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.