On Top of a Powder Keg

Its getting late in the game.  It feels like the bull market will last forever, as all corrections have been immediately bought up since October 2022.  Equity investors must feel invincible, seeing the SPX and NDX blast up to new highs despite the Strait of Hormuz still being closed, now coming up on nearly 3 months and counting.  The AI names have gone up so much, that they are dragging the index up with it, despite a bunch of lagging names.  It is what you saw in the later stages of the dotcom bubble.  

SPX component stock correlations to the index are at their lowest since 2000.  These dips lower in correlations over the past 10 years have been around market tops: mid 2018, late 2021, early 2025.  

Retail investors continue to pour in record amounts into both stocks and options.  The flows have been elevated since Trump got elected in November 2024. They have reached an even higher level in 2026.  Recently on CNBC, they said that retail investors are now the smart money.  Amber flashing lights going off in the background.  

Its not just retail that's very long.  Asset managers are near their all time highs in SPX net longs as a percentage of open interest.  

A big portion of semiconductor stocks in the SOX have inverted put/call skew (calls more expensive than puts).  Historically bearish for SOX over the next few months.

AI is becoming a huge part of the financial markets.  YTD net issuance of IG bonds and venture capital show how much is going to AI.  49% AI for IG bonds, 87% AI for VC.  

There are a lot of AI adjacent stocks out there.  AI is basically all that matters now.

It seems like OpenAI has speeded up their IPO plans from 2027 to September 2026, according to the Wall Street Journal.  Trying to feed the ducks while they are quacking.

So Space X will be doing the biggest IPO in history in June, with a accelerated lockup expiration that will release a big chunk in August after earnings, not the traditional 180 day lock up period. Open AI is trying to get public as soon as possible.  And Anthropic will be following soon after.  SpaceX estimated IPO valuation: $1.75 trillion.  Open AI private market valuation: $800B+.  Anthropic:  $900B+.  Usually private market funding rounds are at lower valuations than the public IPO valuations, so that is some serious supply coming.  If those valuations hold up after 180 days being public, that's releasing a potential $3.5 trillion of supply on to the US stock market by early to mid 2027.  

 The US and Asian stock markets are now just big bets on AI.  It will be interesting to see what happens when the AI capex tops out.  It is a big bear catalyst that is looming in the horizon.  But its a hidden bull catalyst for bonds which the market is ignoring due to the war.  

With the Strait being closed for nearly 3 months now, inflation is rising, and Fed is getting more hawkish.  

You are hearing more worries about the bond market in financial media, as the 10 year yield broke out above the 4.5% barrier.   For AI skeptics, this is setting up an opportunity to make a good risk/reward bet on the AI bubble popping pushing the US economy into a recession, like 2001.  

There is still the bull catalyst out there, the carrot in front of the donkey in the form of a Iran War deal.  It is what helped push oil prices lower on Thursday and Friday, helping the markets.  It is surprising that the market still reacts so strongly to these mostly bogus headlines.  One of these days, the headlines will be true and you could get a big squeeze higher in stocks and bonds on that day.  That is what keeps me from putting on index shorts.  And makes being long bonds a better bet than shorting stocks at this point.  

Small speculators have rapidly reduced their long exposure in 5 year Treasuries, and as of May 19, have become net short.

5 Year Treasury Note Futures Small Speculator Net Positions

We got a 3 day pullback from last Friday to Tuesday based on bond market fears.  As I said before, I don't believe you should short the index due to a weaker bond market.  That is a 2022 playbook.  I am going with the 2000-2001 playbook.   

While investors have fully bought in to the positive stock/bond correlation, I expect that correlation to go negative like it did in 2001.  Bond yields should top out before the SPX tops out.  For bears, buying Treasuries (short duration) is probably the safer play than shorting the index.  On the sidelines waiting.  Over the next few weeks, I see more opportunity in the bond market than the stock market.  

Its 2000 Not 1999

Big difference.  I hear a lot of talk about this being like 1999.  No, its not.  The breadth of the speculation was increasing as the year was progressing in 1999.  That is what you saw last year, not this year.  The breadth of the speculation is shrinking.  Last year, you had a lot of speculation in crypto, nuclear, quantum computing, meme stocks (TSLA, PLTR, etc.).  That has died down, and speculators are now laser focused on AI hardware:  GPUs, CPUs, semi equipment manufacturers, memory, storage, optical, and data center energy plays. 

In 1999, the market was enamored with companies that were internet based, that provided internet services, not the companies that provided the hardware and infrastructure for the internet.  Only in late 1999 and early 2000 did the market started narrowing and focusing on the picks and shovels of the internet, as they realized that the internet would require a lot of capex investment.  Semiconductors skyrocketed and went parabolic at the very end of the dotcom bubble.  They were the last companies to boom higher.  

This AI bubble has played out a bit differently as the biggest providers of AI are private companies, so they have skipped out on the early part of the bubble.  If OpenAI was public when ChatGPT came out, they would have been a trillion dollar company by 2024.  But due to easy capital available in private equity and less public scrutiny, they decided to stay private, probably because they were burning so much cash.  Burning tens of billions of dollars and maintaining a high valuation is much easier to do when you are a private company than a public company.  So with this bubble, its started with the hardware side but has expanded to peripheral hardware.  From GPUs and data center energy plays to DRAM, storage, and more recently CPUs and networking.  As you can see in the SOX performance in 2000 and its performance in 2026, there are some interesting parallels to the dotcom bubble.  

SOX 1999 to 2001

SOX 2025 to May 2026 

 

MU actually was doing nothing for much of 1999, until it suddenly went parabolic in 2000.  MU wasn't doing much for the first 8 months of 2025, and then it suddenly went parabolic starting in the fall of 2025.  CSCO was the favorite big cap tech stock of the dotcom bubble, like NVDA is today.  MU massively outperformed even CSCO at the end of the bubble.

MU (yellow) vs CSCO 2000

 

Expanding production capacity in memory takes years, so DRAM pricing is inelastic in the short to intermediate term.  This inelasticity works both ways, as a sudden surge of demand causes a squeeze higher in prices, which then collapses when the demand cycle peaks and new production capacity starts coming online.  A double whammy of higher production capacity and lower demand.  It will happen again, but investors are blinded by the huge growth rates, the extreme profitably that makes these stocks look cheap on peak earnings in a hyper cyclical industry.    

A new memory ETF, DRAM, which includes Samsung and SK Hynix, have received huge inflows over the past month.  There is serious FOMO chasing the most volatile big cap tech stocks.  It is rare to see a specialty ETF like DRAM attract as much inflows as SPY and QQQ over a week.  There are blowoff top vibes when the crowd goes crazy over a small group of stocks like this into a parabolic rally.

Even some of the favorites during the dotcom bubble like CSCO and QCOM are joining the party, even though it would be a real stretch to consider those stocks AI infrastructure plays.  

But is just the AI plays that are running.  The rest of the SPX are lagging badly, and a big portion are below their 50 day and 200 day moving averages.  Its a narrow market.  Most are interpreting that as bearish, which is wrong.  You had strong breadth in January, as Nasdaq lagged, and look what happened in February and March.  Nasdaq is what matters, and in particular, the biggest cap stocks in NDX.  People buy US stocks because of tech, not to get exposure to banks, health care, or consumer related stocks.  If tech isn't performing, there is no reason to buy US stocks.  You might as well buy cheaper European or Asian stocks that cover the same sectors.  

You will know when a bear market is imminent when the Nasdaq starts lagging the SPX and breadth improves.  That probably happens when the Strait opens and everyone gets complacent.  Right now, you still have that wall of worry, that positive catalyst in the front view, which is the Strait opening and oil prices going lower.  

There has been quite an increase in call speculation among small speculators (less than 10 options contract orders).  Almost as high as late October, which was a local top.  

 

Retail is also back with big inflows into tech.  Now they are no longer interested in catching the falling software knife, and are piling into momentum names in tech hardware.  It has just been one big week of inflows so far (as of May 6), so it may take a few more weeks for retail to get fully allocated and run out of dry powder.

We had some really bad inflation prints this week, with both CPI and PPI coming in hot.  There are consequences from running fiscal deficits above 6% of GDP in an expansion.  Add to that the $166B in tariff refunds going out this year, the lower tax rates from the OBBA going into effect, plus war spending.  All that fiscal largesse is chasing the same number of goods and services, so naturally prices go up.  Don't forget that the Fed is doing stealth QE as they buy tens of billions of T-bills every month to keep an ample reserve regime, and lessen the pressure in repo markets.  It would be a surprise not to see high inflation in such an environment.   US 10 year yields finally cracked above 4.50%, and JGB yields keep making new highs, now well above 2.5%.  Higher bond yields are a feature, not a bug of a banana republic fiscal policy with no desire for less government spending or higher taxes.  

Gold has effectively replaced US Treasuries for China, Russia, and a growing number of other emerging economies.  Gold is slowly replacing Treasuries as the central bank reserve asset of choice, as the US government shows no desire to reign in massive budget deficits.  

Despite the higher inflation and ever increasing fiscal deficits, I am not bearish on Treasuries at current levels.  I see a couple of positive catalysts for the bond market.  1.  Opening of the Strait.  2.  The popping of the AI bubble.  It may take some time for these catalysts to play out, but its a matter of when, not if.  If I were to buy Treasuries, I would focus on short duration, as I see a curve steepening once the positive catalysts play out.  Unlike the 2022 bear market, I expect the next equity bear market to be positive for bonds, as I expect the Fed to aggressively cut rates like Greenspan did in 2001 after the dotcom bubble burst.  With so much of global wealth tied to the US stock market, I expect significant negative wealth effects from the next bear market.  

The COT data for the week ending May 12 continues to show asset managers aggressively adding to their big net long SPX position.  This is a very early warning sign of turbulent times ahead.  Only after the asset manager positions have peaked and start going lower can you expect there to be a market top.  It usually takes a couple of months for the market to trend lower after a peak in asset manager net longs.

Was waiting to get short SPX on an extended move higher, and we got that on Thursday, as SPX burst through 7500.  Unfortunately, was waiting to short on Friday open and missed the entry due to the big gap down on bond yields shooting higher.  We got significant dips in all the high beta tech plays in AI hardware/semiconductors on Friday.  A lot of this pullback seems to be opex related, as the tickers with the biggest options volume and OI were all hit hard (NVDA, TSLA, AMD, MU).  

With the one day pullback on Friday, not much to do, but wait for the market to get back to all time highs or even higher to pull the trigger on the short.  Its still the higher probability play to buy dips in this market, as I expect dips to be shallow and bought quickly until you see the uptrend flatten out for a bit longer.  The AI hardware plays should continue to be the ones that go up the most when the market bounces from these dips.  Those with a bearish bias, who are adverse to playing bubbles from the long side should be patient, as I expect a grind higher for a few more weeks.  That 4%+ pullback is probably something to expect in June or July.  

AI Hardware Mania

AI is all that matters.  I see a lot of parallels between 1998-2000 and 2024-2026.  Back in 1998, it was the Asian contagion and LTCM.  In 2025 and 2026, its tariffs and the Iran War.  Those macro events were a distraction from the secular tech bubble that was growing.  

Iran is just a distraction.  For those who think the Strait of Hormuz will be closed for a few more months, then go long oil, not short stocks.  Don't try to fit a square peg into a round hole.  Oil-stock correlations are going back to where they were before the war, which is near zero.  Don't have a strong view on when the Strait opens. But I do know that with the Strait closed, you are probably not going to get investors all in on stocks.  And if investors aren't all in, then you are not going to get a long term top.

The Strait is closed and the SPX continues to go higher, making new all time highs.  Clearly there was pent up demand for AI stocks while investors were worried about the macro implications of the Iran War.  Even without the war ending, they just couldn't hold back the momentum.  The momentum for AI hardware:  CPUs, GPUs, DRAM, storage, optical networking, etc.  It is reminiscent of the dotcom bubble in late 1999/early 2000.  The sharpest up move in the Nasdaq happened at the end of the move in early 2000.  We are seeing sharp up moves in semiconductors and assorted tech hardware names.  Retail is starting to jump on the bandwagon again.  

 

The hottest tickers on Reddit Wall Street Bets are AMD, MU, and SNDK.  There wasn't so much retail buzz in January, when MU and SNDK were exploding higher.  Back in January, WSB was more enamored with gold and silver than AI hardware/semiconductor stocks.  Retail has a knack for getting excited around long term tops.  It happened in bitcoin in summer 2025.  It happened in gold/silver in January.  And its happening now in the AI hardware space.  When long term trends go parabolic, the end is near.  It happened in precious metals in January.  We are likely within 1-2 months of a blowoff top in these AI names.  

Timing the top of this blowoff move is not like trying to short the top of a short squeeze like CAR.  Short squeezes don't last long, because the narrative doesn't have staying power, there is no fundamental basis for the rise.  They collapse quickly.  But there is a fundamental basis for this parabolic move in AI hardware.  So that gives it more staying power, more fuel to keep going higher.  Rather than trying to time the exact top on the frontside of the move, it may be better to short these names on the backside of the move, after the top is clearly in place.  There is lots of room for downside even after these things go down 10% from the top.  

I remain an AI skeptic, as I see no way that there will be a positive return on investment on all this overpriced AI hardware.  

Equity inflows have been heavy for the past few weeks.  

Last week, BofA clients were heavy buyers of stocks.  

 

We are in the last stage of the AI bubble, as the best performers go parabolic, and retail investors get FOMO and pile in.  2026 = 2000.  The last stage is where the biggest gains are made.  So it is dangerous.  Shorting early in the final part of the bubble is deadly.  

How quickly we forget about tariffs.  But a lot of that tariff revenue that was generated over the past 12 months is going to be refunded, providing more government stimulus.  $166B is the estimate.  Importers get to collect the refund, plus the higher prices they passed on to the consumers as a result of the tariffs.  In the end, corporations win, consumers lose.  

 I have been on the sidelines for the past several days, waiting for a good spot to enter shorts.  With May opex coming up, it appears to be a good time to consider a short on any further rallies this week.  The SPX and Nasdaq are getting extended, and it would be normal to see a post opex hangover after the big run up in the tech names.  I don't expect much of a pullback, maybe 3-4% at the most, but it is worthy of at least a small trade.  

SPX Donkey and the Deal Carrot

Geopolitics and the stock market don’t hang around each other for long.  Even with the Strait of Hormuz still closed, the SPX closed at an all time high.  If you had told investors in March that the Strait would be shut into May, almost no one would have guessed all time highs, and definitely not more than 4% above pre war highs!  The half life for a war to affect the stock market seems to be about 2-4 weeks.  That’s about how long it takes to get weak hands to sell (I was one of those weak hands).   

You are now 2 months into the Iran war, with just a ceasefire and no deal, with the Strait still closed.  Yet here we are above 7200 on SPX.  The market has shown its hand.  It wants to go higher.  Its counterintuitive, but the stock market will be more vulnerable to a drop after the Strait is open than before.  Having a shut Strait keeps that carrot in front of the donkey.  That donkey will keep going trying to eat that carrot, just in front of it.  All these Iran deal pumps by Axios are the carrot.  The anticipation of an exciting event is often better than the event itself.  Once the donkey eats that carrot, there is nothing to look forward to.  It relaxes.  It rests.  

I don’t think this market will make a top until after the Strait is open.  The opening of the Strait is a bull catalyst.  Shorting in front of a bull catalyst is dangerous.  Even when the market looks overextended.

This war is a good way to filter out those on Fintwit and the financial media.  Those still talking about the Iran War, oil prices, and supply disruptions affecting the stock market are stuck in the rear view, always looking backwards.  These are likely the ones that you want to fade.  Those who have moved on and realize that the market is focused on other things, mainly the ongoing AI boom, are looking forward.   These are the ones that understand markets better, and are flexible and listen to the market instead of CNBC and Bloomberg.

Last week was filled with big tech earnings and the FOMC, events that could have stopped the uptrend, but ended up being a wall of worry that the market climbed over.  There was nothing new in these earnings reports.  The hyperscalers are still pouring massive amounts into AI capex.  But they are getting less bang for their buck, because of the ridiculously high prices for semiconductors.  At some point, big tech companies will want a return on that investment.  And while they are less price sensitive now, the closer they get to the end of their AI buildout, the more price sensitive they will become.  

This grace period for reckless spending on AI is going to end sooner than people think.  It looks like its already ended for META.  Who is the next Mag7 to join that list?  The SMH (semiconductor ETF) has outperformed IGV (software ETF) by over 60% in the past 6 months.  This is dotcom bubble territory for tech divergence.  

 

 

There is a generational short opportunity building up in semiconductors/hardware.  It is loved by the investment community.  The rally is getting parabolic.  Timing the top is the hard part.  If you have a long term view and lots of risk tolerance, you could short now, and profit handsomely a year later.  But if you short now, you may have to sit through a painful rally for the next few months.  The options market isn't showing signs of excessive pricing of calls vs puts, which led to reversals in previous rallies in the SOX index.  

 

You have now seen a return of the call buyers into this market for the past 2+ weeks.  The risk appetite is returning, but its been much less broad, as semiconductors and AI centric energy names have been the outperformers.  The ISEE index is now back towards late 2025/early 2026 levels, so investors are definitely feeling more comfortable speculating on further upside.  

 

Hedge funds have not fully embraced this rally in tech.  They were big sellers of Info Tech from April 17 to April 30.  Hedge funds definitely act differently than they used.  Now they seem to be less trend following and more mean reversion / trend fading in their behavior.  There is less dumb money in the hedge fund space these days, so their positioning information is not as useful as before.  

Bigger picture, you have very high allocations to stocks.  Not a great timing tool, as this level has been elevated for the past 2 years.  But it gives you an idea of how much potential weakness is possible when the bull market tops out.  

We are now 5 weeks into the rally off the March 30 bottom.  These rallies off a capitulation  bottom in a bull market usually last about 4 to 8 weeks, and flatten out and then have a pullback.  So we are now in the timing window where we could get a pullback which will likely be bought.  Both upside and downside are limited during the flattening out phase.  

 

As I write, news of Iranian missiles hitting a US warship near the Strait.  I stick with my view that shorting while the Strait is closed is dangerous.  I see little edge either long or short here, so will likely be on the sidelines for the next few days.  

Iran in the Rearview AI in the Front View

It looks like the stock market detour to worries about the Iran War and the Strait of Hormuz is about over.  Yes, the Strait is still closed, but the market has moved on.  The market is forward looking, and there is no way that the Strait stays closed.  It will open at some point, and the market will pop on that event.  So in essence, there is more upside potential with a Strait that is closed than when it is open.  I know there are all the oil barrel counters who say that we'll reach hit tank bottoms if the Strait stays closed for another month, etc.  There are still bears talking about a supply chain related recession due to the war.  The market doesn't care about short term supply chain disruptions.  It could if the war lasts even longer and Iran doesn't give in, but that's lower probability than an opening of the Strait on a continuous ceasefire.  

And higher oil prices doesn't really matter.  On an inflation adjusted basis, crude oil prices are more than 20% lower than 2022 after the start of the Russia/Ukraine war.  So oil prices are really not as high as people think.  And even if oil prices go even higher, high oil prices don't affect the rich, who are the primary buyers of stocks.  The bears say you can't print oil.  Well, they can print money, and last time I checked, US stocks were priced in dollars, not barrels of oil.  If governments react to high oil prices by subsidizing gasoline/diesel, or reducing fuel taxes(very likely, and already done in some nations), that's just more money printing.  If the war continues and the US spends $50B/month bombing Iran to the Stone Age, that $50B is coming from deficit financing, which is essentially money printing.  Money printing is bullish for stocks.  

Its back to AI theme.  A couple of weeks ago, Allbirds, a failed shoe and apparel company, decided to pivot to AI data centers.  You got a couple of other two-bit small caps in random sectors doing a similar pivot right after.  You can't make this stuff up.  Its the kind of nonsense that you saw with the bitcoin treasury companies sprouting from reverse mergers of two-bit small cap tickers in 2025.  Bitcoin and ether just happened to make a huge top last year right after pumpers like Tom Lee came out with ridiculous price targets on ether.  

So that is the backdrop that we are in at the moment, with AI firmly in the center of the hype train.  You see the chase continue in semiconductors/hardware.  Its nothing new.  Its just a continuation of the trend that you saw since the 2nd half of 2025, when the KOSPI doubled in a few months, and RAM prices went bananas.  Semiconductors and AI related energy infrastructure are clearly the favorite sectors for those that come on CNBC.  You are seeing huge inflows into semiconductor ETFs.  The extrapolation years out into the future on this AI boom make these stocks look cheap on a forward P/E basis.  But semiconductors are cyclical, and the price of hardware, in particular memory, is obscene.  These RAM prices are not sustainable for the long term.  People talk about demand destruction in oil.  Well, there is currently demand destruction in RAM.  People will just hold off on upgrading or replacing their PC.  Who is the sucker that is going to pay $250 for 16GB of RAM?  It was $50 just a year ago.  And you can bet that China will be flooding the market within the next few years.  

The ratio of semiconductors to software is approaching the highs in 2000, when the dotcom bubble got everyone excited about a permanently high plateau of demand for semis.  We know how that turned out.   

 

From what I read and hear about the AI capex boom, most are expecting explosive growth out to 2027.  So consensus is expecting AI capex spending to keep growing for the next 18 months.  That is a long time to forecast capex investment, even if the semiconductor companies have locked up purchase contracts until the end of 2027.  If the hyperscalers feel like they have enough, they'll signal it way before the end of 2027, when the contracts expire.  

Its simple.  If you believe that this AI boom goes on for a long time, longer than expectations, than you should be bullish the SPX/NDX.  If you believe that this AI boom ends soon, shorter than expectations, than you should be bearish SPX/NDX.  

It has been almost 4 weeks since the market bottomed in late March.  Often these rallies off a panicky bottom last for 4 to 8 weeks before you get a consolidation/pullback.  So we are getting closer to the window where the rally could flatten out and give back a bit of the gains.  I don't expect a big pullback if it does happen, perhaps 3-4%.  But timing the top of this rally will be the difficult part, as this rally has been powerful, and confounded quite a few investors who were very cautious due to the war.  I covered shorts for a loss last week, and don't want to short again until I see more signs of complacency or a bigger move up.  Probably need the Strait to open for the all clear to get short.  I would rather be a little late to short than to be too early.  Its a tough market to get long, but that's probably the higher probability play than to be short over the next 2 weeks.  Watching and waiting for a better opportunity.  

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.