AI Carnival Barkers

The Anthropic CEO came out pumping for the upcoming IPO, putting a $30T total addressable market (TAM) for his company.  Getting a scent of Musk in those numbers, when SPCX was pumping the crowd for its IPO in June.  Musk stated that the TAM for SPCX was $28.5T.  These carnival barkers don't let reality get in the way of a good story.  So Dario managed to one up SPCX's TAM by $1.5T.  Never mind that these numbers come out of thin air with unbelievable projections.  Apparently, Anthropic is looking for a $2T IPO valuation, once again one upping SPCX which got priced at $1.6T.  

$2T for a company that already has serious competition from China, a place well known for cutthroat competition, leading to price wars and massive overproduction.  These LLM companies are losing loads of money as they sell compute way below cost.  With the much cheaper Chinese models catching up fast to the frontier models, the price competition will only get more heated.  The CDS of some of the companies financing this AI boom are rising noticeably as Wall St. begins to sniff out that all this debt could result in an AI bust if hyperscalers stop malinvesting.

Yet the stock price for NVDA has recently been closing in on all time highs, despite the rising CDS.  There are two different pools of buyers for AI stocks and AI bonds, and there is a divergence growing.  The CDS for AI companies is rising with the growing amount of debt issuance and guarantees.  The stocks are staying strong with equity inflows providing continuing support.

This AI mania is testing the sanity of bears who see an overhyped technology with much fewer practical use cases than what the carnival barkers proclaim.  It all comes down to how much the financial markets will facilitate the continued spending on AI.  Rising credit spreads for AI companies is a warning sign.  If the markets continue to take down gobs of debt and equity without a further rise in CDS, then this mania can continue for longer.  Anthropic and OpenAI are at the center of the circle.  If they have trouble raising capital in the future, that would be a certain death knell for the AI trade.  Before that happens, you probably see some smoke before the fire.  Slowing growth rates, less demand for AI at higher prices, and losing market share to cheaper but very capable Chinese models.

During the last 5 months, we have had the biggest equity fund inflows ever over a 5 month period.  Market cap adjusted, they are even higher than the 2021 flows.  Consumer sentiment on stocks is extremely bullish.  When retail gets this bullish on stocks, a big correction/bear market is not far away.  

Household equity allocations are at an all-time high.  SPX 10 year forward real return vs. household equity allocations.  

When you are looking for a correction off an extended bull market uptrend, you have to give yourself time for the move to play out.  Local tops are harder to time than local bottoms. Its taken longer than expected, due to the lower trading volumes in August.  The lower volatility provides support for the market as vol control funds add equity exposure and lower IV on puts force dealers to reduce their shorts as they delta hedge.  But there is a downside, as lower volatility make investors complacent about the risks out there as they look at the past few weeks and extrapolate it out to the next several weeks.  

The bear catalysts are still ahead of us, perhaps too far ahead for investors to really care about in August.  But as we get closer to Anthropic's IPO and the midterm elections, you should see volatility pickup.  With investors having a big overweight to US equities after an extended rally, its not going to take that much to get that 5+% correction.  

I don't put too much weight into seasonal tendencies, but we are entering historically the most bearish part of the year after having rallied for almost 5 months without a 5% correction since the late March bottom.  There has been studies showing that there is a seasonal pattern to investor risk aversion and risk seeking behavior.  

Even in the most bullish markets, after a significant bottom, there is usually a 5+% correction within 4 to 6 months.  The last time you had a significant bottom, in April 2025, it took about 7 months to get that 5% correction.  Unlike 2025, you didn't get a huge capitulation drop.  The February-March drop didn't even manage a 10% correction, less than half of February-April 2025.  And after the March correction, investors were extremely eager to pile back into the highest beta stocks, so they got their full allocation in June, within 2 months of the bottom.  

COT data for NDX shows small specs increasing to their largest net long position.  Commercial traders have drastically cut their long positions and are now down to net short levels similar to January.  

NDX Futures Small Spec and Commercial Net Position

One of the foundations of my short thesis is NDX underperforming SPX.  While SPX blasted to a new all time high in August, almost 3% above the June highs, NDX was unable to make a new all time high, and has been an underperformer this summer.  In the dotcom bubble, NDX continued to outperform SPX throughout 1998 and 1999, up until March 2000.  It never had a 3 month stretch where it underperformed the SPX before the final top.  Only after the March 2000 peak did you see SPX outperform NDX.  From April 2000 to August 2000, SPX and NDX traded in a range until the start of the bear market in September 2000.  

The NDX lagged the SPX during the final 2 months of 2021, which was right before the final top in January 2022.   Without NDX leadership, you cannot sustain a bull market for long.  Investors don't buy US stocks because they are excited about health care, financials, or consumer discretionary/staples.  They buy for tech exposure and growth.  Without AI, there is no real growth in the US, its all just inflation.  

As I have repeated many times in previous posts, this market is nearly a carbon copy of what happened during the dotcom bubble.  It is surprising to see the NDX lagging SPX for so long, even though the AI capex story remains strong, as everyone out there keeps repeating.  Based on the price action and what I read on Fintwit and wallstreetbets, it seems like a lot of investors are already all in on the AI trade. 

A quick word on the bond market.  The Fed and Treasury continue to get a lot of attention.  Like 2000, the bond market is basically a non-factor.  Clearly, inflation is much stickier than the investment pros will have you believe.  The guy on the street knows that CPI and PCE are bunk, that they vastly underestimate inflation.  Commodities like wheat and corn are making new 52 week highs during a seasonally weak time period right before harvest.  The fiscal deficits continue to grow with an aging population, defense spending, tariff refunds, and OBBA tax cuts.  The Fed is too dovish considering the environment we're in.  But at current 10 year yields, I would say its neither stimulative or restrictive.  You would need at least a 50+ bps move in yields for bonds to become a factor again, and I doubt that happens.  Any significant market reactions to a dovish or hawkish Fed are overreactions.  

This week, some were thinking that Jackson Hole would be a market mover, and we did get some intraday volatility, but nothing major.  In the past, the Fed was the only game in town.  Not anymore.  Its fiscal and AI.  Fiscal policy is basically used up, with Trump already passing his tax cut bill and with Democrats all but a lock to take the House, ensuring gridlock.  The Dems are definitely more anti-AI than the Repubs, so not likely to get much AI friendly legislation passed in the next 2 years.  

Maintain my full position short SPX and NDX.  This market is testing the patience and conviction of the shorts as it has gone nowhere over the last 3 weeks.  If you are a long term believer in the AI theme, then you shouldn't be short.  If you are not a believer, then this is probably the best time to be short since the bull market started in October 2022.  

Taking Crazy PIlls

Am I taking crazy pills?  Or is the market?  It is all in on AI, believing that LLMs can do almost anything.  You even have some of the Kool Aid drinkers believing that evil AI robots could destroy humanity.  People hardly bat an eye when they hear about Jensen Huang selling $500B worth of GPU backed securities.  It thinks that Bessent is omniscient, more powerful than the bond market.  Some even think he can single handedly stop yields from going higher.  They think what he's doing is like QE.  

Let's talk about that compulsive liar/Trump puppet Bessent.  He was a struggling hedge fund manager before he became Treasury secretary.  He thinks that he can run the Treasury like he ran his hedge fund, but with unlimited ammo.  He thinks he can act like a Fed chair.  Maybe he should go look at the Federal Reserve Act, and study up on what he can and can't do.  He can't print money.  That's the Fed's job.  

His recent Treasury buyback announcement is Operation Twist lite.  Sure, at the extreme, Bessent could stop issuing Treasury bonds, and issue all Treasury bills, and that would lower long bond yields.  But that torpedoes the dollar, and make the US government even more sensitive to short term rates.  Given the huge budget deficit, it would mean that rate cuts would actually be like a fiscal tightening, and rate hikes be fiscal loosening.  The Fed would lose total control over controlling inflation through the interest rate channel.  He would turn a molehill of a problem into a mountain.  

He's messed around in the arena, and thinks that he's a gladiator.  After the USDJPY intervention, stocks rallied (had nothing to do with USDJPY move), so he probably thought he could make stocks rally again with another ham-fisted intervention.  This time, the stock market popped, but gave it all back and more the next day.  All his little stunt managed to do was weaken the dollar, make gold look even more attractive vs. Treasuries, while bond yields keep going higher.  That's absolutely the worst reaction from his operation.   

It has managed to reawaken the animal spirits of the debasement trade, everything but in Treasury bonds.  Bitcoin and gold are rocketing higher, and that may be great for Bessent, Trump, and friends to make quick profits in their brokerage accounts, but it has backfired spectacularly in the bond market.  Now foreigners will question whether investing in US dollar assets is worth it if the dollar depreciates.  Remember, foreign investors have been big buyers of US equities for the past 2 years.

We continue to see the crowd very bullish on stocks, bearish on bonds, and bullish on the economy.  BofA fund managers are very optimistic on US economy.

Hedge funds have been aggressively buying recently.  BofA and Goldman hedge fund data.

BofA client flows show a record week of tech stock buying.  2nd biggest was the week before.  Meaningful to see a weak NDX right after heavy buying.  

State Street shows equity allocations at highest since 2007.

 Google search for risk on terms have been sky rocketing since April.  

 NVDA Credit default swap spreads going up along with the stock price.  Unusual.

Stock buybacks down significantly vs. recent history.  Buyback window not much of a factor anymore.

The DBMF trend following ETF has significantly increased its net long position in MSCI and SPX futures.  The bigger their long position, the more fuel there is to the downside when they sell on weakness.  

Nothing really notable in the COT data.  It looks like most of the NDX call punters sold, as dealers were big net sellers, undoing their hedge.  

Pokemon bubble update:  it looks like the bubble has popped.  Similar to the AI trade, the Pokemon bubble hit its peak around May/June, and has been trending lower.  As I mentioned in a previous post, Pokemon Bubble Redux, there are eerie parallels between the Pokemon bubble of the late 1990s/2000 and the dotcom bubble, and the current Pokemon bubble and AI bubble now.  These speculative bubbles tend to pop on similar timelines.

 

Pokemon price index based on TGC player traded market prices.

Based on what I see on CNBC, Twitter, wallstreetbets, Youtube, etc., you are seeing a disconnect between fund managers and retail investors.  It is confirmed by the BofA data.  Fund managers are very bullish, as they are basically closet indexers, and SPX is close to all time highs.  Hedge funds are piling into this market.  Hedge funds can't have big drawdowns, so if they are buying in August, and we get a pullback, they will either stop buying or sell what they just bought.  

On the other hand, retail investors don't seem quite as bullish anymore, after seeing the big pullback in AI stocks, and having been burned in meme stocks and assets over the past 12 months.  While they are not as enthusiastic as they were in 2024/2025, they are probably even more complacent.  Retail investors have become stock zombies, thoughtlessly buying based on muscle memory and past performance of the SPX and NDX, rather than true belief in this bull market.  Retail investors are still aggressively buying dips, even as they feel less bullish.  

Retail investors are very long the AI stocks, and are starting to lose conviction in buying single stocks.  They have been massively underperforming the indices, so they aren't in a strong position to keep buying.  In fact, their big long positions in AI stocks make them weak hands and vulnerable to puking out their position if we get a correction. You saw a hint of that in late July, but we never got a real broad market selloff to ignite real panic.  

With the Anthropic IPO coming in the fall, along with the midterm elections in early November, those are not events that investors will want to be aggressively long into.  Fund managers are likely to raise cash ahead of both events.  Retail investors are up to their eyeballs in AI hardware and semiconductors, which have been lagging since June.  Will they triple down on those holdings?  Given the waning fiscal stimulus and weak job market, I don't think they are in a strong enough financial position to do so.  We'll find out over the next 2 months.  

Holding a full short position in NDX and SPX.  Consensus is too bullish on AI and the economy.  This level of optimism and complacency are not sustainable in the long run.  Same with the continued AI spend with 2 big money losers, OpenAI and Anthropic, responsible for a lot of it.  The AI unwind will take years and few investors are prepared for it.  NVDA earnings and Jackson Hole next week, the crowd is poorly positioned for NVDA if it disappoints.  There is some fear of a hawkish Warsh at Jackson Hole, so could see a relief rally next Friday if you get a big selloff ahead of it.  If not, then I would expect a muted  reaction.  

AI All the Time

They only care about the AI stocks.  There are a few meme stocks that people still talk about (TSLA, flavor of the week names like HTZ, etc.), but those are sideshows.  Almost all of the bandwidth is spent on memory, storage, semiconductors, optical, data center, etc.  Its an obsession with tech stocks, in particular, high beta tech stocks.  The higher the beta, the more interest there is.  That's why you're seeing much more interest in MU and SNDK than NVDA on Reddit.  The stock market has turned into a mega sized online casino.  

There is a mind meld of the YOLO and FOMO mentality.  Almost everyone believes that this AI capex boom will continue for years. They expect handsome profits on their high beta AI names as the earnings keeps growing bigger and bigger.  They think this boom is a perpetual motion machine, with vague logic backing their conviction.  Something about hyperscalers spending as much as possible to be the first to achieve AGI.  Or scaling laws, about how AI capabilities will grow exponentially, rather than flattening out.  Or how productivity will soar as AI is used everywhere.  Great talking points, if you are trying to raise capital from VC firms, but sparse on concrete details.  

Investors have bought into the AI story.  They have been undeterred by the tech pullback in June and July, as the Schwab STAX index shows.  

 Top net buys at Schwab looks like retail doubling down on stocks that were the weakest in July.  

Tech fund flows show the investor FOMO into tech. 

 Record breaking inflows lately.  

These inflows are happening as stock buybacks are being reduced and equity issuance is massively increased.  Net demand is lower than the SPAC frenzy of 2020/2021.  Anthropic IPO is about to flood the market with more supply in September/October.  OpenAI probably coming soon afterwards.

Margin Debt / GDP ratio have been making all time highs in 2026.  It is when the parabola ends that you get the sell signal.  The margin debt data is lagging so it may have already rolled over.  

Latest FINRA margin data are out, and July margin debt went down vs. June, even though market was basically flat.  If we get a couple more months of lower margin debt, it will probably confirm that we've reached a peak in investor speculation and equity prices.   

Hedge funds bought aggressively last week.  

As investors go hog wild getting super long tech, especially AI stocks, they are forgetting the little detail about hyperscalers eventually wanting a return on their investment.  Or how all this spending will be recouped through AI demand from non-circular financed sources.  The hyperscalers are thinking their AI infrastructure will be even bigger than what they make from cloud hosting.

AI is a different animal.  It is speculative.  It hasn't proven that it can generate long term returns on investment.  The speculation is that it will massively increase overall productivity to justify the huge capex.  These hyperscalers are making a big bet that AI data centers will generate even bigger profits than their regular data centers.  It is a risky bet given the greater competition in the AI data center space, as well as the questionable economics of using AI at unsubsidized prices (currently AI compute is sold way below cost by money losing OpenAI and Anthropic), and most of all, finding enough practical uses for AI at unsubsidized pricing.  

A look at the profit margins of the SPX 500 sans Mag7 show margins have gone nowhere over the past couple of years.  Maybe the era of agentic AI will unleash a huge profit wave for the end users.  That is unlikely, IMO.  

For those wondering why real world inflation seems sticky, despite what the CPLie says, the answer is simple.  M2 money supply is increasing at the fastest pace since the 2020-2021 money spew.

This is the main reason that the US economy is resilient even as you have almost no employment growth, and almost no population growth, due to the reduction in immigration.  It is why the bond market is trading weaker, because inflation is not under control.  You are also getting tons of corporate bond issuance to fund AI investments, which is crowding out some demand for Treasuries.  And the 2026 fiscal deficit is on pace to blowout last year's deficit levels.  The OBBBA tax cut package, tariff refunds, war spending, more spending on SS/Medicare, some grift, etc have each contributed.  Government spending is out of control.  It is the main reason inflation is so sticky.  Without QE, there just isn't enough natural demand for all this paper.  Bond yields going higher and higher after a long bull market is reminiscent of 2018 and 2022.  

The volatility in ordinary tech companies is extreme.  MSFT and AMZN traded like meme stocks after their earnings reports.  The day to day volatility in memory stocks, AI hardware, and semiconductors is obscene.  Look at PLTR. It went from 160 to 110 in June, and recently went from 120 to 175 in a week.  After an extended bull run, this kind of up and down volatility in the megacap names is flashing a big warning sign.  It is what you saw in 2000.  In the 2nd half of 2021.  And in 2026.  

COT Data as of August 11 shows big moves among small speculators, who have added heavily to their longs in both SPX and NDX.  

NDX Small Speculator Net Position

SPX Commercial traders have their biggest short in the past 52 weeks.  

Seeing the opposite in NDX, as commercial traders have their biggest net long in the past 52 weeks, coming mostly from dealers.  Dealers probably are hedging a lot of short call positions by going long NDX futures.  

NDX Commercial Net Position

Despite the high single stock volatility, the SPX is trading placidly.  Like its just a normal sleepy market.  Its a huge deception created by continued sector rotation.  If you look at the intraday price action in SPX, it is nothing like what you saw for most of 2024, or even 2025.  These days, it is common to see sudden up thrusts and air pocket down drafts. The price action is similar to 2000.  Similar to 2021.  The speculative fervor is similar.  The fund flows are similar.  If it quacks like a duck, and walks like a duck, its probably a duck.  

Based on what I hear on podcasts, see on Fintwit, CNBC, Bloomberg, etc., there seems to be unbridled enthusiasm and belief in the AI trade.  They view it as a no brainer.  This is quite different than the skepticism that was more prevalent in 2025, when people were questioning its actual use cases.  As a technology, the internet was a no brainer.  That's why the bubble got so big, because everyone was using it and realized how life changing it was.  And the SPX still dropped 50% after the bubble popped.  AI can't hold a candle compared to the productivity and efficiencies that the internet brought.  AI generated images, chatbots/search, coding, and a few other niche uses is not revolutionary.  And the internet was deflationary, because it reduced energy usage.  AI is the opposite.  It consumes so much power that no one wants a data center in their backyard.  Which is why its so hard to believe that you have so many drinking the AI Kool Aid.  There is so much malinvestment ongoing, the unwind will be brutal.  It will take down the US economy.  Anyway, that's something worth playing for after the stock market tops out.  

While I don't believe Iran is a big factor in financial markets, it's not nothing.  It is a minor factor that can nudge the market in either direction.  Time is on Iran's side.  They need to control the Strait to have leverage against future US attacks.  Going back to pre-war conditions without a blowout offer from the US is not happening.  Markets are getting complacent about Iran, as it hasn't stopped the markets from going to all time highs.  Long positioning in crude oil futures is back towards the low end of the historical range.  The futures market is not positioned for a sustained supply disruption.  The barrel math still applies.  Global inventories are steadily declining, and the pain is being buffered by SPR releases.  Those SPR releases have a limited capacity, so when they stop, energy markets could panic and we could see another surge higher in crude, without an active war.  

Added to shorts earlier in the week.  Now up to a full position short in SPX and NDX.  Despite being early and wrong so far, I have more conviction on the short side this time vs. July.  Looking to hold for longer, looking for a bigger downdraft this time around, as we head towards more equity AND debt supply in September/October.  I expect to see more secondaries out of the blue from tech companies like INTC which raised $20B this week.  Also expecting some de-risking going into the midterm elections.  It is looking like a big win for Democrats in November, and the stock market definitely prefers Republican control over Democrat control of Congress.  

Seasonally, we are right on the cusp of a weak window that lasts about 2 months, with the Street heavily long.  It sets up an asymmetric risk/reward opportunity.  While I am hearing more calls for price targets above 8000, I feel like this market is so stretched to the upside, and positioned so long, that the mere anticipation of big equity supply coming soon will be enough to knock it down.  Similar to what happened right before the SPCX IPO in early June.  Could see that happening ahead of Anthropic IPO this fall.  Initial target on the downside is SPX 7400.  And I give it about a 50% chance that you get down to 7000 before November.  

Return of the Call Punters

The savage rip higher in SPX this week has reignited the bullish horde.  Last week's momentum capitulation in semiconductors acted as a springboard for this week's rally.  Catch up call buying has added fuel to the fire.  If we were in the middle stages of the bull market, I would say that last week's bottom was enough to fuel several weeks of upside.  But my view is that we're in a late stage bull market where rallies do not last for several weeks.  The price action from early June to late July is more indicative of the future than the price action in the first week of August.  

The speculators are leaning heavily to one side of the boat.  That is a precondition for a long term top, but not sufficient.  You also need to see price action showing fast money/ momentum performing worse than slow money.  Fast money was having a feast over slow money until June.  That's changed dramatically, as SPX has been outperforming, with lower beta stocks outperforming higher beta stocks.  In particular, retail favorite names like TSLA, MU, SNDK, AMD, DRAM, SOXL, etc. have been notable underperformers.  Kospi is at the center of the AI buildout trade.  It has been lagging both NDX and SPX badly throughout the summer.  All of this is happening despite the heavy inflows into tech funds.  The sharp reduction in Mag7 stock buybacks and big increase in supply from IPOs and secondary offerings are taking their toll on the market.  Equity inflows are fickle.  They follow performance with a lag.  When the inflows dry up, the market will be vulnerable to a waterfall decline.   

There are rare moves happening with increasing frequency.  There was historic levels of SPX call volume on Tuesday.  

 Rarely do you see SKEW go down so much when SPX is ripping higher.  Its usually the opposite.  The last time its happened to anything close to this degree was January 2018, right before a 10%+ drop in SPX in February.  

Call speculation has come back with a vengeance.  SPX Call Skew at extremes, even higher than late October 2025, May/June 2026.  Previous 2 extremes were near local tops.  

The torrent of equity inflows continues.  During the 5 weeks leading up to July 31, investors aggressively bought the dip, as tech funds 5 week rolling sum of inflows is highest ever.  

Schwab clients are bullish.  

Record margin levels at Schwab.  

Its not just retail that's heavily net long.  Asset managers + leveraged funds are very long SPX and MSCI EAFE futures.  

This week, as risk assets rocketed higher, it was notable to see MU, SNDK, DRAM, and the Kospi underperform.  While that was happening, software names were booming higher.  There continues to be a squeeze on the hedge funds who are still stuck in the Jan-June playbook of long semis/AI hardware and short SaaS/software.  I can see that those on Reddit wallstreetbets are not having fun while the SPX is making new all time highs.  They are all crowded into the same names:  MU, SNDK, DRAM, AMD, INTC, etc.  The most likely scenario is that they have their Leopold moment in the next couple of months and puke out their AI infra plays when the pain gets to be too great.  

As for the macro/fixed income backdrop, I think people are still too complacent about the Fed hiking.  Yes, you got a weak NFP number, and Warsh is a Trump puppet, but inflation is the key variable, not jobs.  Elevated inflation with a stock market at all time highs and massive investment spending on AI, it is a no-brainer to hike rates.  The Fed always acts too late when hiking, so it doesn't surprise me that they are behind again, and likely forced to re-establish their credibility with some hikes.   The weakness in fixed income despite numerous TACOs is the tell.  The bond market is telling them to hike.  

You will be wrong many times in this business.  How quickly you realize that you are wrong is what keeps losses under control.  Being early is still wrong.  I was too early beginning shorts around SPX 7600.  I was still stuck in my view that the early June highs would act as a ceiling. I recognized my mistake on Tuesday, and slowed down the pace of additional shorts, until this Friday, when there were signs of momentum stalling.  I plan on adding more to shorts next Monday/Tuesday.

I believe this week is a false breakout that will be given back within a few weeks.  SPX outperforming NDX for several weeks after the NDX made a euphoric all time high is reminiscent of spring/summer 2000 and late 2021.  A split market with lots of individual stock volatility is another symptom common at long term tops.  So are heavy inflows into equity funds.  All the pieces of the puzzle are fitting exactly as one would imagine a bubble top to be.  

The Bubble Has Popped

The price action over the past 2 months has been extraordinary.  You rarely see such a divergence between SPX and NDX.  The NDX is trading almost 2 times the beta of the SPX.  What makes that even more unusual is that the NDX components, the Mag7 as well as MU and AVGO, make up 9 of the top 10 stocks by market cap in the SPX.  The top of the SPX board is dominated by NDX names, yet you still see a huge difference in price action between the 2 indices.  The last time you saw this was in the spring of 2000, when the dotcom bubble popped.  It looks like the AI bubble popped in June 2026.  

There has been quite a bit of volatility both inter-day and intraday in the SPX, even though you are close to all time highs.  Usually the VIX is mostly between 13 and 16 when near all time highs.  This time, its hovering mostly between 16 and 19.  Volatility increases around market tops, as you get more selling to match the buying, causing sudden intraday drops that you rarely see in the middle of a bull market.  

This market is giving you a lot of time to buy around lows since the June top.  In a bull market, they don't give you much time to buy near the lows.  In a non bull market (both bear and sideways markets), they give you a lot of time to buy near the lows.  Some examples below.

2000.  Before the start of the bear market in September 2000, the SPX gave traders plenty of opportunity to buy local lows well below all time highs.

2015-2016.  Before the waterfall declines in August 2015 and January 2016, SPX had several pullbacks of 3-5% while being range bound.  

2021-2022.  This top was a bit trickier, as the topping process was much briefer than in 2000 and 2015.  Only real warning signs of impending top was the November/December weakness, but the false breakout to 4800 probably would have hit a lot of stop orders for premature short positions.  The waterfall decline in January 2022 gave you many opportunities to buy near the lows, signifying significant weakness.  The late March top after the counter trend rally was a great shorting opportunity.  

2026:  The SPX appears to have hit a ceiling at SPX 7600, now going on 2 months without making a new all time high.  More importantly, spending a lot of time near local lows, with no V bottoms during those 2 months.  Super high dispersion and a very split market is similar to what was seen in 2000.  NDX relative weakness after the early June top is another tell, similar to the post March 2000 top.  

So if the AI bubble has popped, why not be short?  Before this week, there was TACO risk on the short side, as Brent crude went above 100 and there were war fears percolating. There was still potential for a reflation of the bubble to early June levels, after another TACO.  I was expecting a relief rally after the TACO, big tech earnings, and the FOMC meeting.  You had the reflexive rally after the TACO over the weekend, and it lasted just a few hours during the overnight session.  The relief rally finally happened after all the events had passed on Thursday, but only after getting pounded down heavily ahead of them.  These gradual, extended selloffs and sharp intraday selling of gap ups are hallmarks of weak markets.

After seeing how sharply the AI hardware and semiconductor names went down for the first 3 days this week on no news (even some good TACO news), while the rest of the US market was barely negative, it showed how saturated the AI positioning has gotten.  Some may say it was Leopold Aschenbrenner's large AI fund's blow up that caused the cascade of selling, but his fund wasn't large enough to cause such a huge move.  And if that is all it takes to crush the AI names, then that is a show of extreme weakness itself.   

Looking at the put/call ratios, you didn't get the panicky readings that you had in June at those local bottoms.  It is a bit surprising how unaffected the SPX is considering how much the high beta tech leaders are faltering.  It is deja vu, but 26 years later.  

Retail heavily selling single stocks this week, net daily flow hit -243M on 07/28.  Retail has gone from buying single stocks (speculative) to buying equity ETFs (less speculative).  Still speculation, but going from high beta tech speculation to just beta equity index or somewhat high beta tech fund ETF speculation.  They are still heavily invested.  The next stage of the selling will happen when retail goes from buying equity ETFs to selling them to go to bonds or cash.  That's when we get the waterfall.

 

This week, you saw some retail traders throw in the towel, as the DIX went down towards 40, a level that has marked local bottoms in the past.   

 

Bigger picture, heavy foreign investments into US equities is a warning sign of a late bull market.  Peaks in 2000, 2007, 2021.

Insider buying is extremely low.  

Bonds continue to trade weak.  Hitting new highs in 10 year yields on Friday.  Yet we still have investors acting like ostriches burying their heads in the sand.  Expecting the Fed to stay on pause, or even expecting the next move to be a rate cut!  Recency bias is prevalent, as they are expecting another no-reason rate cut, just because Trump wants it.  They could be in for a shock when the rate hike happens later in the year, as is being priced in STIRs.  

COT data as of 07/28 showed asset managers buying the dip (unusual) in SPX and NDX futures, while dealers added to net shorts in both.  Small speculators continue to maintain large net long positions in both.  

There was more evidence this week that the final top of this bull market for NDX was reached on June 3.  The relative weakness of NDX vs. SPX has extended out towards 2 months.  It can't be shrugged off as mere rotation.  There has been no bad news in the earnings outlook for AI names to justify the weakness.  Some may view that as a irrational selling.  I view it as extreme weakness on no news, which is a tell.  Funds have overallocated to the AI trade, and the incremental flows are not there to support these bubbled up prices.  

Mostly in cash, and waiting to see if we get a short term oversold bounce that takes SPX to between 7550 to 7600.  That is a prime area to enter short positions in the index.  Individual tech names popular among retail are also good short candidates on a bounce.  This is not like 2025, when you had a big flush out on Liberation Day and it took several months to get to extended bullish positioning, and high beta names/retail favorites outperformed throughout.  In 2026, you had a mini flush out due to the Iran War, but it only took 2 months to get to extended bullish positioning, and high beta names/retail favorites are lagging for the past 2 months.  Its a much more bearish picture in 2026, and it is something that investors are only just beginning to realize.  The real selloff happens when the point of recognition hits later in the year.  

Zombie Buyers

SPX ended the week down 46 points, about 0.6%.  The stock market should be down more given the continuation of the war, crude oil pumping higher, disappointing earnings in TSLA and GOOG, and bond yields making new highs for the year. 
The zombie buyers kept a bid under this market and prevented a real selloff from happening.  The inflows keep coming as investors pile into tech funds/semiconductor ETFs.  The FOMO is real.

 

There are a lot of fully invested bears. You keep getting a lot of bearish responses to surveys while money continues to pile in to equity funds.    

Bullishness is a mile wide, but only a few inches deep.  And it keeps getting thinner as the weeks go by, as retail favorites keep getting taken out.  Earlier in the year it was PLTR, and an assortment of small/mid cap spec tech like IONQ, RGTI, ASTS, RKLB, OKLO, etc.  Then SPCX got hit.  This week it was TSLA.  With each piece of the retail portfolio taking big hits, the bulls get worn down.  I can sense a definite lack of enthusiasm among retail for this market.  

It seems as if the inflows into stocks are more muscle memory than convicted buying.  The default setting is to buy stocks.  Investors have become stock zombies, buying no matter what, with very little thought about valuations, with no worries about the AI bubble.  They have been brainwashed into thinking that equities are the best investment, no matter what.  It is the opposite of the environment you saw from 2009 to 2019.  During that decade, the main buyers were corporations, and the investor inflows were mostly going into bonds, not stocks.   Now its corporations that have become sellers, and investors inflows going into stocks.

SPX Skew is high again.  In the past, a jump higher in Skew usually meant a pullback was coming soon.  That hasn't worked as well in recent years. A slightly bearish signal.  

BofA client allocations show the classic signs of a late stage bull market.  High equity allocation, low cash and bond allocation.  

Hyperscalers have a lot more debt than shown on their balance sheets.  Eventually this will matter, as there are limits on how levered companies can get, and how much investors are willing to buy their debt.  AI capex at current levels is not a sustainable number.

GOOG got punished after their earnings report after they guided above consensus on capex and also plans on issuing $49.6B of equity to fund more AI capex.  These stubborn hyperscaler CEOs with grand AI dreams don't seem to be getting the message.  Their main form of currency, their stock, is going down in value because they are overinvesting in AI.  The stock market is screaming to them to slow down, yet they remain hard-headed.  Free cash flow has gone significantly negative for GOOG.  Similar picture for the other hyperscalers.

Asset managers are very short VIX.  

VIX Futures Asset Manager Net Position

FOMC Meeting on July 29 is live.  Market is pricing in 38% chance of 25 bps hike.  This is what Warsh uncertainty looks like.  They have not signaled a hike, or a pause.  So market has to price in some odds of a hike given the lean that Warsh and Fed members have shown.  I doubt they hike next week, so if they don't, market probably breathes a sigh of relief.  I would look to short any relief rally on Fed not hiking, as the Fed is not really meaningful now.  Its all about AI.

 

Tops are a process where prices chop sideways and investors get less bullish.  We are in the middle of that sideways chop.  Where the chop ends and the waterfall begins is tough to predict.  My assumption is that the high probability scenario is range bound chop for the next month.  That is the way I am playing it for now, until I see less "bad" news.  TACO risk is getting greater on the short side as you are building up some war premium in crude oil now.  

Counterintuitively, an end to the war, a deal, or a ceasefire that opens the Strait would set up a good short opportunity.  The Strait doesn't really matter for the big moves.  War/deal headlines can cause a short term knee jerk reaction, but they have usually been a fade.  What really matters is the AI trade.  AI will determine whether the chop continues or if we get a sharp move higher or lower.  I am betting on continued chop for now.   Thus, I covered the remainder of my shorts this week, expecting another bounce soon to short.  I could be wrong, and miss a much bigger move lower over the following week.