DIX dropping to lower levels is one of the necessary ingredients to form a bottom.  

 

Nothing really notable in the COT data, although you did see small speculators reduce their net long position in SPX futures.  Its now down towards the middle of the range for the past 2 years.  

The bond market weakness after a horrible nonfarm payrolls number last Friday is bad news.  The last thing the stock market needed beyond skyrocket oil prices is a bond market that can't find any sort of safehaven bid.  Worldwide, bonds are selling off, which is eerily similar to the March 2025 selloff.  The last thing this market needs is bond investors to also be losing money as equities go down.   

We got some news overnight from the G7 nations wanting to release oil from their SPR.  Unfortunately for the US, it already released so much oil from the SPR in 2022, that the US won't be able to release much this time around.  Plus, the fundamental problem of lack of oil passing through the Strait is what has the market worried.  Releasing SPR oil is a short term band aid on a gushing wound.  While Iran keeps getting pummelled, they still have a massive number of drones that can be released towards ships trying to pass the Strait.  US Navy escorts are not going to be a solution.  Only a ceasefire or an end to the war will restart the flow of ships.  While Iran is getting pummelled, they still have plenty of drones that they can use to keep ship traffic from passing through.  

Made a bad call last week about wanting to short oil, but thought twice about it when I saw the strength throughout the week, with headline risk, as well the price levels that were not high enough to provide a good risk/reward.  Luckily didn't go with my first instinct.  The oil market is beginning to get unhinged, so a bit too risky to trade at the moment.   

As for stocks, you need to see more investors de-risk to get a high probability buy setup.  We haven't seen meaningful capitulation, just a gloomy atmosphere where retail keeps trying to buy the dip.  Things to look for that we've seen sufficient de-risking include:  higher put/call ratios (higher than last week), lower DIX, SPX not going down despite oil going up.  

Looking to get out of my longs after the cash open, hoping for a rally in the first hour from retail buying and SPX put monetization to get out as gracefully as possible from bad longs.  Will look to re-enter longs if SPX gets to the 6500-6540 level.  Intermediate term (looking out 4+ weeeks), SPX is likely to have a strong bounce back towards the 6900-7000 area.  Short term, it looks weak without a TACO.  

Iran and AI Extrapolations Gone Wild

Take on the Iran attack:  It was well telegraphed and was a matter of when, not if.  The prediction markets were expecting it to happen by mid to late March.  It happened sooner, which is better than later.  Now that the strikes have happened, everyone acts like they were surprised.  You have your usual fear mongerers talk about more Middle East geopolitical risk, possible closing of Straits of Hormuz, possible bombings of oil infrastructure, etc.  I would fade any coming equity weakness from these Iran based fears.  The market hates uncertainty more than bad news.  Why?  Because its irrational, as it reflects human emotions.  The Iran cloud hanging over this market has been a contributor to the elevated VIX levels with SPX near all time highs.  Now that bad news cloud is going to pass.  Less uncertainty = lower VIX and usually a higher SPX.  

War is like boxing.  A boxing match involving fighters with equal skill levels are competitive and can last long.  War involving those with similar strength and resources are more uncertain and last longer.  US and NATO weapon support of Ukraine military is the reason that the Russia-Ukraine war continues.  Otherwise, the war would have already been over with Russia taking over Ukraine.  

War between a clear favorite and a clear underdog do not last long.  They end quickly as in boxing, with the favorite knocking out the underdog.  That is the case with US/Israel vs Iran.  The most pertinent example is the Gulf War.  Anyway, even in the slight chance there was a protracted war, the market likely shrugs it off.  War doesn't hurt corporate earnings.  On the whole, it is a small positive due to higher military spending, which increases the earnings for defense companies.  

It looks like a good time to short oil, which has been running up on these Iran strike threats, and gapping up on the news.  These Iran strikes are a like horror movies with multiple parts.  Part 1 was April 2024.  Part 2 was June 2025.  Part 3 is now.  The supply-demand fundamentals are weak, as OPEC keeps pumping, without regard for price.  And you have speculator positioning which has gotten much longer in Brent and WTI futures since the start of the year.   

Now to more relevant news for the financial markets.  AI.  

The AI theme has had a few twists and turns.  The market has been focused mostly on the AI winners, and not too concerned about there being losers.  In middle of that honeymoon period, some haphazard conclusions from the growth of chatGPT made GOOG an AI loser, even though they were developing their own LLM models, and developed TPUs to bypass NVDA for a lot of their compute needs.  Of course, later, everyone changed their mind after Gemini became more popular, and GOOG has been an outperformer ever since.  Perhaps the masses are drawing the same haphazard conclusion for SaaS companies as they did for GOOG for much of 2024 and 2025.  Too early to say.  Stocks like CRM, WDAY, and NOW have been beaten up and valuations look reasonable now, although they don't have monopoly powers of a GOOG, so they are riskier plays.  

AI was viewed as a positive for all involved from the advent of chatGPT until October 2025.  Then something changed in late October 2025. As AI related positioning got saturated, the views changed along with the price action.  The view on AI became more nuanced, with the market being more discriminating on what stocks to pump.  The pump is continuing for semiconductors and AI energy related plays.  But the dump is coming for the hyperscalers, AI data center plays, and software.  The AI data centers because they had a horrible business model with low barriers to entry.  The hyperscalers because they were pouring hundreds of billions into AI capex with big hopes and dreams without much tangible return.  It is why META got crushed after their earnings report last October.  Its why ORCL got destroyed after their earnings report last December.  Its why MSFT got pummelled after their earnings report in January.  

As usual, the price action dictates new explanations and rationalizations for the move. You didn't hear much about software stocks until 2026.  Even when they were underperforming in 2025, it was mostly under the radar, because the SPX was going up and up, and a rising SPX covers up bad things underneath the surface.  Then the AI disruption fears came like a heat seeking missle for SaaS stocks, and it seems to have peaked for software last week with the Citrini Substack article.  I don't pay for Substacks, so I didn't read the article, but from all the buzz, it seems like one of his adverse scenarios in the coming AI revolution were massive white collar job cuts and software companies losing business due to Claude and other vibe coding LLM wrappers.  I'm sure the article didn't go viral because it was well written or insightful.  It just hit the spot for the market's zeitgeist, which was AI disrupting the SaaS business model.  

We've reached peak SaaSpocalyse.  The IGV to SMH ratio bottomed right after the Citrini article and has bounced back post NVDA earnings.  

AI has been hyped as the future of hyper productivity, where corporations would be able to reduce labor costs and expand profit margins.  It was the reason that the hyper scalers were using all their free cash flow to spend on AI infrastructure.  But if these hyper scalers get punished for spending so much on AI capex, its not a big leap to predict that they will eventually cut their AI capex to save their stocks.  Big cap tech receive a lot of benefits from having such high valuations.  Mainly the ability to give out stock based compensation instead of cash to employees, without heavy dilution due to the high valuations.  Within the next few months, I expect the next AI scare to come from reduced AI capex, which would put the target on the backs of the semiconductors and hardware space, the ones that have been mostly unscathed during this tech attack.  The XLK ETF short interest has skyrocketed this year, as fund managers are aggressively hedging with tech shorts.  

The last sudden increase in XLK short interest happened during the bond market scare part 2 in the fall of 2023.  It marked a bottom for the SPX.  

In addition to the AI fears in software and big cap tech, you have seen financials underperform the market.  The worries in the banking world now is private credit.  There have been some writedowns in private credit funds, and BDCs have been getting crushed for several weeks.  My default stance when it comes to news headlines is to view it as being overblown/irrelevant for the market.  But I believe the smoke is real.  Nothing like the GFC. But bigger than one off events like Silicon Valley Bank.  Its another potential bear catalyst for the future.

Private equity/credit have gone bananas since ZIRP in 2009.  Private equity has been one of the favored asset classes for IBs to sell to pensions, rich private clients, and to endowments looking for higher returns.  They loved it because they thought it was some private club only they were given access to.  Similar to what they thought of hedge funds in the post dotcom era.  The fact that it was not marked to market made it even better, as it was viewed as being less volatile than stocks.  With all the money pouring in, the private equity guys overbought and overlent.  For the past few years, they've been scraping the bottom of the barrel looking for good acquisitions.  There are few and far between.  So they've been buying and lending to more marginal companies.  Which makes their portfolios littered with more junky companies, more bad credits.  And they are having a harder time re-selling their leveraged up companies, which no one wants anymore.  They are getting more desperate.  When you see Robin Hood launching a private equity fund, run for the hills.  

Its one thing to do LBOs when you have Fed Funds at 13 bps, and a 10 year below 2%.  Its a whole another thing to do LBOs with Fed Funds at 3.63%, and a 10 year above 4%.  It seems obvious, but the higher the interest rate, the less likely these companies can fully repay.  Higher interest rates require higher nominal growth for credit markets to remain stable.  

The government is running huge budget deficits which does keep overall nominal growth higher than it would be otherwise, but its not quality growth.  Its the government borrowing money to pay more to Social Security and Medicare, to pay for unfunded tax cuts and wars, to pay more interest on the national debt because they run an inflationary fiscal policy.  That increases GDP, but decreases productivity.  The fiscal largesse isn't spread evenly.  It creates winners and losers. Those past winners who become losers will have a hard time paying back their debts in the private markets.   

The COT data showed some surprising positioning changes in SPX.  Asset managers continue to add to their big net long positions.  As of Feb 24, asset managers are holding the largest net long position over the past 52 weeks.  

Overall, the inflows keep coming for equity funds. YTD, equity inflows are running at a pace of an annualized $1.1 trillion, which would crush the high inflow numbers of 2024 and 2025, and set a new all time high, greater than the 2021 inflows.  The flows have gone from US market cap weighted indices to US equal weight and international, but the overall inflows numbers are growing.  That's why this market isn't dropping despite the bearish price action in big cap tech.  

Long term, these large net long positions among both fund managers and retail are a huge source of potential selling.  But with liquidity pouring in from the fiscal side, its hard to fight right now.  

Bought some more longs last week, with room to add more.  If we get any Iran related weakness on Monday, I will be looking to buy that dip.  A CNBC guest from the CBOE was talking options positioning and she mentioned that investors were now buying fewer calls, and doing more covered call selling.  Selling covered calls is taking a short term bearish position against your longs, as you are selling partial deltas, lasting about 2 to 4 weeks, against a 1 delta position.  With the big increase in XLK short interest, the hedging has already happened.  It feels really late in the SPX selloff, with war concerns now added on top of the AI fears.  The mere return to normal levels of fear and concern could result in a face ripper.

Fiscal Pump

The refunds are coming.  The bulk of the OBBA stimulus will be hitting the economy over the next few months.  We are just at the beginning of tax refund season, which lasts into early April, with refunds set to be about $100B more than 2025.  According to Wells Fargo, the higher tax refunds and lower tax withhold for 2026 will add $220 billion of fiscal stimulus.  I expect a lot of this fiscal largesse to hit the stock market in coming weeks.

On Friday, the Supreme Court finally made a decision on tariffs, and overturned the Trump tariffs.  Of course, Trump came out with a backup plan and instituted a new set of tariffs under Section 122, which is limited to a cap of 15%, and 150 days.  There are other sector specific exceptions available to put on tariffs, but they will require investigations.  All of these tariffs will likely be challenged by importers, who probably win their cases like last time.  And unlike this tariff case, I don't think the Supreme Court will intervene next time, as they've already made their ruling on tariffs overall.  So Trump tariff threats have lost a lot of bite, and with it, the uncertainty that came with it.  

 

It is unusual to see big cap tech stocks underperform other sectors for so long.  You've seen occasional rotations out of tech into less popular sectors, but they've been brief.  And usually during market downturns.  Not when the market has been this close to all time highs. The last time you saw this kind of extended underperformance near all time highs was in 2000, right after the Nasdaq topped out.  Since 2008, Nasdaq has consistently outperformed the S&P 500, with the sole exception being during the late 2021 to late 2022 period, which was a bear market.  

The MAGS ETF / SPY ratio has been in a downtrend since October.  If you just looked at this ratio chart, you would have expected the market to be down much more than it actually is.  It shows you the effect of heavy inflows into ETFs, which have kept the SPX quite resilient.  These bearish rotations from large cap/growth to small cap/value/defensive sectors have limited effect on the SPX when money keeps pouring in to the market. 

 That's why I don't believe these narrative driven shifts from one sector to the other are meaningful to the overall market.  You need equity inflows to slow down and go in reverse to make it worth shorting.  Just pounding the retail favorite names is not enough to bring down the SPX. 

Looking at the options market, you can see that they are buying lots of puts these days.  Its surprising because the SPX and NDX are just not down that much.  Similar put/call ratio to what you saw last November, when there was a much bigger pullback.  

The heavy put activity in February makes it much less likely that you get any real weakness for the next 4 weeks.  Most hedging occurs with options with less than a month till expiration, so that provides a protective put shield that keeps investors from panicking.  Investors have loaded up on protection against a short term pullback.  I don't see many who expect a big, extended drawdown from here.  When investors are put protected, it makes them less likely to sell or panic, especially when the indices only have small pullbacks.  Its the punch that you don't see that hurts you, not the one you expect.  

For the week ending February 13, when the SPX went down less than 100 points, institutions were selling in size.  Retail continues to be the biggest buyers of stocks and ETFs.  

According to BofA, you had near historic levels of single stock selling, at -$8.3 billion, with total outflows over the past 15 weeks at -$52 billion.  In contrast, they keep buying up equity ETFs, with a total net inflow of $35.6 billion over the past 17 weeks.  Whenever they mention single stock selling, you can assume that it is mostly tech stocks, as they make up the vast majority of single stock volume.  They are selling tech to buy ETFs, both domestic, and more recently, international.  

This is why European and Asian indices are outperforming the SPX, year to date.  This is why the Korean Kospi is soaring.  Investors being bearish on US big cap tech doesn't mean they are bearish on stocks.  They are loving international stocks.  The biggest trend following ETF, DBMF, is massively overweight international stocks, and underweight US stocks.  

A consensus is forming around the market that international stocks will outperform US stocks.  And within the US, small,mid cap, and non-tech stocks will outperform large cap, and tech stocks.  I generally agree with this consensus, because investors globally are so overweight US stocks, and underweight non-US.  But I do think SPX will also perform strongly over the next several weeks as the US is still leading in terms of fiscal stimulus, with the OBBA tax refunds/lower tax withholdings kicking in, and now tariff refunds coming down the pike.  Combined that's about $400B of fiscal pump for 2026, with much of that coming in the next couple of months.  Those are the flows that you are fighting right now if you are shorting the index.  While only a portion of that stimulus will go directly into stocks, a large portion will flow into the broader economy which will indirectly help the stock market.  

The COT data for SPX showed asset managers adding significant amounts to their net long position, to bring it to 52 week highs.  This and the options data are showing opposite positions, so fund managers remain bullish for the intermediate to long term, but are nervous about the next few weeks.  I hold the opposite view, as I am short term bullish, intermediate to long term bearish.  

The bond market has been trading stronger than many expected, with more rate cuts being priced into the SOFR curve, and long end yields going down meaningfully.  It looks like we've reached a level in 30 year yields where demand is enough to take down supply.  The 5% level is a psychological barrier.  Given the shenanigans at the Treasury to try to fund as much in T-bills and reduce the amount of duration issued, I think yields will trend lower in 2026.  The BLS are doing a great job manipulating CPI lower, underreporting inflation, and low oil prices and less immigration are helping to keep a big chunk of inflation under control.  Also, I expect AI capex to slow down from the current pace in the 2nd half of 2026, putting some pressure on AI stocks, and thus the economy.  

Outside of international stocks, gold continues to trade as the strongest financial asset on the board.  After a massive blowoff top, I expected more weakness and deeper pullbacks.  Those pullbacks have been brief, and shallow.  The COT spec positioning in gold has been significantly reduced, and open interest is much lower now.  And China will be coming back from their Chinese New Year holiday.  I expect lots of buying from the Chinese, who seem to have gone from real estate speculation to gold speculation.  The continued strength in gold has surprised me, as I thought the blowoff top would have caused more weakness afterwards.  The dips have been brief, and dips buyers have eagerly bought up any weakness since that parabolic top on January 29.  Not a market that I want to go to battle against right now.   

Entered into a small SPX long position last week, with plans on holding it into March.  The SPX has been range bound between 6800 to 7000 for the past several weeks, and investors seem to be overly comfortable with the range.  Given the liquidity situation, the SPX could be surprisingly strong in the coming weeks.  You have NVDA earnings next week, which brought in a bunch of volatility last time.  If we get a similar dip post earnings, I will be looking to add to SPX longs.  

Reverse RobinHood

The HOOD chart tells you how retail traders are doing. HOOD has attracted mostly millennial retail traders who caught the investing bug during Covid and have been addicted ever since.  They post on Reddit wallstreetbets and Stocktwits. Their top holdings are NVDA, TSLA, PLTR, bitcoin and ether, and an assortment of pumped up but now deflating speculative tech stocks in one of the following sectors: AI adjacent play (energy, nuclear, data center), space, quantum, and semiconductors.   When retail traders are doing well, their account balances go up, they trade more, and HOOD makes more money from payment from order flow.  When retail traders are doing poorly, their account balances go down, they trade less (size), and HOOD makes less money from payment from order flow.  No, Robinhood is not there to take from the rich and give to the poor.  They are the reverse Robin Hood.  They take from the poor and give to the rich.  Robinhood has gone a long way to enriching those at the HFT firms Citadel, Susquahanna, Virtu, Wolverine, etc.  

Robinhood investors had a very difficult Q4 in 2025, losing 24.6%, even though the SPX was up over 2% on the quarter.  And so far in 2026, the losses continue, even as the SPX remains in a tight range, flat on the year, while Robinhood traders have lost an estimated $4-5 billion in January.  

The pain is real, as you can see HOOD stock take it on the chin ever since their clients started losing boatloads of money since the October 2025 top.  Based on the HOOD chart, I think Jim Chanos's estimate of Hood customer losses in January are low.  

The trading performance of Robinhood customers may seem irrelevant to the overall market, but it reveals a lot about the financial situation of retail investors.  Since stocks are now a large portion of their net worth, investor psychology plays a big part in their trading.  The bigger the position, the bigger the emotion.  While retail investors were motivated by greed due to their strong performance from January 2023 to October 2025, things are changing now.  Previously, big Hood retail investor down swings were a result of a weak SPX/NDX.  But over the past 4 months, the SPX/NDX are barely down, but retail investors are getting pummelled in this market.  It is a game changer.  The sharks are smelling blood and going after them.  

They are in all the wrong stocks and assets.  They are loaded up on crypto and stocks like PLTR, OKLO, IREN, RGTI, IONQ, ASTS, HIMS, etc.  To make matters worse, Hood traders follow the herd, chase moves, and usually buy the most near tops.  All of their favorite holdings are down big from their 52 week highs.  Hence, they are in big drawdowns, even at SPX 6830.  

Fear is now a factor.  Investors don't make many mistakes when they are making a lot of money.  They make a lot of mistakes when they are losing a lot of money.  Fear is a stronger emotion than greed.  I would be on the lookout for lots of fear based trading from retail traders in the coming 12 months, mainly because of the Wall St. greed machine.  When Wall St. sees an opportunity to dump lots of supply at high prices to the public, they will.  

Later this year, those retail investors will be flooded with tons of supply in the speculative tech sector.  We are going to be getting huge IPOs in 2026 from Space X ($1.5 trillion estimate), Anthropic ($500 billion estimate), and Open AI ($1 trillion estimate).  Add to that  a bunch of chunky sized AI related IPOs coming from the private markets.  Private equity is looking to cash out and get liquid as they are having a tough time selling their bags in an oversaturated and overpriced private asset world.  Elon Musk is many things, good and bad, but one thing he is exceptional at is playing the market.  Space X buying up xAI and then IPOing as quickly as possible at the final stage of this bull market will end up being a boss move.  

I am seeing more bearish calls from traders on Twitter.  Just a month ago, they were quite bullish, and very complacent.  But ever since the Greenland fiasco, investor confidence has been getting worse.  Now the focus is on what stocks get hurt by AI, rather than what stocks benefit from AI.  The options market is acting like the SPX is down 10%, not 2%.  You are seeing similar put/call ratios as in mid November, when the SPX went down 400 points from the highs to the lows. 

Whenever you see this much put buying on just a small dip, it usually means that you won't be getting a bigger dip.  All the put buying means that investors are well hedged for more downside, making the downside less likely to come.  

Even while they are buying puts, they also keep piling into the market like mindless robots.  Retail equity inflows according to JP Morgan are coming in hot and heavy.  Those that say that this is the most hated bull market of all time (quite a few that say this) are talking nonsense with no data to back it up.  It looks more like the most loved bull market of all time.  

The ETF inflows are now going from mostly tech, to non-tech.  You are seeing the highest sector inflows into non-tech stocks over the past 15 years, at +3.7 std. deviations above the norm.  

While retail traders keep getting pummelled as they continue to pour their money into the market, I wouldn't bet against them continuing to pour more funds into this market.  Tax refunds will be much bigger this year, and tax refund season peaks from mid February to late March.  That also happens to be when the most equity inflows occur.  

Shorts will be fighting an uphill battle with all the tax refunds coming down the pike.  These inflows should last into April, where they will peter out, which could coincide with the final top for the SPX.  The liquidity is on the bull's side for the next several weeks.  The main reason I would rather be a buyer of dips than a seller of rips.  Long term, I agree with the bears that Nasdaq weakness will eventually lead the market lower, as the AI hype wears out and the hype doesn't match earnings potential.  Along with increased tech supply via jumbo sized IPOs and lockup expirations coming later this year and in 2027.  But short term, the elevated put/call ratios and fiscal pump are bullish factors.  

Nothing notable for the equity indices in the COT data released last Friday.  For precious metals, you continue to see de-risking from speculators, and open interest dropping, which usually means a range bound market and reduced volatility going forward.  No strong opinion on the metals here, they are acting stronger than expected after the blowoff top.  The Chinese New Year will keep the most aggressive buyers of the metals on the sidelines for the next week, so it will be interesting to see how gold and silver hold up during this period.  I fully expect the Chinese to come roaring back with aggressive buys after their long holiday, so I wouldn't short gold here.  Historically, gold and silver are quite strong for the month after Chinese New Year.  

Will be looking to buy the dip in SPX this week. SPX 6800 seems to be a durable support zone, and I will be looking to buy around the 6750-6800 zone.  Bottom line, short term bullish, long term bearish.  

Violent Ping Pong

If you ever watch ping pong pros play a long point, you see how much effort it takes to hit a small ball back and forth.  The ball just goes from one side to the other, but there is a lot of energy expended.  This stock market is violently going up and down.  But it ends up in the same place.  Its a ping pong match.  Sectors are making big moves, but the index is relatively calm.  Correlation is low. Intraday volatilty has gone up, even day to day volatility has gone up, but week to week volatilty remains low.  

It reveals supply and demand equlibrium at the index level, but disequilibrium at the individual stock and sector level.  Tech stocks, in particular software has been weak.  Consumer staples, industrials, energy, and materials has been strong.  Combining -8 with +8 is zero.  Sectors are ignoring the index, moving to their own beat.  The index is also ignoring the sectors.  

Passive inflows are keeping the beach ball afloat. There is still risk seeking capital entering the system via retail investors, but it is being offset by reduced stock buybacks due to AI capex.  Before the AI capex boom, stock buybacks were the axe.  Now its passive investing flows via retail investors who have been conditioned to believe that equities are the best long term investment, no matter what.  FYI, equity inflows are the greatest from January to April, and then tail off into the fall, where they are the lowest.  

Hyperscaler capex has gone from $200B in 2024 to an estimated $600B in 2026.  Corporate buyback trends have made a big down move since 2024.  They are reflection of big cap tech doing less buybacks in order to fund capex on the AI buildout.  

Some counterintuitive moves are happening among retail favorite stocks.  While retail continues to pile into individual stocks (see below), its not having the expected effect of higher prices.  Instead, Reddit Wall Street bets type investors are experiencing tough times.  Even with the SPX just 1% below all time highs.  

Bitcoin/ether are trading like they have the plague.  TSLA and PLTR continue to lag badly.  Same goes for nuclear, quantum, drone, and AI data center plays.  Even the beloved space theme has been weak lately.  Its a world of pain for retail, even at SPX near all time highs.  This is an ominous sign.  Their disregard for valuations is hitting back, as the market now is less friendly to bets on obviously speculative and overvalued tech stocks.  

Once again, this reminds me of spring and summer of 2000.  After a huge influx of retail money into stocks the previous several years, the index entered a stall period, unable to go higher.  Semiconductors were the hottest sector.  With the SPX near all time highs, lots of retail favorite stocks were lagging, except a few select internet related favorites like CSCO and MU.  Consumer staples and energy were outperforming tech.  And in 2000, you had lots of dispersion, with many Hindenburg Omens signals firing off.  Lots of new highs and lows as the index was near the highs.  Like we’ve seen the past several days. 

On that list of signal dates, there are quite a few that are around significant intermediate to long term tops.  July 2007, January 2018, September 2018, January 2020, December 2021. 

There are many bearish long term signals in the market, which I have noted earlier this year.  Last week you had a mini flush out of risky assets, in particular precious metals, bitcoin, and SaaS stocks.  There a couple of bullish short term signals coming from hedge fund shorting activity and the options market.  

GS Prime book saw the biggest increase in short trading flow among US single stocks over the past 5 years.  

You also have seen elevated put activity, similar to November 2025 levels, which saw lots of short term volatility but eventually led to a V bottom.  ISEE index is back down towards the levels seen 3 months ago.  

Investors are getting well hedged for further downside, which will mitigate any reflexive effects from investor selling.  The ISEE index 20 day moving average is still not close to the November lows, so it may take a few more days of a choppy down move before you get a tradeable bottom.  

Big picture, the bearish long term signs continue to be confirmed by market price action, with activity very similar to early 2000.  For the short term, you have bullish fiscal flows from the OBBA bill which will counteract the bearish long term signals.  Income tax refunds in 2026 are going to be about $1000 more than the past few years, which will be a short term stimulus.  Some of that is priced in, as OBBA is one of the reasons investors are so bullish for the start of 2026.

 

The talk of the Street has been Anthropic's Claude taking over the software world.  Now everyone is extrapolating an LLM wrapper as a cheap replacement for coding and software development from engineers.  The SaaS stocks are getting obliterated.   LLMs are probabilistic engines, and they are only as good as the data that is fed into the model.  And there is a lot of junk data out there.  No matter how fast and expensive the LLM is, it doesn't change the quality of the data.  

Investors are extrapolating the current trends and improvements into infinity.  But AI doesn't get better like semiconductors did following Moore's law.  There is an S curve in technological advancement, and AI seems to be much further towards the flattening out stage than people believe.  ChatGPT is a perfect example of diminishing improvements with each edition.  The jump in performance was much bigger from GPT2 to GPT3, than from GPT4 to GPT5.  Many complained that GPT5 was almost like GPT4, and were massively disappointed.  You didn't see that in CPUs until the 2010s, when Intel CPUs couldn't make anything much faster, so they just overclocked their previous CPUs to improve performance.  It took Intel over 30 years to reach that performance wall.  Its taken OpenAI less than 3 years to see that wall.  And while  some people may think Anthropic is now the top dog and OpenAI is a runner-up, these LLMs are very similar to each other.  You can tweak OpenAI's model to make it look like Anthropics.  What Claude can do now will be similar to what it can do in 5 years.  Those extrapolating the AI improvements over the past 3 years due to more intensive compute are trying to fit Moore's law into a technology that doesn't apply.   

Software companies were loved due to the SaaS revenue model, but they got tremendously overvalued.  And they issue tons of stock based compensation, which inflates their earnings.  These big down moves in growth stocks happen because of overvaluation.  And people say that valuation is not a timing tool.  It is not a good short term timing tool, but it is a very good long term timing tool.  

The COT data didn't reveal much for the indices.  It did reveal that the blowoff top and subsequent violent pullback in gold caused a big reduction in long positioning.  Open interest is down huge over the past 2 weeks.  Lower open interest means that you have taken out a lot of weak hands/scared money.  It also means lower volatility because you will see a lot less forced buying/selling going forward.  I expect a range bound market for gold and silver for the next several weeks.  

Last week, you saw violent price action ending with a strong Friday rally in SPX.  CNBC Fast Money experts seem more bearish than usual.  That usually signals a short term bottom in bull markets.  But it is an aging bull market, and it has shown its age in the past few months.  In bear markets, CNBC "experts" being bearish doesn't mean much.  The best buy the dip assets out there seems to be gold/silver, followed by international equities, and then SPX.  The worst is bitcoin/ether.  Bitcoin is trading like a classic post bubble asset.  I expect a milder version of what is happening to bitcoin to happen to precious metals in a few months.  Still remain long gold, but with plans to exit this week.  

Six Sigma Metals

 We are living in interesting times. Talking about the SPX or Mag7 earnings is like talking about the weather as World War 3 begins. The precious metals is where the action is. Its where fortunes are being made and lost. Its where longs and shorts are involved in a bloody battle. Last week, shorts finally capitulated and FOMO bulls overstepped their bounds.  

Hindsight is 20/20. Given how long and strong the uptrend in gold and silver were, it was likely to end in a highly volatile and spectacular fashion. The precious metals have stood out as the strongest of the speculative assets since September. By then, China was also catching the fever. China has only added fuel to the fire. 

Unlike stocks and bonds, China is a major player in commodities. They are not just a tail wagging the dog. They are one of the big dogs. They were the ones inciting a short squeeze in silver with their rampant speculative buys in the Shanghai futures market. COMEX shorts in silver were getting squeezed indirectly by the speculative longs in Shanghai. The Shanghai silver premium has been hovering around $12-14, way above the low single digits in the fall. China caused the blowoff top. 

It was about as extreme a parabolic move as I have seen in a major asset since Nasdaq in 2000. While a lot talk about the crazy move in silver, the move in gold is more spectacular from a monetary view.  Silver is much more speculative, much smaller, and easier to push around than gold. Gold going up 12% over 3 days and then dropping 14% in 1 day is literally off the charts.  I am a counter trend trader, but instinctively, I knew that it was dangerous to short silver and even gold. I did try last Monday and was too early and bailed out for quick losses. 

Before the blowoff top, the upside potential was still unknown. The risk in being short was high because of the unknown upside. Because of the weak shorts out there, waiting to be taken out by sharks smelling blood. Investment banks have a full view of all the positions in the futures market. Word spreads quickly among bankers. They know who is running low on margin. They know who are feeling the pressure and about to stop out. It doesn't mean that shorting before the blowoff is dumb. Just high risk. Of course, this risk comes with big rewards. The big reward was the six sigma down move on Friday. 

To get these kind of moves, major players must have been throwing in the towel. It was a super deep cleanse and flush out of positions. It changes the calculus moving forward. Weak shorts have been taken out in full. This will make short covering pressure nearly non existent. 

On Friday and Monday, the tables were turned.  Friday and Monday combined was a savage 1-2 combo aimed straight at leveraged longs who stayed with the trend.  Longs have finally experienced some serious pain.  You also had extreme volume at the top, creating tons of bagholders. They will act as future resistance. With the shorts taken out, it will be longs that will have total control of the market for the next several weeks.  That is not a good thing.  Short covering was one of the main drivers of this move higher from the fall to now.  Now short covering will no longer be a factor going forward.  

Following a blowoff top, you usually get a reflexive bounce that retraces 50 to 70 percent of the down move from the top.  Investors who don't like to chase or buy near all time highs come in to buy, and they support the market for 1 to 2 weeks. After this latecomer led rally, with shorts already taken out, saturated long positioning and bloated prices weighs on the market.  You make lower highs and then suddenly the market cracks again, dropping sharply.  This usually happens 1 to 2 months after the blowoff.  

The SPX and NDX markets seem uninteresting by comparison.  As they say, nothing ever happens.  The action overnight was not in SPX futures, but in precious metals, and Asian indices, in particular, the Kospi.  The Korean stock market is now one of the hot, crowded markets filled with fast money longs.  They got a deep cleanse on Monday.  Its still only back to the previous all time high levels of just 10 days ago.

For the US market, you still have the occasional Trump news bombs but the market is getting used to it, and reacting less and less.  The VIX remains bid, but there haven't been big one way moves to justify it.  Its been choppy, but going nowhere fast.  Put/call ratios are rising, and you can sense the nervousness.  I see very little edge and its unpredictable.  I am watching on the sidelines.  It is notable that the big down move in MSFT was due to AI capex spending concerns.  We are now seeing the market punish big capex spends in AI if there are no increases in revenue to justify it.  META got a pass this quarter because it was already beaten down for it 3 months ago.  We are getting closer to the end game for the AI circle jerk.  I give it 6 months, at the most before the house of cards come crumbling down.  

When you get panicky moves in markets like you saw on Friday and Monday, you see where the fast money is.  You locate where the biggest pain points are in the market.  1. Precious metals.  2.  Asian indices, in particular, the Kospi.  3.  Cryptocurrencies, which has had all the downside but none of the upside.   

Got a small long in gold bought on Friday, will look to buy some more if it dips some more.  This is to play for a short term bounce.  It could last 1 to 2 weeks.  I will look to reverse to a short after a bounce.  Not looking to make any moves in SPX or NDX.  Tax refunds will be pouring in hot and heavy due to OBBA.  February and March will be the 2 biggest tax refund months, and that liquidity will be a positive for US risk assets at the margin.  So don't want to fight those inflows.  

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.