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.   

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 real 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.  

Topping Process

They say fear is a stronger emotion than greed.  But greed definitely lasts longer.  Bottoms are an event.  Tops are a process.  Retail investors do the most buying around tops, and corporations and insiders do the most selling.  Monster IPOs, secondaries, private placements, stock-based compensation are providing the extra supply.  The supply is being met with retail investor demand.  But retail investor demand doesn't last forever.  Once retail investors get to a big allocation in equities, there is less dry powder to buy.  You get buyer saturation.  That is when uptrends end and volatility increases.  It looks like we are near that saturation point.  

Interesting price action in semiconductors this week.  Over the past few days, you have gotten big earnings beats from ASML and TSM.  Instead of going up on those beats, the semi space got crushed.  After the parabolic up move, this kind of good news, bad price action is an eye opener.  Once again, spring of 2000 vibes.  

The whole AI hardware/semiconductor trade unwind has spared almost no one, and has spread out to all the speculative stocks out there.  Quantum, space, and speculative AI hardware plays have been relentlessly going lower since the start of June.  Lots of money has been lost in those spec names.  Its game over for the fast money gamblers who have flocked to the highest beta, most speculative names. 

 

The momentum bull market has gone through a few stages, and it looks like there are no longer any viable momentum candidates to take the baton and drive this bull market even higher.  It started in 2023, when almost everything went up.  In 2024, it was NVDA and then the rest of the Mag 7 leading the bull market higher.  From November 2024 to October 2025, joining the Mag 7, all sorts of speculative assets moved higher: crypto, AI, quantum, nuclear, space, etc.  From late 2025 to June, as the Mag 7 faltered, it was the AI hardware/semiconductors taking the momentum baton.  What's the next group to lead this market higher?  Back to Mag 7?  I just don't see it happening.  There is saturation across the board in Mag 7.  Its the most heavily owned group of stocks on the planet.  Sectors like financials, health care, energy don't have the growth to justify strong momentum.  I think we've hit the end of the road in the momentum trade, and thus the end of the road for this bull market.  

Over the past couple of months, MU, DRAM, SNDK, AMD, INTC, etc. have dominated the message boards on Reddit wallstreetbets.  Similar to what you saw in gold and silver from December to February, when they made a blowoff top and then sold off.  The wallstreetbets crowd are likely holding big positions in the latest "hot" group, the semiconductors/AI hardware space.  

These retail bros on wallstreetbets and Stocktwits brag about having diamond hands, but they turn into paper hands when dealing with a margin call.  There have been lots of margin calls going around in Korea lately.  Rarely do you hear about Korean stocks in US financial news.  But heard them talking about Korean stocks a few times on CNBC this week.

 

Looking at retail investor activity gives you a bigger picture view of where we are in the cycle.  When retail investors are buying heavily after a long bull market, that usually spells trouble.  They've been buying heavily since January. 

BofA clients were heavy buyers for the week ending July 10.

BofA fund manager survey shows fund managers holding 3.6% cash.  Historically weak over the next month after previous signals.  
 

Record inflows into tech funds.  All those inflows into NDX and it went down, while still lagging SPX.  

Old beliefs die hard.  Still seeing people be bullish on the market because of strong breadth.  Since 2020, strong breadth after an extended rally means that the leaders are faltering (momentum stocks weakening), which has preceded corrections (July 2024, January-February 2025, January 2026).  Expect the same to happen this time.

Latest COT data for SPX shows asset managers reducing their big net longs, and small specs adding to their big net long position.  Big picture, small specs are holding nearly their largest net long since 2021.  

Fed funds futures are pricing in a 68% chance of at least one rate hike by the end of October.  

But 83% of BofA fund managers see no Fed rate hikes before midterms (November).  Market is usually right more than fund managers, so probably looking at a Fed rate hike before the midterms.  I would expect that to be a negative catalyst in the coming months.  Also, lots of economic optimism among the crowd, as 54% see no landing, a record number.  

 

Despite lower than expected NFP, CPI, and PPI this month, 30 year yields have stayed above 5%.  Bonds are trading weak.  It appears to be more of an indicator of a lack of liquidity rather than economic strength.  The worst kind of bond market weakness for stocks.  The AI buildout is sucking out liquidity from all over, including the Treasury market.  

You are seeing record dispersion in the SPX, as the jaws widen, between index IV and single stock IV.  You saw something similar in the dotcom bubble in 1999 and 2000.  A lot of this is the rise of the AI trade boosting the average IV levels for single stocks.  Stocks like MU, SNDK, INTC, AMD, etc. are at insane IV levels.  Huge inflows into index ETFs is another factor keeping index vol contained while single stocks get more volatile.  Equity fund inflows are backwards looking, so if stocks start going down, those inflows will go down.  

To determine a market top is more of an art than a science.  There are no formulas or technical indicators that tell you where the top is.  Its a mix of fundamentals, technical indicators, price action, investor sentiment, seasonal flows, and news.  When the weight of the evidence is overwhelming, that is the time to fight the trend, to play for a trend reversal.  You can't just wait for the trend to turn down to get in.  That is a recipe for shorting dips and immediately being at a loss on the position when you get false breakdowns.  Shorting those dips in June was negative EV, especially after such a strong up move in April and May.  Shorting a bull market, especially a bubbly one, is both dangerous and low probability.  To get favorable odds, you have to wait for premium entries.   

From both a time and price perspective, this week provided a good risk/reward entry for shorts.   NDX continues to lag the SPX. Bearish. Momentum continues to underperform everything else.  Bearish.  Bonds trading weak since the end of June despite much lower crude oil prices, weaker than expected NFP, and lower than expected CPI/PPI readings.  Bearish.  All of this is happening as the SPX lingers close to all time highs.   More supply is coming, as a big chunk of SPCX shares are unlocked in August after their earnings report.  While the market is about to enter a seasonally bearish time of year, from late July to late September.  

Put on a large short position in SPX and NDX earlier in the week, trimmed some on Friday to have dry powder to short a bounce if it happens.  Given how much the semiconductors are down this week, a dead cat bounce seems possible early next week.  But I just don't see a resumption of the uptrend happening, so I will be adding to shorts into that bounce.  The war has restarted, and Iran has closed the Strait, so there is now TACO risk for those who are short.  I would be a bit more comfortable being all in short if the Strait was open, as that eliminates a potential short term bull catalyst.  

All the signs are there that we've reached a top in the NDX.  But if the NDX strongly bounces for a few days, that could take SPX back to all time highs.  I am not ruling it out.  I expect any new highs in SPX to be marginal, and manageable for those short a little bit early.  Or its possible this down move that started Thursday could be the start of a 3-4 week selloff that takes the NDX back down towards 26000 and SPX back down towards 7000.  If we get a strong bounce next week, that would delay the start of the big selloff by a couple of weeks, to late July.  If not, then I would expect this selloff to lead to a climactic bottom by mid August.  Due to the quick rally from SPX 7000 to 7600, there is a big air pocket from SPX 7000 to SPX 7350 where very little volume has traded.  The market likes to revisit air pockets to fill in some volume at those levels.  I expect that to happen in August.  

What is Unsustainable Will Not Sustain

The market is hanging off the edge.  Hyperscalers are going into negative free cash flow to chase AI dreams while semiconductor companies reap all the benefits.  The hyperscalers have bought into the Kool Aid, thinking that there is a big pot at the end of the rainbow for having the most AI compute.  But that's not how Wall Street is viewing the situation.  Their stock prices are going down the more they spend on AI.  Hyperscaler CEOs are rewarded when their stock prices go up.  They are hurting themselves chasing their AI fantasies.

The current situation is unsustainable.  The return on AI investment is uncertain, and likely to disappoint.  Hyperscalers' infatuation with AI is the foundation of the momentum trade.  If corporate executives finally realize that spending more will hurt their stock prices, then naturally the next step is spending less on AI capex vs. consensus.  That isn't in the forecast for many investors.  It would send out seismic reverberations to the semiconductor/AI hardware space.  It appears the market is sniffing out a sea change in the behavior of corporate CEOs, as more and more, token efficiency is being emphasized over tokenmaxxing.  The past couple of weeks has been quite weak for semiconductors relative to hyperscalers (GOOG, META, MSFT, AMZN).  

Without the momentum stocks leading, rallies are less potent and lack staying power. Since June 22, momentum has underperformed the SPX by 7% in an uptrending market.  

Momentum is the oxygen that breathes life into a bull market.  There was a historical outperformance of momentum stocks from the start of April to the start of June.  SPX went straight up, on the coattails of the momentum stocks.  The backbone of that momentum was AI capex.  It reminds me of the Nasdaq going parabolic from January to March of 2000, as semiconductors went bonkers.  History doesn't repeat, but it does rhyme.  From April to September 2000, the Nasdaq and the SPX both entered into a volatile, but range bound market.  It was the topping process that would lead to a 2 year bear market. 

Will we get something similar this time after the AI bubble pops?  Its possible, but unlikely.  The government and central banks are much more interventionist, much less laissez faire.  In a bear market, I would expect the Fed to rapidly cut rates, restart QE, and when those measures fail, start buying US equities with Congressional approval.  The US economy is heavily financialized, so a long extended bear market like the post dotcom bubble would be much worse for the overall economy.  

Let's not get ahead of ourselves.  Its still a bull market.  In a bull market, its much easier to make money being long than being short.  If you are going to short, you have to get very good entries.   Even if you are wrong about the bull market ending, good entries will not hurt you much, or even make you money.  For short-biased traders, the default position in a bull market should be to be in cash.  That is the only way to survive and thrive when the bear market finally comes.  

But the bull market is showing its age.  There is a growing pile of evidence that suggests that this bull is very close to ending.   

Since the start of June, you have seen some classic signs of a top.  

1. Choppy, high volatility price action in momentum stocks after a big move higher.   

 

2. Underperformance of momentum stocks/market leaders.  

3. Heavy inflows into equity funds, especially those with higher beta (tech).  

4. Heavy retail investor participation in higher beta stocks.  

5. Lots of equity issuance (IPOs, secondaries).

The extremely high two way volatility of the momentum stocks, while the overall market's realized vol is much lower, is a warning sign.  Momentum stocks lagging lower beta stocks is another.  Popular stocks/assets among retail investors underperforming the overall index is another.  But retail continues to buy more, even as their favorites stocks go down.  The STAX index, Schwab's index of retail buy/sell activity, shows the largest amount of buying since the bull market started in late 2022.  

STAX Index vs SPX

 

Let's get into the psyche of the retail investor.  They've made a lot of money buying the Mag7 since 2023.  But those profits are slowly melting away, as the Mag7 go down, even as the SPX goes up.  They are feeling some pain now for loading up on high beta growth stocks.  But they maintain their faith for the time being, because its worked for so many years, and the overall market is still doing OK.  

Since Trump go re-elected in November 2024, retail has gotten heavily involved in meme stocks and assets, like bitcoin, ether, quantum, nuclear, space, gold, silver, etc.  One by one, those holdings are going down, and not just small down moves, but big haircuts.  Bitcoin got cut in half, from $120K to $60K.  A lot of the meme stocks like IONQ, RGTI, OKLO, ASTS are down anywhere from 50% to 80% from their highs, in less than a year.  All of this is happening as the SPX is near all time highs.  These investors have gotten burned repeatedly chasing meme assets and meme stocks, even in a overall bull market.  They went for the most speculative assets to try to make fast money, only to lose huge chunks.  Eventually, retail investors will shy away from chasing the hype that isn't backed by earnings fundamentals.  It is already happening.  Look at how quickly the SPCX hype has died down. After having gone above 200 the week after the IPO, its back down under 150.  Almost all post IPO SPCX buyers are now underwater.  

You had the SK Hynix IPO in the US today.  In hindsight, the weakness in the AI semiconductor/hardware names could have been fund managers selling ahead of the IPO to raise cash to buy SK Hynix.  Just like you saw weakness ahead of the SPCX IPO, after it was over, you had a couple days of the market bouncing as the selling pressure abated.  I could foresee a similar situation here with the SK Hynix IPO out of the way.  Plus the first half of opex weeks are usually bullish.  Waiting for a really good entry point to short.  We are getting there.  If we get a further rally on Monday/Tuesday, I plan on putting on tech stock and index shorts.  We are getting close to the end of the seasonally bullish time period, and about to enter a seasonally bearish time of the year, from mid July to late September.  With all the bearish signals in recent weeks, it is about time to get more aggressive on the short side for the coming weeks and months.  

Chinks in the AI Armor

We are starting to see changes in the hyperscalers.  META is following in the footsteps of xAI, cutting its losses on its AI ambitions.  META announced they are going to be renting out their excess AI cloud capacity, and it resulted in a big jump in the stock.  Maybe AI compute capacity isn't as tight as people assume.  Judging by the reaction to the META announcement, the stock market is rewarding hyperscalers cutting costs, and punishing those that mindlessly dump more money into AI capex.  Eventually, the hyperscaler CEOs will get the message and start reducing their futures capex plans.  It could come as soon as the next tech earnings reports in late July.  If MSFT, AMZN, GOOGL, and META signal lower than expected AI capex, that could be an atomic bomb dropped on MU, SNDK, NVDA, DRAM, SOXX, AMD, INTC, DELL, and a slew of other AI hardware/semi names.  

The AI momentum trade has hit a speed bump.  It is coming at the same time that the SPX has been in a short term rally.  This is the first time this year that the AI infra/hardware trade is underperforming the market as it is going up.  The biggest trade of the year is showing a change of character.  This comes after MU had a huge gap up after a big earning beat, and then sold off hard afterwards.  It has been only a few days, so I wouldn't say its game over for the AI trade, but it makes me more interested in shorting the index this month on a rally towards SPX 7600.  

It is interesting that CNBC seems to be more bullish on the overall market now that the non-tech stocks are rallying while the semiconductors are pulling back.  This is the exact situation where they should be more bearish.  Ever since 2020, rallies led by tech and momentum stocks have been much more durable than rallies led by a lot of non-tech stocks and small caps.  

Investors have poured in record amounts into US equities so far in 2026.  

Retail has been aggressively buying dips in 2026.  They've also been buying quite a lot on up days as well.  Both are above the lofty 2021 levels.  Given the underperformance of the heavily retailed owned Mag7 this year, it looks like they are doubling down as their holdings go lower.  Not a pretty picture.  Bad things happen when retail investors refuse to cut their losses and instead add to their losers.  The bigger your position, the weaker your hand.  Retail investors are in a weakened position right now, and it is beginning to show in their favorite names.  
 

Got some outflows from US equities this week, but money continues to rotate into tech stocks.  When tech stocks underperform while getting big inflows, it catches my attention.  

 

Only halfway through 2026 and IPO proceeds already above the SPAC mania 2021 levels.  More big IPOs are lined up for the 2nd half of the year.  Supply is coming out big time to meet the demand for US equities.  

SK Hynix has pulled forward its US IPO plans to July 10.  It was originally planned for August, but it looks like they want to sell shares while the iron is hot.  

The evidence is undeniable.  Equity supply is increasing at the fastest rate since the dotcom bubble.  Add to that the reduction in stock buybacks by big cap tech.  It creates a supply-demand dynamic that requires big investor inflows to keep the bull market going.  If we just get a normalization of inflows to just the average over the past 10 years, the demand won't be able to keep up with all the new supply.  Equities are priced at the margin.  With passive investing dominating equity flows, the stock market is much more price inelastic than before.  A small drop in demand, a small increase in supply could result in a big drop in price.  You could see some big time volatility if we see equity outflows when these big IPOs have their lockup expirations later in the year and into 2027.  

Last week, we finally heard the crowd recognize that Mag7 has been performing poorly this year.  The crowd just about nailed the bottom in the Mag7, as it has been outperforming the AI momentum names like MU, SNDK, etc. since then.  Either the Mag7 or the AI infrastructure momentum names have to lead to keep this aging bull going.  If they are lagging the indexes, the days will be numbered for this bull market.  There is no way that non-tech stocks will be able to lead this market for long.  Investors don't buy US stocks to get long low growth health care, financials, utilities, staples, or old fashioned industrials.  That doesn't drive a long term up cycle.  They are hedge fund pod shop rotation plays that have a limited shelf life.  

Bonds are trading much firmer in recent weeks as oil prices come down and the AI capex trade cools off.  CTAs are near max bearish on Treasuries and near max long on equities.  If you get equities selling off, that will trigger CTA sales in the indices, and probably CTA buys in Treasuries.  I expect a long awaited revival of Treasuries as a negative correlation, flight to quality asset.  It won't be like the QE years, but I do expect somewhat lower bond yields on equity market selloffs.  You saw a hint of that in late June.  

The next 2 weeks are a seasonally strong time period that aligns with start of the 2nd half inflows into equities.   Its almost time to put on long term shorts that could be held for months.  Seeing more signs of a meaningful top in the AI momentum trade, NDX trading weaker than SPX, and value outperforming growth.  All signs of a coming trend change for this bull market.  Holding a lot of dry powder, waiting to deploy shorts on rallies over the next 2 weeks.  Still think that non-AI infra tech is the place to be on the short side, even though the AI momentum trade looks toppy.  It may be less reward to short names that aren't up so much on the year, but its also much less risk.  There are plenty of non-AI infra tech names that are overvalued and underperforming the Nasdaq.  Lots of potential downside out there even in non AI hardware/semiconductor tech names.  

Sticks of Support

Post opex weakness came as advertised, even as oil prices and bond yields went lower. A blowout MU earnings report resulted in a huge gap up that was aggressively sold at the cash open.  Good news, bad price action.  

We continue to see a very split market, with lots of highs among the semiconductors and lots of lows spread out among a variety of sectors.  Semiconductors continue to outperform  the Mag 7.  The semis have held up the SPX, but their strength has wobbled this week.  Another Hindenburg Omen fired off this week.  There is growing evidence that we are making a significant market top.  

As the market is showing topping signs, $119B went into US equity funds for the week ending June 17.  Easily the biggest weekly equity fund inflow since 2015. 

Retail is aggressively participating in this market, as of June 15.  

Starting this week, retail investors have been on a buyer's strike.  You are seeing less buying in the dark pools, meaning less retail buying this week.  The DIX index has plummeted.  Low DIX readings have often marked short term bottoms as retail sells. 

This week, investors finally pulled money out of US equity funds for the first time in 3 months.  Its a drop in the bucket compared to the deluge of inflows over the past 3 months.   

 

As of June 16, hedge funds have historically high beta exposure.  

As of mid June, GS Prime Broker data shows hedge funds have accumulated heavily in US equities and macro products over the past 20 days.  

It is unusual to see such heavy inflows into US equity funds while the market is chopping violently from the top to the bottom of the range (SPX 7300 to 7600).  Perhaps it is the Iran-US peace talks and opening of the Strait that is getting investors more bullish.  It could just be investors seeing the strong uptrend since the end of March and feeling like 2026 will be like 2025, where the market bottomed in the spring and went up continuously for 6 months. They are feeling FOMO.  

Realized volatility is increasing, but the VIX is well behaved.  The put/call ratios have been increasing since early June, as the uptrend has turned into a violent, choppy sideways range.  Options traders have gotten much less bullish.  ISEE index is now back down to more normal levels.  

We had a big drop in the net position of commercial traders (dealers) after June opex.  Before June triple witching expiration, there was a huge amount of calls that dealers were short (customers were long) that they hedged by going long SPX futures.  The unwind of that position resulted in commercial traders having the biggest net short position in SPX since early 2025. 

SPX Net Position of Commercial Traders

The US stock market is going up because of the AI boom.  Hyperscaler AI capex spending is driving economic growth.  But the current situation is unsustainable.  The ridiculous prices for memory, GPUs, storage, etc. are not compatible with hyperscaler profitability.  MU, SK Hynix, and Samsung's profits are coming at the expense of OpenAI, Anthropic, SPCX, MSFT, NVDA, AMZN, GOOG, META, and ORCL.  These mega tech companies will not continue to burn cash in a bottomless money pit if their stock prices keep going lower.  

The Mag7 continues to lag the Nasdaq 100.  The Mag 7 is down 7% YTD while the SPX is up 8%. It is wild to see the Mag 7 down 7% this year considering how much money has flown into US equities YTD.  I finally heard CNBC commentators mention this Mag7 underperformance this week.  It probably means we are near the end of this trend.  I expect the hyperscalers to begin to rein in their spending on AI capex, as well as AI token use.  That's likely to happen as soon as the next earnings report season in late July.  That would be bad news for the semiconductors if that happens.  

You are already seeing a shift in the share of tokens used from more expensive US models to cheaper Chinese models.  The Chinese models are rapidly catching up with the US LLMs, and I expect more companies to use slightly worse models that can get the job done for much cheaper.  

Into the post opex weakness, I covered my short tech short positions.  We are now around the start of a seasonally strong period for the market, near the end of June into middle of July.  Given the big unwind in long call positions from speculators, evidence of retail selling in DIX index, and higher put/call ratios, we could see a bounce towards the upper end of the SPX 7300 to 7600 range.  Bought some gold into the weakness this week, looking for a technical dead cat bounce next week.  Big picture, seeing classic signs of topping.  But I expect the speculators will give one more push higher before we get the big move lower in late July/early August.