Strait Saga

The Strait went from being open to then being closed.  The market is looking past it, as this gap down is tiny compared to all of the gains in the past 3 weeks.  This market wants to go up.  The news is a distraction which often tricks traders into getting into positions at the wrong time.  Yes, the Strait of Hormuz is still closed.  But those who were worried about geopolitics and higher oil prices have already sold.  Some may have bought back in, but a lot have not.  

We've replaced a lot of weak hands with stronger hands in the stock, bond, and commodities market.  That makes the market much less vulnerable to liquidation waves like we saw throughout March.  Once these pod shops and hedge funds liquidate their positions, they don't all come back with the same size when markets go back up.  They get back in with 30, 50% position sizes which makes them much less likely to get stopped out.  It is a self reinforcing volatility crush.  Less size means less market impact from stop losses.  

The stairs down, elevator up phenomena is a recent one.  It is clear that the market has more FOMO (fear of missing out) than FOLM (fear of losing more).  That manifests itself in choppy down moves that take a month to get to the bottom, but a relentless surge higher every day that takes much lesser time to recover the losses.   

The options market is definitely trading differently than the cash market.  Options traders are fast money.  Cash traders/investors are slower money.  The options market has entered all in bull mode.  On Friday, total options volume was 99.4M, 47% higher than the recent average.  Call volume was 61.5M, which is the highest number that I can recall seeing in a long time.  The put/call ratio was just 0.61.  The ISEE index also shows the rapid increase in opening call transactions vs. puts last week.  We are now back to levels seen near the highs in late 2025.  

There is still time for this rally to go even higher as the cash traders/investors catch up with the options traders and enter all in bull mode.  Given the FOMO out there, it probably will be done within the next 2 weeks.  

The first group that the fast money have clamored to are the semiconductors.  Their favorite group is still AI hardware.  April is only halfway done and the semiconductor ETF inflows are the biggest ever.  The March outflows that took the whole month, which was the biggest outflow in history, was only half as big as the inflow so far in April.  The fast money doesn't wait for the all clear sign from news headlines.  They are already piling in to the highest beta sector in the market.  

The SPX COT shows asset managers back towards the highs for net long positions.  But small speculators, who tend to lag the asset manager positions, have still not gotten even close to their previous big net long positions.  

SPX Asset Managers Net Position

 

SPX Small Speculator Net Position 

 

The VIX closed at 17.48 on Friday.  Normally after such a strong rally, the VIX would be under 15.  The options market is pricing in a higher volatility environment even after big rallies like it did in 2000, 2007, and 2021.  If the VIX sustains below 16 for a few weeks, then I will admit that we've entered back into a boring, grinding higher market.  But I suspect that we'll keep this higher volatility environment for the rest of the year, with realized vol catching up with implied vol, with less dispersion as correlations increase with all risk assets acting like one.  The positioning is just too big in equities for there not to be a true panic on the way down later this year, not this stair step down, elevator up price action we've seen so far.  

Entered in a premature short position last week.  Will look to get out sometime this week, as it was only meant to be a short term trade.  It was a bad entry point.  There will be much better spots to enter shorts in May.  Any Iran war related weakness will not last for long, as this market is clearly back in full bull mode.  Do not fight it until you see the uptrend flatten out and worries about the war are over.  The war could end, or it could not.  But the worries about it will eventually fade way regardless, just like Russia/Ukraine.  I only want to put on long term shorts after the crowd is no longer looking at Hormuz traffic or discussing the war. 

Blockading the Blockade

Here we go again.  The markets thought we were on the cusp of a deal and then Trump flips over the negotiating table.  If you think this blockade will last, then you haven’t learned a thing over the past 6 weeks.  Trump keeps bluffing like a loose aggressive maniac at the poker table.  He thinks everyone will believe him, even after all those TACOs.  And he keeps doing it because the market reacts like its not a bluff.  This time, he’s using the George Costanza strategy of doing the opposite of what he wants, with a full US blockade of the Strait.  Trump is treating this war like a made for TV drama. 

As the drama continues, the global oil inventories go down 13M barrels a day, take another step closer to the breaking point where demand destruction pricing is necessary to ration oil.  Time is on Iran’s side.  The longer this drags out, the worse it is for Trump, and the global economy.  I did not expect Trump to score on his own goal.  People still expect Trump to act rationally,  which is the basis for the lingering hopes that this war will end soon.  Because its so bad politically for him.  However, second term Trump has a different reaction function than first term Trump.  He can’t get re-elected, so he does what he wants, and cares less about public opinion.  Its hard to explain, as he's acting more like the President of Israel than the President of the United States.  The conspiracy theory about Israel blackmailing Trump with the Epstein files seems plausible now.  

As a bonus for all the chaos he creates, him and his family and friends are making a killing with insider trading.  Yet the exchanges still can’t figure out who did the suspicious trades ahead of his “Truths” throughout this war.  The CME zealously goes after small time "spoofers" who are harmless, yet can't seem to track who did those giant, suspicious trades a few minutes ahead of Trump's Truth bombs.  The system is completely corrupt.  The grift is done in plain daylight and the cops on the beat are acting like nothing happened.  

Before the weekend events, the market made an emphatic statement.  It stated that you can’t hold back this bull.  They say that the stock market takes the stairs up, and the elevator down.  Well, that's flipped for this market.  It takes the stairs down, and the elevator up.  That is why its dangerous at this stage of the cycle to position for a bear market.  The bull market has lasted for so long, and with so many staunch believers, that its going to take time to transition to a bear market.  The FOMO is so deeply entrenched that stocks actually go up faster than they go down!  It won’t last forever, and the longer this market goes sideways, the more explosive the move will be afterwards.

 It is amazing that in a choppy market that has trended mostly lower in 2026, we've seen over $500B in US Listed ETF inflows YTD.  This dwarfs the inflows from any of the previous 5 years, and those were some very big inflow years.  Investors can say they are bearish in the sentiment polls, but their actions are completely opposite.  There are a lot of fully invested bears out there.  

 

When stocks are in an uptrend, investors either chase stocks at higher and higher prices or get left behind holding cash, underperforming the index and their fully invested neighbors.  This relentless uptrend reinforces investor behavior to buy stocks as soon as they receive their paycheck.  The sooner they buy, the better the entry price.   It rewards aggressive allocations to high beta stocks.   It rewards use of leverage:  the more they buy, using margin or call options, the more they make.  All of these psychologically reinforced behaviors have taken stock valuations to excess.  It leads to investor saturation.  It appears we've reached that point in the cycle.  

Once you get to the saturation point, the uptrend transitions into a choppy, range bound market.  It started in October 2025.  As the stock market chops violently at the top, you change the psychology of stock investors, who are very heavily invested in stocks as a percentage of their net worth.  Instead of greed, you introduce fear into the equation, as more and more investors are underwater on their stocks.  Instead of getting rewarded for buying as soon as they get their paycheck, they sometimes get punished.  And they really get punished for buying call options and buying stocks on margin.  And to make matters worse, their favorite, high beta names which all their buddies have crowded into underperform. Popular leaders, like the Mag7, as well as retail favorite stocks like PLTR have lagged badly.  

The psychology slowly changes from FOMO to sell the rips to have cash to buy the dips.  With the market chopping sideways, it rewards patience and waiting to buy lower, rather than chasing at the highs.  And when the market gives you more opportunity to buy at lower prices, it reduces the urge to buy when the market is going up.  This reinforces the chop pattern.  Out of this sideways chop pattern, you get a new trend, either up or down.  Based on all the long term indicators showing a very overvalued, aging bull market, odds are high that a bear market emerges once the chop phase is complete.  A rough estimate is that we are 75% through the chop phase of this market.  

Retail behavior is changing, as Citadel notes in their retail trading report. 

Retail cash flows into equities went from very high for January to negative by early April.    

Vanda Research confirms the much lower retail flows.

Just like the dotcom bubble, this bubble is driven by retail investors.  It is their fervor for stocks which has kept the bull market going.  When they become less eager to buy stocks, watch out.   

CTA exposure to equities has plummeted.  This is a bullish thing, as you can see that the markets rallied strongly after each of these purges, except in 2022, when the selling pressure was so intense that positioning didn't matter.  

 

The DIX from Squeeze Metrics has once again proven to be a great indicator for spotting bottoms.  The bottom on Monday, March 30 was the bottom of the downtrend, at SPX 6343.  The DIX hit a 52 week low at 39.3% on that day.  Since then, the SPX is up 480 points in less than 2 weeks, and the DIX on Friday, April 10 closed at 47.6%, the upper end of the range for 2026.  

 

There has been a lot of put buying (opening transactions) since the war started in early March.  Traders are very well hedged with puts, and not doing much call speculation.  You did finally start to see more call buying on Friday, as ISEE went up to 124. The ISEE index 10 day moving average has plunged down towards 100, which is equal amounts of puts and calls opened.

Sold remaining longs last Wednesday.  Holding cash waiting for a dip to buy, around SPX 6600, or waiting a few weeks to short around all time highs if it goes there.  Don't see a compelling trade at this point.  Given how much CTAs and hedge funds have de-risked over the past month, I would lean towards the market grinding higher in the coming weeks.  Seasonally, its a strong time of year, from now until mid June.  I am only interested in the short side after investors put this war behind them, which will probably take weeks to months from now.  I expect a lasting TACO soon, even with the latest threat of a Naval blockade.  Those betting on escalation are betting against TACO, which is usually a bad bet.  

Trust the Plan?

Things are not going according to plan.  At the start, the war was supposed to take 4 weeks.  Its been 5 weeks.  The war continues, even as traders keep trying to anticipate its end.  Trump is doing his part to keep the hope alive, that the war will be over soon.  He's been saying that the war is almost over for the past 3 weeks.  Trying to keep oil prices down, stock prices up.  After listening to his Wednesday night speech, it didn't seem like a person looking to end the war soon.  And the US keeps sending more soldiers to the Middle East.  I would actually be surprised if the war ended in 2 weeks.  But who knows? Trump flip flops regularly.  

You can't think rationally about this war.  So many analysts are trying to get inside Trump's head, assuming that a very unpopular war, with no real purpose, leading to higher gas prices would mean he would end it quickly.  But it seems he has some deep hatred for Iran.  He's attacked them 3 separate times.  One in 2020, one in 2025, and one in 2026.  This time, he's trying to send them to the Stone Age.  I doubt he'll get the deal he wants, so it looks like boots on the ground soon.  Polymarket shows how the odds have been rising for boots on the ground in Iran, as of April 3.  

Big change in trend this week for stocks, bonds, and metals.  It was mostly a one way train down from the end of February until the end of March.  Now its a different ballgame.  The market feels like it wants to rally.  A big gap down after Trump's war hawk speech was bought up ravenously after the cash open, even with oil up big.  Bonds also recovered all of their pre-Trump speech losses on Thursday.  Perhaps we've built up a big short base and they didn't want to be short ahead of the 3 day weekend, with the possibility of a Trump pump.  We have now shaken out a lot of weak hands, so you are no longer seeing sustained selling.  At the same time, with war uncertainty still high, you are likely to see some chop as there aren't many willing to buy at higher levels.  

You have purged a lot of speculative long positions.  Some of the more aggressive funds have gotten short.  The biggest trend following ETF, DBMF, is short a sizeable amount of SPX futures.  I've tracked this fund over the years, and it is rarely short SPX futures.  

GS Prime Book shows a massive amount of selling at funds in March.  Similar levels to the selling around Liberation Day in March/April 2025.  

BofA fund flows also show lots of selling in the last week of March.  The 4 week avg. for total flows is -$2.2B, compared to the 52 week avg. of -$0.4B.  Most of the selling has come from hedge funds and institutions.  Retail continues to HODL.

We saw a lot of put buying this week.  The put/call ratios have consistently stayed high, even with 2 big up days this week.  The ISEE index has plunged lower, and stayed low even with the big rally this week.  

The Iran war has scared a lot of investors.  You can see it in the flows and in the options data.  The main talking points I hear are that higher oil prices will weaken consumer spending, cause the Fed to be more hawkish, leading to weaker growth and thus a weaker stock market.  That hypothesis has a lot of holes.  The stock market isn't driven by the lower end of the K.  Its the upper end of the K that drives asset prices.  And higher prices for food and energy aren't going to change their behavior.  Only much lower asset prices will.  The SPX being 6% down from all time highs won't do it.   

As for the Fed.  I don't see the Fed doing anything but being mealy mouth and trying to support the stock and bond markets while not sounding cavalier about the coming higher inflation readings.  They won't say transitory, but they'll use other words to describe their view is that the higher inflation will be transitory.  So if the Fed is on hold and higher food and energy prices don't affect the upper end, then it shouldn't hurt economic growth.  The lower end will feel a bit of a squeeze from higher inflation, but they don't matter to asset markets.  The fiscal stimulus from the OBBA should keep the economy afloat for the next few months.  

Reduced my longs after the rally this week.  Mostly in cash.  The funds have heavily de-grossed in March.  That sets up a stock market where downside will be limited.  But the upside is also limited, due to high valuations, SPX down just 6% from all time highs, and equities at a historically high percentage of financial assets among households.  

It also looks like the Mag7 trade is over, as AI seems to be the boondoggle that the Big Tech CEOs are obsessed with, even if it means taking down their stocks.  Eventually they'll face reality and cut AI capex.  Reduced AI capex means lower growth, taking down the biggest stock in the world NVDA, leading to a cascading domino in the AI space, which would signal the end of the AI bubble, like the end of the dotcom bubble in 2000.  

Markets were choppier with more W bottoms than V bottoms back in the day.  You still have a lot of old school technicians who have been left behind who can't adjust to the new environment, and need to see a retest of bottoms for confirmation.  I don't want to be that guy, the retester, but I am hoping for a retest to get more aggressive on the long side.  @RealStockCats with a nice illustration:

  

Short term, I expect a choppy market, where dips down towards SPX 6300-6400 will be buyable.  It could keep going higher towards SPX 6800, but I would rather miss the train than chase it here and bleed out if the war in Iran drags on for longer.  Not interested in shorting in this environment due to the reduced fund positioning, heavy put activity, and a more resilient tape.  Optionality is valuable in this environment.  I would continue to fade Trump pumps.  Having dry powder to take advantage of short term dislocations is essential here.