Significant Local Top?

Risk came fast.  It didn't wait for the tariff deadline to selloff.  Looking back, while a lot of traders were hedging for the August 1 deadline, there were probably quite a few who were also betting on a tariff deadline pop higher, as the tariff news flow was mostly bullish for the weeks leading up to August 1.  Add to that flashback memories of last August when you had a vicious 2 day selloff after the nonfarm payrolls.  That opened the trap door.

Suddenly, everyone, including Jim Cramer is talking about the weak seasonals and how August and September are weak months.  

Maybe Cramer is right this time, but a lot of investors are thinking the same thing.  Perhaps the caution on seasonal weakness is being front run.  Europe likes to take long vacations in August, so they were probably looking to lighten up on equity risk ahead of their long break.  

It has been nearly 4 months since the market bottomed on April 7.  It has been a long rally, but nothing out of the ordinary when compared to other rallies off of big selloffs.  The most recent example being the rally off of the August 5, 2024 bottom.  That rally lasted 6 1/2 months, hitting the high of the move in February 19, 2025.  But most of the upside of that 6 1/2 month rally was made in the first 4 months, with a significant local top made in early December.  Before that, you had a relentless 5 month rally off of the October 27, 2023 bottom, which made a significant local top in early April.  

SPX 2 year Chart

Based on the enthusiasm in meme stocks and cryptos in July, it feels similar to the post election euphoria last November/early December.  From December to February, the market chopped in a roughly 5% range from 5800 to 6100 for 2 months before the waterfall decline.  You may see something similar, but I would expect the choppy range trading time period to be less than 2 months.  Investors have added significantly to US equities in 2025, making it more likely for the topping process to be shorter.  Economic weakness is more apparent now than back then, so recession fears will flare up more easily.   

If you look back at the last bear market in 2022, it wasn't necessarily a big bond bear market that led to the stock bear market.  You've had bond market weakness without a bear market in stocks many times, including 1994, 1999, 2006, and 2013.  It was the fear of a Fed induced recession from a rapid increase in short term interest rates.  Back then, it was fears of the lag effect of higher rates and an inverted yield curve.  The stock market's primary fear is always weaker earnings coming from future economic weakness.  That is what caused the panicky selloff post Liberation Day. 

It was quite notable how strong the bond market was on Friday.  10 years yields have been trading in a range from 4.20% to 4.50% for several weeks, but it feels like it will break down from that range towards 4.0% or lower.  While Powell didn't reveal his hand for the next Fed meeting, there will be increased pressure to cut rates now that you've got a weak nonfarm payrolls report with weaker than expected CPI numbers the last 2 months.  Of course, these government inflation numbers are works of fiction, but the Fed and many of the brainwashed economic community take them as unadulterated facts.  Those in the real world know inflation is still raging hot.  

With "contained" inflation and a weak NFP, Powell will have plenty of justification for a September cut and more.  Given how well the market responded to last September's Fed cut, I'm sure that will keep many Fed obsessed investors bullish on the market during this topping process.  

History has shown that the worst bear markets happen during a Fed cutting cycle (2001-2003, 2007-2008), not a hike cycle like 2022.  This time, Fed rate cuts will have even less effect in stopping economic weakness.  One, the huge national debt actually neutralizes the positive effect of lower short term rates via lower interest income from T-bills and short term Treasury notes.  And the huge mortgage refi cycle in 2020-2021 means there will be limited stimulus from lower mortage rates if the long end yields fall.  There is no guarantee you will get much of a fall in long term yields due to the massive fiscal deficit and government debt load.  The view on long term US government debt is rightfully negative, as politicians have shown no willingness to cut spending or raise taxes despite worries from investors about the increasing debt and deficits.  

Short term, the Fed obsessed investors will keep this market from crashing, as Fed funds are pricing in a near lock for a September cut.  A stronger bond market also keeps the risk parity funds from selling stocks.  Lower bond yields are bullish for stocks, all else being equal.  But bond market strength is only a positive if the economy outperforms expectations.  Investors have been burned selling stocks near a bottom based on recession fears over the past 16 years, they have gotten complacent.  You can see the complancency in investor asset allocations, which have low cash levels.  Surprising with short term interest above 4%.  

The COT data as of July 29 showed a bit of buying from asset managers, but net long levels are still much lower than the highs late 2024.  Overall levels are still very high, so not really a sign of asset manager bearishness.  

SPX Futures Asset Managers

Looking for a bounce attempt early this week, which likely fails and we drop back down towards SPX 6200.  Looking for range bound trade in August, mostly between 6200 and 6400 on the SPX.  Trimmed some single stock shorts on Friday, but looking to put those shorts back on in the coming weeks.  Not looking to put on any big index positions until late August/early September.  

Meme Mania

It appears that we have reached the top for meme stocks.  While many traders like to compare this to 2021, the breadth and firepower of this meme mania is far less than that crazy period.  Since 2021, retail investors have been sheared through numerous pump and dumps.  The HFTs, market makers, and pro traders got their pound of flesh taking the other side of these stock gambling addicts.  

The free capital available for the meme stock chasers is much smaller now.  There is no crazy Covid stimulus gravy train driving these moves.  The firepower is just not the same now vs when the government was handing out stimmies and fat weekly unemployment checks.  What capital is available for speculation is mainly getting sucked up by crypto treasury companies issuing overvalued shares to buy cryptos.  According to the WSJ, $86B has been raised for crypto treasuries so far in 2025.

Its amazing how much demand there is from investors who are trying to catch the next MSTR by paying 2-3x mNAV in companies that continuously dilute equity to buy cryptos.  Just the sheer audacity of these promoters and hucksters is amazing to watch.  They continue to hype such an obvious Ponzi scheme.  And its working, so far.  But the price action of bitcoin in recent days signals that we are at a local top, if not a final long term top.  The scam is just too obvious to sustain for long.  

The current mania in meme stocks and cryptos is almost as bad as the tulip mania several hundred years ago.  At least the internet bubble had a foundation of plausibility due to how revolutionary it was.   Now these companies aren't even pretending to try to grow revenues and be profitable.  Its just about pumping stock, sucking in the sheep, and feeding the ducks when they quack.  The veneer of legitimacy is getting thinner as the market trades more on memes and technicals than on fundamentals.  

We have the AI bubble, but its mostly confined to NVDA, AVGO, TSM, CRWV, and a few other smaller beneficiaries.  The lack of breadth in the AI names is quite telling.  There just aren't many companies that are using AI to make a profit.  Only those that are selling infrastructure that AI runs on is making money.  Even back during the dotcom bubble in the late 1990s, there were several profitable internet companies that weren't infrastructure related (YHOO, AOL, etc.).  Productivity gains from AI is heavily hyped, but its hard to measure.  Since so much energy is required to train and run these LLMs, you will need to have a lot of productivity gains to match the huge amounts of electricity consumption from all the AI data centers.

Investors and traders are running out of good small cap companies to invest in, so bad ones are getting pumped.  Even with all the pumping in heavily shorted names, the Russell 2000 continues to trade terrible vs the SPX.  Investors have now mostly given up on breadth as a bull/bear indicator, because the Russell 2000 has been lagging for so long.

Since the April bottom, there has been a huge short squeeze targeting cookie cutter long/short hedge funds.  They were all crowded in the same names, for good reason, but they put a target on their backs by doing so.  Traders have realized that its a lot easier to spook short sellers into covering stock and creating a short squeeze than to convince investors to buy stocks based on fundamentals.  High short interest stocks have massively outperformed low short interest stocks over the past 3 months.  You have to go back to late 2020, early 2021 to see a bigger divergence.  

The systematic long short HFs have gotten crushed as the SPX has gone higher.  

When hedge funds lose money, they reduce risk and close out positions not because they want to, but because they have to.  That's what causing these short squeezes in highly shorted stocks.  But once the weak hands have covered, there is no further buying demand because no one who actually looks at fundamentals would want to buy these names.  The price action this week in heavily shorted names and meme stocks is quite telling.   While the SPX has grinded higher all week, the heavily shorted stocks have lagged all week.  The chart for meme stock OPEN, the AMC of this recent meme mania, tells all. 

 The peak in excitement for these meme stocks was a week ago.  Since OPEN, sympathy meme plays like DNUT, KSS, and GPRO have had recent pumps but died out quickly.  The meme stock bagholders are beginning to pile up, and that dead weight of overhead supply will be weighing on future pump attempts.  

The COT data for SPX and NDX futures as of July 22, 2025 shows asset managers selling into the rally.  Asset managers have been reluctant to add to their big net long position into the furious rally off the April lows. This is not what you want to see if you are short the indices.  

Surprisingly, the put/call ratios have not been that low during the grind higher this week.  It appears that we are still seeing put buyers looking to hedge ahead of tariff announcements on August 1.  You probably need to get past that deadline and have the uncertainty go away before you can find a reliable top.  We did get some more trade deal optimism over the weekend.  But we've squeezed about as much juice as you can from these announcements.  I want to see the VIX go a bit lower and for more call volume to get back into index shorts.  

It has been a tough times for short sellers.  This is about as bad as it gets, although 2021 was pretty bad for shorts as well.  But there was a good reason to avoid shorting back then:  the overflowing Covid stimulus and liquidity.  This time its not liquidity that's driving the move, its pure animal spirits and FOMO.  The 2020-2021 everything bubble ended with a 25% bear market when M2 money supply growth and liquidity exploded higher.  This bubble doesn't have the same ammunition.  Considering how overvalued and overextended this market is, it would not surprise me to see a worse bear market after this bubble bursts than the last one in 2021.  But we need to get to the top first.  Its tough to time the top so it may take multiple attempts on the short side before success.  For short sellers, its important to keep losses contained to be able to capitalize when the worm turns.  

Covered my SPX short for a loss late last week.  Still maintaining most of my single stock shorts which have been trading much weaker than the overall market.  The strength, lack of pullbacks, and resilience of this market is surprising, but it sets up better opportunities for the fall  These relentless, one way grind up moves often peak about 5 months, after the bottom, or start of the move.  The market bottomed on April 7.  5 months from April 7 is in September.  If there are some better indications of a top from options or COT data, I will consider putting on an index short before then.   If not, will probably just focus on single stock names with bad fundamentals.  

Crypto Treasury Ponzi

Financial nihilism seems to have reached a permanently high plateau.  In 2020 and 2021, it was the endless wave of SPACs allowing grifters like Chamath to get huge chunks of equity for taking two bit companies public to sell to unsuspecting investors.   The trillions in Covid stimulus effectively went from the government money printer to the grifters and corporate insiders who sold stock to the public.  Then there was payback in 2022 for all the printed money chasing the same number of goods and services.  High inflation, higher rates, and a much less forgiving bond market.  

Those side effects linger, but the speculative fire remains.  The liquidity is no longer as flush as 2021, but it still flows in the form of massive fiscal deficits, although without the money printing coming from the Fed.  Thus, bond yields remain high, the real estate market remains soft, and small caps lose out to large caps.  Outside of the oligopolies and anointed large caps, earnings growth is stagnant.  Private equity has picked over every non-listed corporation with a fine toothed comb, and are running out of businesses to buy.  Leveraged buyouts don't work as well with 10 yr yields at 4.5% than when there was ZIRP and 10 yr yields traded with a 1 handle.   The real economy is definitely slowing.

So when investing in real businesses don't work anymore, but the SPX keeps hitting new all time highs, there is a simple solution for the investment banks and the grifters.  Profit off selling stocks.  In 2020 and 2021, SPACs were the vehicle to suck up investor capital.  In 2025, its crypto treasury companies sucking up capital through PIPEs: buying BTC, ETH, SOL, etc. and then selling more stock through ATMs to buy more cryptos.  Money is now flowing into stocks, which then goes into cryptos.  Crypto treasuries are now the vehicle sucking up dumb money.  In order to be able to sell as much stock as possible through ATMs, lots of famous, and promotional finance figureheads are used to increase liquidity and the amount able to be sold thorough these ATM offerings.  

Theoretically, selling overvalued stock to buy cryptos allow for the book value of the stock to rise at the expense of the sheep buying the overvalued stock, who are of course hoping to sell at a higher price to the greater fool.  Its also a Ponzi scheme.  The earliest investors, the ones who get in on the PIPE, get in at the lowest price.  Then,  wild, greedy speculators chase the price higher after the PR announcement, allowing the crypto treasury company to sell bloated, overvalued shares to buy the crypto asset that they are linked to, increasing the price of their stock which is linked to the asset that they buy.  Into the strength and liquidity provided by the late comer speculators, the initial investors can cash out a fat profit.  

It works as long as you get a steady flow of greedy speculators willing to buy overvalued stock, which creates a steady buy demand for cryptos.  When the demand drops, the realities of all that supply sold to the public will then weigh on the stock price, which makes it harder to sell enough stock without crushing the stock price to below mNAV.  Without selling stock, there is no more money to buy cryptos, chopping off one of the big sources of demand.   And this scheme only works when you have the greater fool willing to pay above mNAV for these crypto ponzis.  When those fools run out, then there is no ability to pump up the price of cryptos with capital coming from the greater fools.  Then the price of cryptos collapses, as well as the crypto treasury stocks.  Who knows when we get to that point, but it doesn't feel that far away.  This kind of hot and heavy speculation doesn't last for long.  I suspect the floor on this will fall fast and hard, as the underlying asset has no real value other than for speculation.

The speculative mania has lifted a lot of boats in July, as you are seeing big moves higher in nonprofitable tech stocks, with the corresponding large call speculation.  

The last time you saw this kind of call buying frenzy in low profit, highly speculative stocks was in December 2024, and before that, February 2021.  Unlike February 2021, you don't have several trillion in helicopter money in the form of Covid stimulus being dropped on the heads of everyone in a developed country.  

The difference between December and now is that you've had a lot more time for retail investors to load up on these speculative stocks, making these markets that much more saturated with retail money.  The thing about retail money is that its a much more fickle source of  capital flows vs institutions.  A large population of retail investors are in stocks to get rich quick, thus the demand for the highest beta, most speculative stocks.  20%/year, what the SPX has delivered for the last couple of years, is not enough.  They want more.  Fundamentals are an afterthought.  Its all about what's hot, trending, and meme worthy that can lead to fast moves higher.  

Listening to finance and investing podcasts, its clear that the zeitgeist of the moment is huge fiscal deficits leading to dollar debasement.  This is the rationale to overpay for US stocks.  Not much talk about tariffs anymore.  And when tariffs are brought up, its no big deal, because of TACO.  The complacency is real.  The herd has gotten super greedy, going beyond bitcoin, to the more speculative ethereum and other alt coins.  This rampant buying in crypto has been rationalized by laws passed in Congress that are favorable for crypto.  The value of crypto currencies are in the eye of the beholder.  There is no cash flow, no fundamental need for it.  Unlike gold, it has no secondary uses like jewelry.  There is a short history and the "brand" has not stood the test of time like gold.  But it has a lot of buzz, and hype behind it.  Its the symbolic asset of this era.  

Unlike AI, which has to eventually prove itself by providing value beyond the cost of capex, bitcoin has nothing to prove because it doesn't promise anything, or provide anything of value.  Bitcoin and cryptos just exist, for speculation, and for theoretically providing a store of value against dollar debasement.  That's a low bar to climb over.  Lots of assets provide a store of value against dollar debasement, which actually have real world value.  The most obvious one is real estate.  Its funny how so many people are negative on the US real estate market, yet positive on cryptocurrencies.  Aren't they both theoretical hedges against dollar debasement?  Of course, one asset hardly trades, and is no longer in the good graces of the get rich hucksters out there.  While the other trades 24 hours, with lots of volume and lots of get rich quick hucksters.  Its like we're back in 1999, when beanie babies were the hot alternative investment.  Or 2021, when NFTs were hyped up.  

On a different note, recently, Morgan Stanley's Mike Wilson, who was bearish most of the time from 2021 to 2024, finally became bullish on the market in the past few months.   After a nearly 1000% move higher in SPX since March 2009, saying this looks like a new bull market?  LOL.  The guy who used to always talk about high valuations and P/E ratios no longer mentions them, when they are even higher now.  When analysts with a bearish lean like Wilson are suddenly bulls, its a sign that most bears have been slaughtered, or just thrown in the towel.  

Last week, I put on index shorts as well as shorts on some speculative stocks which have squeezed higher.  The speculative call activity and overextended market is setting the market up for a 5% pullback.  Looking for the pullback in the next 1-2 weeks, ahead of a potential negative catalyst on August 1 from tariff announcements, as well as weaker seasonal tendencies.  With this amount of wild speculation, it takes a few weeks to cool off, for dip buyers to get satiated.  So not expecting a sharp drop here.   But a pullback in the coming weeks would set up the market for a final move higher which would then probably top out in September, and lead to a bigger correction and possibly the start of a bear market in the fall.  

Speculative Fire vs Tariff Extinguisher

Speculation in bitcoin and AI is flaming hot.  But tariff headlines are making a comeback, and starting to act as a fire extinguisher.  Investors still view these tariffs as TACO material, which is encouraging for those looking to put on short positions.  You want to see complacency out there as the news flow gets worse.  But the outperformance of the high beta sectors and speculative names reveal some subtle clues for the short and long term.  

At the start of the month, my initial thesis was that we could see a meaningful, long term top in July, based on the slowing economy, huge amounts of equity fund inflows, and retail investor overconfidence.  There were signs that bitcoin was starting to lag vs. SPX.  To confirm a long term top, you want to see Nasdaq underperform vs. SPX, and the SPX underperform vs. Russell 2000.  That has not happened.  Bitcoin has surged higher and is again a leader in this market.  You are seeing strength in AI names, and big cap tech continues to trade strong vs. the overall market.  

This is not what a final top feels like.  You are not seeing a big chase for the Russell 2000, which you often see late in a rally.  In the past, the Russell 2000 used to be a leading indicator for the SPX.  Now its a leading indicator in the contrarian sense, where Russell 2000 outperforms right before a big downside reversal.  

However, it feels like the beginning of the topping phase.  The highest beta, most speculative stocks in the market are outperforming the market, and have even gone up when the SPX has gone down.  AI bubble is getting bigger.   Bitcoin is on fire.  You are seeing a very active pump and dump market, which can happen around local tops, but usually not around final tops.  These are signs of a rally in the late stages, with long positioning getting saturated.  When retail investors are this active and confident, bad things happen in the long term.  

If we are to make a comparison, this feels more like December 2024 than February 2025.  Remember, the speculators were much more active and bullish in December 2024, enjoying the Trump victory afterglow, than in February 2024, when the SPX made marginal new all time highs with AI names and bitcoin lagging.  

Big picture, there is limited upside and lots of potential downside.  Equity allocations among BofA private clients is now the highest since early 2022.  

We are seeing the CTAs rapidly increase their equity exposure as the longer term moving averages and trend indicators turn technically bullish.  The DBMF trendfollowing ETF has been increasing SPX longs considerably for the past few weeks.  The vol control funds have been rapidly increasing long equity exposure as the 3 month vol window starts to replace early April vol with early July vol.  When the systematic funds start piling in, after a huge up move,  that's a warning sign that a trend reversal is near.

There was nothing noteworthy in the CFTC COT report for index futures.  The ISEE index is showing lots of call buying in July, as speculation is rampant out there.  

The market has been shakier since July 4.  This is not what was expected, as the seasonal strength is for the SPX to continue to rise into the middle of the month.  And usually July opex week is a bullish time for the market.  But the tariff threats are starting to wear down this market, slowly but surely.  The plan was to put on shorts into strength on July opex week, and we may get that.  But if we do not, I will not be chasing weakness and looking to put on shorts into a down market.  The Nasdaq and big cap tech are just too strong for me to short into the hole.  If we get an up move towards SPX 6300 this week, I will look to put on a short position.  If we grind lower, I'll wait on the sidelines.  

Retail Investor Frenzy

Retail investors feel invincible.  The meme stocks (except TSLA) are all doing well, the high beta speculative stocks are rallying, and the most popular big cap tech stock among retail, NVDA is the best performing Mag 7 since the April lows.  They have bought more stocks and ETFs so far in 2025 than in 2021, when the everything bubble running on Covid stimulus was at its peak.  

The 2022 bear market didn't do anything to discourage them.  Instead it has emboldened them into thinking that every correction serves as a springboard to a quick move to new all time highs, like what happened in 2020, in 2023-2024, and now in 2025.  

The stocks with the most net call volume are outperforming, another sign of heavy speculation on more upside.  

The ISEE index of calls to puts is now hovering around levels that led to pullbacks in 2024 and earlier in 2025.  

The bull/bear surveys, which are less important, but are also showing signs of complacency and high optimism.  The NAAIM survey number is now above the highs from mid February, and around the post Trump election euphoria levels.  

Technically, the market is looking overextended as its shooting straight up for almost 2 weeks since the Israel/Iran ceasefire.   You had a beat in the NFP number an a big rally ahead of July 4 weekend.  Over the weekend, you had more can kicking / TACO on tariffs as the deadline moves from July 9 to August 1, according to Lutnick.  You had the BBB pork bill get jammed through Congress so that's another bit of "good" news for the market.  So much "good" news in the market lately!  

As the call open interest accumulates and call volume rises, you build up a gamma squeeze higher as we get closer to monthly opex.  This can result in an overshoot which present good shorting opportunities.  We are 1-2 weeks away.  Expecting the "wait till after July 9 tariff deadline to buy" chicken little bulls to start quacking and buying the strength this week.  Sitting on the sidelines, letting the bulls take this as high as they can before taking the other side.  

Bubble Gets Bigger

WW3 was avoided and the market squeezed higher last week.  The BTFD crowd won again, although a 1.5% drop is not much of a dip.  The bubble is inflating again, and that is both good and bad.  Bad if you are short, but good if you are long or in cash waiting to short.   This may be the best thing to happen for the shorts, as such a quick move higher means less possibility of a long term grind higher move.  Those long, slow meat grinder up trends are absolutely deadly for shorts, especially for bears who are long puts.   

In the short term term, there is not much positive for those shorting the market here.  The market shook off one of the worst seasonal periods of the year and just blasted higher last week.  The previous all-time highs didn't even act as a speed bump for this freight train.  Usually you see some hesitation and consolidation at the previous highs, especially after a huge drawdown.  But not this time.  This shows immense buying pressure and its not something I want to fade quickly.  The first half of July is the start of the 2nd half of the year.  Its a time when you tend to see a lot of inflows into stocks and historically the most bullish 2 week period of the year.  

Last week, the big winners were the AI names, especially NVDA, which was the strongest of the Mag 7.  Investors are chasing the highest beta names, as they believe those have the most upside.  The animal spirits are percolating throughout this market.  Its interesting to see though that the recent macro fund favorite, European equities, have been lagging badly for the past month.  It just shows that when investors get greedy, they like to go back to the most reliable and highest beta playbook: US big cap tech.  Haven't seen so much love for big cap tech since 2021.  

A lot of the buying in April and May came from retail investors, in June, a lot of the buying is coming from hedge funds.  Macro HF beta to equities has skyrocketed, and is near the highs in 2024.  

Nothing noteworthy in the COT data last week, asset managers are still reluctant to get back to aggressively long positioning.  Dealers got shorter.  Overall, still a bearish picture for SPX futures, but its been that way for several months.   

I see some tremendous long term shorting opportunities just as the economy is starting to show signs of slowing down (weaker housing market, labor market).  There is a reason that the Fed is starting to get more dovish.  Yet, most investors view the Fed's dovish turn as a big positive.  I would disagree, as monetary policy has lost a lot of its effectiveness with the mass mortgage refi's done in 2020-2021, and the huge budget deficits that provide so much interest income to the wealthy through Treasury issuance.  Lower interest rates = lower interest income coming from the US Treasury.  

Covered my shorts last week for a small loss, but actually excited to see this kind of move up as this bubbly price action sets up a much more volatile and opportunity rich environment later this year.  

WW3 = BTFD

"But as long as the music is playing, you've got to get up and dance. We're still dancing." - Chuck Prince, Citigroup CEO, July 2007.

"What the wise do in the beginning, fools do in the end" - Warren Buffett

World War 3 fears couldn't have come at a better time for retail investors.  They can now load up even more on the most speculative stocks at a discount to sell to the greater fools after the no WW3, no nuclear apocalypse relief rally!

The consensus view among the majority that I see on Twitter and the  financial media is that geopolitical events are usually buying opportunities, and that the recent crude oil rally won't last, and oil prices should go right back down.   It is true that most geopolitical events end up being nothingburgers, and those dips are usually buying opportunities.  But that's when there is actual fear that is generated during those dips.  Right now, we've yet to see real fear from the Israel/Iran war.  The VIX has rallied, bu the market has hardly done anything, only selling off in drips and drabs.  As of Friday's close, it was less than 2% down from the recent highs.  

Talk is cheap, so I don't fully trust anecdotal evidence.  I need to see it backed up by trading and positions data.  The put/call ratios have been subdued since Israel started its attack on Iran a couple of weeks ago.  There remains a lot of wild speculation in the most high beta, speculative names like CRCL and CRWV.  Bitcoin treasury plays that are small cap low float pump and dumps are still hot.  Retail investors love this stock market.  

It is getting late in this bull market.  Really late.  There is widespread retail investor participation.   Retail flows into the S&P 500 are above the everything bubble days of 2021.  You can see this in the huge rallies in highest beta and most speculative tickers.  One of the hallmarks of late bull markets is the lack of fear when you have pullbacks, even on "scary" geopolitical headlines.  When the consensus view is that pullbacks are buying opportunities, that is when things get dangerous.  

The institutional investors are also warming up to this market.  Despite the daily Middle East war headlines, investors in the NAAIM investor survey are now just as bullish as they were in February, before the tariff madness.  

EPFR fund flows data shows huge inflows into equity funds from June 11 to June 17, estimated at $38.1B for the week.  

Still holding the short position put on a couple of weeks ago.  The war headlines are a red herring that is taking attention away from what matters more in the next few weeks:  the tariff deadline decision.  We are heading towards the deadline with a lot of complacency on tariffs, with TACO being the meme of the times.  This provides an asymmetric reaction function to bad tariff news vs good tariff news.  Good tariff news may take this market up 2-3% over a few days.  Bad tariff news would like take the market down 8-10% over a few days.  I do believe it will be another TACO moment as the tariff deadline approaches, but I wouldn't bet on it with any long exposure.  At the same time, if the market pullbacks ahead of the deadline, I would not want to be short ahead of the decision.  

There hasn't been a big move yet, and it looks unlikely that we'll be getting that 5% pullback down to 5700-5750.  While I am longer term bearish, I recognize that Trump is likely to kick the can for the tariff deadlines on July 9, which will get rid of the uncertainty for a few more weeks.  And crude oil should eventually go down after the shorts all are squeezed out this week due to the war.  I expect the Fed to start getting more dovish as the economic data gets weaker.  You are already seeing some signs of internal dissent against the non cutting Powell.  Waller is trying to audition for the Fed chair role after Powell's term ends, and he's coming out super dovish.  

We are in the start of a short term bearish seasonal period after the big June triple witching opex and the start of corporate buyback blackout period.  Staying short for now, but will look to scale out of shorts this week on weakness.  

Kid's Hurdles

The Israel-Iran War will be over before you know it.  The market "overcoming" this event, effectively jumping over kid's hurdles, will be hailed as bullish.  I can already picture the bullish reaction if we get a short term bounce on Monday-Tuesday.   Those managing real money are not freaking out about a war that will last a few days.  Even if it lasted a few months, the fund managers would NOT care.  

Israel knows that it can get away with a lot of war crimes (anywhere) as long as Iran's crude oil export capacity is not touched.  That's a red line they are not going to cross.  Iran's leaders also realize that if they do anything adventurous that would cause a spike in oil prices, it would make regime change even more likely.  So the most likely scenario is a nothingburger for the financial markets.  And the markets are pricing in that fact, by not doing much.  It may freak out some headline focused overleveraged day traders and 0DTE options jockeys but its not going to move the needle for fund managers.  

The war will get a lot of air time and coverage by a hyperbolic media that will try to make it like its the start of WW3.  And I'm sure a lot of bulls will buy into the belief that this is an unstoppable bull market that can overcome anything, including the threat of WW3!  All of a sudden, instead of war being a negative catalyst, it will make people even more bullish on the market.  Of course, getting even more bullish just 2% from all time highs, at historically sky high valuations, with economic growth slowing, and with a tariff off/on switch active in the White House.  The overriding view that I see on Twitter these days is BTFD, TACO, dips on geopolitics is always a buying opportunity, nothing stops this train, etc.  Retail has been brainwashed into believing that the US stock market is invincible.

The 2022 bear market has done nothing to discourage these retail stock gamblers who fashion themselves as long term investors in high growth stocks, with no regard for valuations or fundamentals.  In fact, the 2020 Covid flash bear market and 2022 bear market may have emboldened these punters into believing that if you don't sell during a big down move, stocks will always comeback quickly, and go much higher quickly.  The thought of an extended bear market is the farthest thing from their minds.  This attitude coincides with the highest allocation to US equities in the last 75 years.  Higher than 2000, higher than end of 2021.  

The more you experience the markets, the more you realize that irrational herd behavior can be rampant in the short run to intermediate run.  But this usually results in a painful payback for that behavior in the long run.  

Nothing noteworthy in the COT or put/call ratio data for last week.  The bullish forces from the June quarterly opex are soon to be behind us, and I expect a post opex hangover after the huge rally from the April lows to the June highs.  Lots of calls options are in the money, that will soon expire, forcing dealer selling, and most June put deltas have already evaporated.  We are also entering the stock buyback blackout period in late June, which will eliminate a lot of the positive buy flows for US stocks.  These seasonal factors show up in the performance historically for the 2nd half of June, which are among the weakest of the year.  

The tepid reaction of the Treasury market to the Israel/Iran War shows how little safe haven demand there is for US Treasuries.  The world is awash in Treasuries after the blowout annual budget busters from the US government since 2020.  The unwillingness for Treasuries to meaningfully rally without a big stock selloff means that a stocks up, bonds up scenario is highly unlikely even in a Fed cutting cycle.  This bond market weakness is an incremental negative for stocks.  Bonds continue to trade terrible and I don't see it improving much until you get closer to the end of Powell's term, when the bond market tries to price in a much more dovish Fed from May 2026 onwards.  

Last week, we finally reached my target price level for a good risk/reward short at SPX 6050.  I entered a short SPX position around those levels and plan to hold the short position for several days.  

Approaching the Apex

We are approaching the top of the mountain.  For anyone who's climbed a big mountain, the closer you get to the top, the greater the sense of excitement,  achievement, and euphoria.  This is what is happening in the US stock market.  You can sense it from the return of complacency (TACO trade), speculation in risky assets like bitcoin, and even seeing the beginning of a move towards low quality, like the Russell 2000 (massively outperforming SPX in the premarket).  

With Russell 2000 lagging so badly over the past year, when it starts outperforming after an extended rally, its often a sign of investor exuberance and excessive speculation.  The Russell 2000 is a different barometer than it was in the pre 2020 era.  Before 2020, the Russell 2000 usually outperformed coming out of bottoms as risk seeking investors flocked towards the more speculative and higher beta small caps.  Back then, Russell 2000 would top out before the SPX and Nasdaq, acting as a canary in the coalmine signal of waning upward momentum.  No longer.  Now Russell 2000 outperformance is a sign of investor complacency and exuberance, happening after extended rallies.  

Tops take time to form, which make them tricky to trade.  Tops breed complacency.  Bottoms breed fear.  The tops that lead to bear markets (not just corrections) usually have the following attributes:  

1. Consistently high inflows into equity funds/ETFs and speculative high beta stocks showing increased retail investor interest in stock speculation/investing.  (Check) 

2. Big gains in the stock indices over the past 2-3 years.  (Check)

3. Historically high valuations.  (Check)

4  Economic growth decelerating. (Check)

5. Investors getting less bullish as uptrend flattens out and gets choppy, but still staying fully invested.  (Check)

We reached a peak in investor bullish sentiment in December 2024, after Trump winning the election.  There was euphoria over future tax cuts and deregulation and hopes for a repeat of the SPX performance during Trump's first term from 2016 to 2020.  The Fed meeting last December where dove Powell left the room and hawk Powell returned was the beginning of the topping phase.  The SPX reached higher highs in February, but investors were getting less bullish as tariff news started to come out.  Usually bullish sentiment tops out before prices do.  There is often a delay of several months before dropping bullish sentiment eventually shows up in the SPX with a big selloff.  

In the 2000 top, investor bullish sentiment actually hit a peak in December 1999, when the original dotcom bubble bellwethers YHOO and AMZN peaked.  The Nasdaq continued to go higher until March 2000 but that was led by second wave of dotcom bubble stocks like CSCO, various semiconductors, and speculative biotechs.  Just as NVDA was the first wave speculative leader of the 2023-2024 boom due to AI, it topped out before the second wave of more speculative stocks like quantum computing, PLTR/APP type of pseudo AI names, and of course bitcoin, which are still going.  

You are seeing a second wave in the bitcoin froth with various junk small caps starting bitcoin treasuries, leading to one day jumps in their stock of hundreds of percent (SBET, NAKA, etc.).  We are finally getting some big IPOs in the bitcoin sector, with CRCL and STRD.  This is all happening as the US economy is noticeably slowing, with historically nosebleed valuations.  

Tops take time, but they don't last forever.  The most extended top was in 2000, when the SPX chopped violently in a range for 8 months from December 1999 to August 2000.  Then the bear market started in earnest in September.  In 2007, the SPX went most sideways from June to October, so 4 months in a choppy range before the start of the bear market.  In 2021-2022, the SPX went mostly sideways from September 2021 to March 2022, about 7 months trading in a choppy range before the bottom fell out and the bear market really got started.   So the 3 most significant tops in the past 25 years took approximately 4, 7, and 8 months to complete before a bear market really got started.  

The SPX is no longer in a clear uptrend, but in a sideways chop, with long term moving averages flattening out.  It has been 6 months since bullishness hit a peak last December, and we've been in a choppy range ever since.  Given how much time we've gone sideways, something has to give.  If my thesis is correct and the current market is forming a meaningful top, history says that there is not much time left before a bear market starts in earnest.  

Given that its been 2 months since the SPX bottomed in April, enough time has elapsed for many traders to get back to previous net long exposures.  Retail investors have consistently been the most bullish on this market.  That is 2000 type of stuff.  That is a bad long term sign, as they are historically even worse market timers than the institutions.  The TACO trade, less fear about tariffs, more calls for all time highs, and increased complacency among investors are signs that the market has priced in a lot of good news and optimism.  It took some time, but hedge fund net flows are now back to beginning of the year levels, and above levels seen at the all time highs in mid February.  There is now ammo for both retail and hedgies to panic if we see a significant correction in Q3, which is my base case.  

Private client equity allocations at Bank of America show historically high levels.  Only the crazy speculative period in 2021 tops the current levels at 63%.  This is potential fuel for a nasty bear market if private clients just get back to just average levels of 56%.  

The latest COT data was a mixed bag, as asset managers meaningfully decreased SPX long positions even though the market went higher for the week ending June 3.  However, small speculators increased their long positions.  

You saw something similar as asset managers decreased SPX long positions as the SPX grinded higher in late 2021, as the SPX was making a meaningful top.   

Last week was brimming with weak economic data, which was mostly shrugged off.  The feared nonfarm payrolls report is behind us, and tariff fears are much diminished with Trump recently having a good call with Xi, opening the door for chicken little longs to buy as there is now more "certainty".  Now expectations on tariffs are too bullish, as most assume the drama is over.  While that's possible, knowing Trump, he loves to shake the tree to become the center of attention again and then be the one to play hero and make trade deals, pause tariffs, or try to pump stocks by saying its a good time to buy, etc.  He is both the arsonist and the firefighter.  All the while being the center of attention, which he craves.  I expect him to throw a wrench into the TACO trade before the July 9 deadline for the tariff pause.  With the amount of buying and re-risking that's happened over the past 2 months, I expect a sharp correction for the next 2-3 months.  

Still not yet at that exquisite short moment, but we are getting close enough that I would rather be a bit early than try to time the top perfectly and miss this golden shorting opportunity.  Thinking the most likely scenario is a top around SPX 6050 after the CPI release and a short term pop in both stocks and bonds on that data point.  But I'll probably start scaling into shorts into any strength this week starting on Tuesday and adding till the end of the week.  For those with a bearish bias, this week will be the time to strike.

TACO = Complacency

They're talking about the TACO trade.  Looking in the rearview mirror.  Again.  Yes, Trump always chickens out.  But it's a red herring.  It assumes that this is a good stock market to invest in if Trump doesn't go through with his tariff threats.  That is a news-centric view of the market that ignores long term fundamentals, positioning, and recent investor flows.  

With the rise of the retail investor, market viewpoints have gotten more short term, less fundamental, and more news-driven.  The percentage of volume coming from retail is much higher now than it was even 10 years ago.  Its probably higher than it was even in 2000.  It breeds short term logic and causes kneejerk market reactions.  

Last week you saw Trump back off within days of the tariff threats he put on the EU.  It led to a huge gap up.  Then you had another monster gap up in the works after the Court of International Trade, whoever the hell they are, said that Trump's tariffs were illegal.  By the way, these judges are part of the swamp, as they will do anything to further corporate welfare, in order to boost the stock market.  Its irrelevant because Trump will chicken out anyway on the tariffs.  But still, it shows you how deeply entrenched corporate lobbyists are in all branches of government.  The market reaction to that kneejerk rocket higher in the overnight session was valuable information.  The market sold the news relentlessly, taking back all the gains in the regular market hours.  

The same thing happened to NVDA, as it gapped up much higher after better than expected earnings, only to see all the gains evaporate on Thursday and Friday.  The market is starting to feel heavy above 5900, as good news is not being followed by sustained strength.  Its quick moves higher that are now faded.  

It has lowered the bar for entering short positions in the coming weeks.  Still looking for that exquisite short opportunity if SPX breaks above 6000 and the paper napkin chartists get even more bullish, but it might not happen.  Early June is a bullish time of the year seasonally, and the systematic and CTA funds are still either short or have very low equity exposure.  But the discretionary funds and retail crowd are back to high equity positioning.  

The NAAIM sentiment survey shows institutional investors are back to being very bullish.  

The COT data showed large speculators adding to longs.  We are seeing signs of long saturation in the SPX price action.  There could be one last gasp rally in June due to systematics jumping on to the bull bus.  Or it could be that we've seen the top already for this move in the overnight market on that tariff ruling from the Court.   Hopefully we get that last gasp rally as that would set up a really great short entry for the big move lower that should happen in Q3.  

What was the most interesting part of the COT data last week was in the Treasuries.  Across the curve, small speculators added big size to their net long positions.  This is counter to the weakness that we've witnessed in May for the long end of the curve.  They are buying the dip heavily in Treasury futures.  Small speculators tend to be wrong so it does make me begin to question my thesis of economic/stock market weakness leading to Treasury market strength, especially in the long end of the curve.   In any case, its a bit of a bearish sign for bonds, and even for stocks.

2 Year T-Note Futures

10 year T-Note Futures

Ultra Treasury Bond Futures

On the sidelines but looking for a good spot to get short.  The bulls are on borrowed time here.  Retail investors are complacent and heavily invested in stocks, and the price action is getting heavier.  Institutions are a bit cautious, but still way above average net long positioning if you go back to a 20 year window.  Lots of economic data coming out in the next 10 days, it may help form a top if its better than expected and the cautious bulls finally get on board.  

Push Pop Bubble

If you've ever played around with push pop bubbles, you can push down on the bubbles, and they go down, but the slightest push back in the other direction makes the bubbles pop up again.  This feels like a push pop bubble market, where you can push the bubble down, but it eventually pops back up without much effort.  It feels so resilient, which is what the market is conditioning traders and investors.  Yet, the overall condition is dangerous, with rampant call speculation and theme stock chasing, high levels of equity holdings among households, and high levels of foreign ownership of US stocks.  

We are close to the end, maybe the end? of the up phase of the market.  You have the return of the retail speculators bidding up speculative theme stocks in  bitcoin and quantum computing (RGTI, QBTS, IONQ).  There is renewed excitement over AI stocks, such as CRWV.  Stocks with high short interest are being squeezed, as hedge funds hold large gross positions, meaning lots of longs and shorts on the books.  Those shorts are squeezing the crap out of their portfolios.  Once again, hedge funds have become the punching bag for the market.  They were the most beared up of all the major institutional groups this year.  

Retail has trounced the hedge funds this go around.  And you can see retail investors getting bold, buying aggressively in this market.  There was data coming out of JP Morgan showing retail investors buying the most stocks ever in the first hour of last Monday after the downgrade of US sovereign credit.  They were also aggressive dip buyers on the Deep Seek and tariff induced dips back in late January and early February.  They may be getting set up again here, with markets showing short term resilience to "bad news", only to see a much bigger down move a few weeks later on no news.  I think it will take a bit longer this time for the SPX to collapse, as we've already had one in April, so its likely to take several weeks for the complacency and positioning to set up for another waterfall decline.  Gut guess is sometime between mid July to late August for that waterfall decline to happen.    

Not much interesting happening on the COT front, as you have asset managers slowly adding long exposure, but nowhere near the highs of late last year.  You are seeing more call buying in the past 2 weeks, back to high levels, where the market is vulnerable to deep pullbacks.  

On a much longer term chart, you can see how extreme the call buying got in late 2024, and how high it still is at the current time.  Even during the everything bubble in 2021 you didn't see this level of call buying.  Retail is basically all in on US stocks.  In particular, the most speculative and highest beta names.  There are flashing amber lights in the background.  April was a big warning, that this market is fragile.  Yet investors have been so well rewarded buying the dip and hanging on to their longs, that they are bold and aggressive, and almost feel invincible.  This is what it felt like in 2000.  

Last week, we got a few scares, from rising bond yields, to Trump's tariff threat against Apple and the EU.  Within a few days, Trump has already retreated from his threats.  Proving that his threats are becoming more bark, and less bite.  Bond yields have quickly dropped back down from the lows seen last Wednesday.  As I suspected, the US economy is just not strong enough for bonds to really selloff and for 10 year yields to hit 5%.  I expect the next big down move to come from recession fears that are accompanied by yields going lower, not higher.  

After all the up and down last week, we're almost at the same spot as we were last Monday after the US credit downgrade.  Its been a tempest in a teapot, moving quickly up and down, but ending up back in the same place.  I expect more of these violent moves up and down in a SPX 200-250 point range, until the complacency builds up and the systematics are no longer in a low net equity position.  

Took a quick short last week and covered quickly, as I have little confidence in a big move lower yet.  The plan is to wait to put on a bigger short position as the weeks go by as we head closer to a more seasonally weak period for the markets(mid July to mid October), when the residual fears from April are further erased from traders' minds.  The exquisite short opportunity is still ahead of us, so I will not be rushing into any short positions.  Perhaps a little breakout above 6000 will get the CTAs long SPX again and induce latecomer bulls to buy the top.  

Chasers are Back

Its as if Liberation Day didn't happen, the trade wars are behind us, and its all blue sky ahead.  The market is moving on from the negative effects of tariffs, towards the positive effects of tax cuts and blowing out the federal budget to pump up the economy.  Trump was initially viewed as a huge boost for the US economy after getting elected, with excitement over tax cuts and deregulation.  Then the tariffs started coming out.  And it was as if Trump didn't care about the stock market and was hellbent on putting on tariffs no matter what.  And that ended up being the wrong thesis, with Trump caving amidst the heat.  Now we are back to pumping on tax cuts.  Life is a circle.  

Many remember how the markets kept going higher as the Trump tax cuts were initially passed in late 2017, eventually resulting in a parabolic blowoff top the following month.  I am sure some are expecting the same thing to happen this time.   But 2025 is not like 2018.   

In 2018, the fiscal deficit was in the low single digits.  The 10 year yield was in the high 2% range, not in the mid 4% range.  You had much less retail investor participation back then.  Now, almost every Joe Schmo is in the stock market.  No, this is more like 2000 than 2018.  Those who claim that this is the most "hated" bull market are laughable.  The retail trader flows data from JP Morgan are showing huge retail buy flows since last summer.   The fund inflows over the past year have been outsized, and much bigger than any year since 2008, with the sole exception of 2021, when the Covid money spew spilled out to all risk assets.  Speculators are heavy into this market.  There is still a lot of hot money in the US stock market.  

Last week, after the relief rally on the China trade talk news, the most speculative Mag7 names NVDA and TSLA rallied hard, along with various smaller cap spec names like RGTI, QUBT, HIMS, etc.  A lot of it was short covering, but there was also new long positions getting put on.  Its almost a reflexive reaction to an up market.  They flock towards the high beta spec favorites TSLA and NVDA.  It reveals the high risk appetite out there.  

Lot of fund flows have been going to leveraged Nasdaq 100 ETFs, mostly on the long side.  As you can see, these levels are back to the bubbly time period in late 2024.  

It late April, as the SPX was struggling to break above 5500, I saw many investors compare this market to 2022.  Now that we've V bottomed all the way back above 5900, there are now comparisons to 2020.  It shows you how quickly market views change in this market, and how bullish the crowd has become in such a short period of time.  

The COT data as of last Tuesday didn't reveal much, as the expected increase in asset manager longs happened, along with small specs.  What was a bit suprising was that dealers reduced their large short positions into the rally.  They are usually fading the big moves.  Big picture, it really doesn't change anything.  We could see a few more weeks of a grind higher in the SPX based on what I am seeing.  

The put call ratios really dropped hard this week, and the ISEE call put index are now back to outsized call buys over puts.  Speculators are back to betting on upside via calls, which is an early warning sign that the uptrend is now vulnerable to sudden down moves, as showchased by today's big gap down.

The bond market is a popular topic these days.  I remember back from 2008 to 2020, lower bond yields were viewed as being negative for stocks as it supposedly signified economic weakness.  Yet stocks kept rising even as bond yields kept dropping.  Now the popular view is that higher bond yields are bad for stocks, because of what happened in 2022 and 2023.  Yet, stocks kept rising even as bond yields kept rising.   With economic weakness and labor market weakening more and more, I have a hard time believing that bond yields will go high enough to really hurt stocks.  People will forget about the tax bill after its passed, and inflation from tariffs is overhyped, as the energy deflation and shelter disinflation will counter a lot of the imported goods inflation.  And the economy is not as strong as many believe, as the withheld tax data from the Treasury is showing weakening income taxes withheld numbers in May.  

I expect the next big down move in stocks to come from recession fears, not inflation/higher bond yield fears.  It doesn't make me a bond bull, but I am definitely not bearish bonds at 10 year yields at 4.5%.  I would rather play economic weakness via short SPX than long Treasuries.  

Moody's came out after the Friday close to downgrade US sovereign debt, which is bad timing for those who have been waiting for the right time to strike on the short side.  I was looking to short this Monday if we were to trade above SPX 5950, near the closing levels on Friday.  Alas, it is not to be.   I will not chase shorts in the hole after such a fierce burst of upward momentum.  I expect the first dip to be bought, although I will not be buying it as I see the possibility of a dip going as low as 5700 before a strong bounce back.  If the market does shrug off this news and goes right back to 5950, which is very possible, I will be looking to short at those levels to play for a pullback down towards 5750-5800.  Right now, the news ruined the post opex short play.  I will be waiting for the next rally to short.