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. 

Don Tzu

We are entering the retail capitulation phase of the stock selloff.   Retail investors have been buyers of this dip, believing in TACO, believing that there is a Trump put.  That belief is eroding day by day.   Trump’s attempts at pumping the stock and bond market, and dumping the oil market are losing their effect.  The half life of the Trump pumps are getting shorter.  The lies are becoming obvious.  He is losing credibility.   The pumps used to last 48 hours,  Then it went down to 24 hours.  Then 12 hours.  Then 4 hours.   Now, everyone has caught up to the game.  That these pumps are selling opportunities.  Now the pumps don’t even last 5 minutes.  

 

With each day that passes with the Strait of Hormuz closed, it just adds more fuel to the parabolic oil rally.  And its not just oil.  Its LNG, fertilizer, helium, sulfur, etc.  We are getting closer to the point where oil prices need to get to demand destruction / hoarding levels, which would be $200+ for oil.  It probably takes another month of the Strait being closed for this to happen.  But like bankruptcy, it happens gradually and then suddenly.  The market is sensing this danger.  And losing patience as a result.  

There is a small piece of good news in the gloom and doom.  The stock, bond, and precious metals markets are diverging.  During the post FOMC liquidation from March 18 to March 23, stocks, bonds, and metals all sold off in unison, the correlation going to 1.  After Trump’s pump last Monday, markets started to diverge.  Stocks and bonds continued to trade weak, but gold traded stronger, post FOMC liqudiation.  And on Friday, while oil was going higher, and stocks were getting pummelled, the short end was rallying, steepening the yield curve.  And gold went up signficantly as stocks sold off.  Cross asset correlations are going down, as the market is now rightfully pricing in economic weakness due to stock market weakness.  The bid is returning for short duration bonds and gold.  

This is the first sign that hedge funds have degrossed significantly, enough that they are no longer panic selling their non equity positions when the SPX is going down.  According to latest GS Prime Book data, equities were heavily net sold and net leverage has gone down significantly.  

 

We are finally seeing some dark pool selling (sign of retail selling), with DIX getting down to 41.5% on Friday.  

 

The fast money has left the emerging markets this month.  Huge foreign investor outflows from Asian equities.  

Bigger picture, its still grim.  The charts for retail investor favorites, like the Mag 7 look horrible.  The Mag 7 has underperformed SPX by 10% over the past 6 months.  There is a ton of overhead supply now filled with retail bagholders in big cap tech as well as speculative small cap tech.  

 

 

 Investor cash levels are historically low.  Lots of room to sell.  

From a fundamental economic perspective, investors are overreacting to the effect of higher oil/LNG prices.  To the extent that higher oil prices make central banks more hawkish, it is a negative.  But I can't imagine the Fed hiking rates into spiking oil prices with the labor market this weak.  So there is a floor to how much they can selloff bonds here.  The lower end consumers getting squeezed by higher gas prices don't really matter for the stock market.  Its the high end consumer which matters.  It is the one that's been driving the spending over the past 3 years.  High end consumers don't really care about gas prices.  They care about stock prices. With the OBBA stimulus, extra defense spending, and tariff refunds flowing through the economy in 2026, it will take a lot to weaken the US economy.  I would only expect a noticeable economic slowdown if stocks enter a bear market.  The US is a financialized economy, and oil prices don't matter that much if the Fed doesn't react to it.  They can jawbone to try to sound tough on inflation, but I doubt they'll actually raise rates to fight inflation.  They just don't have the balls to do it with a soft jobs market. 

 

I am noticing a very different tone in investors' views on the market.  There were quite a few hopeful bulls before last week, expecting a quick TACO and an end to the war.  But that hope has been dissipating as all the Trump pumps have gotten sold, with no tangible changes.  For longs, its good to finally see the base case going from quick TACO to boots on the ground and a longer than expected war.  So less downside if the worst case scenario happens, and more upside if there is a TACO.  No one knows what's going to happen.  But if the market gives you good odds for a positive outcome, its worth making a bet.   

 

With so much put protection in the market, and an overpriced VIX, its difficult to get a IV spike led selloff (vanna selloff) because people are well hedged.  Stocks are overvalued and overowned, so the dark cloud of uncertainty over the war is enough to keep the selloff going.  But at SPX under 6400, you are getting close to levels where a strong technical bounce can happen out of the blue.  And it has been a month since the start of the war, so the selloff is very mature.  Unless you are in the middle of a bear market (not the start of one), selloffs that extend beyond 1 month without a strong bounce are rare.  

 

Hedge fund positioning has been pared down and bonds are no longer selling off with stocks.  It feels like you are getting close to a tradable bottom.  Added to longs last week, but have dry powder to buy lower.  The risk/reward favors longs here.  But we may need to go a bit lower before you get the reversal.  With the Easter holiday coming up, its possible the last remaining weak hands sell stocks this week, ahead of the long weekend, making a bottom.  Looking to buy slowly on the way down.  

Degrossing

Trump has repeatedly tried to pump the markets, to push down oil prices with "war is almost over" tweets in a number of different variations, and people keep falling for it.  They did that again in afterhours on Friday, hoping that Trump was looking to finish up the war.  It took less than 24 hours for Trump to contradict himself.  After the past few weeks, if you still believe what politicians say, in particular Trump and MAGA, you are hopeless. 

People hate admitting that they are wrong.  Traders don't like taking losses.  So euphemisms are popular.  Instead of saying I took a loss, they say "stopped out".  Instead of saying I am selling, likely for a loss or a much reduced profit, they say I am deleveraging, or degrossing.  What you saw last week was a lot of degrossing.  A more apt term would be liquidation.  We are in the liquidation phase of the selloff.  The final phase.  This is the scariest part of the selloff, as investors who have tried to hang on, to wait out the storm, reach their pain threshold, and eject.  Since many of these funds have strict loss limits and try to control drawdowns, it means forced selling based on risk management, not fundamentals.  

The FOMC meeting last Wednesday was an aha moment for the markets.  The last bit of hope that the Fed would remain dovish and look through higher oil prices was gone.  Precious metals, bonds, and stocks all fell together in a vicious move from Wednesday to Friday.  Just by looking at the synchronous and rapid drop, it felt like a bunch of pod shops and hedgies had hit their loss limits and liquidated all at the same time.  The move in rates has been notable, and this will have lasting reverberations for stocks if it isn't reversed.  The SOFR curve was pricing in 3 rate cuts over the next 12 months before the war.  Now its pricing in a slight chance of a rate hike at the next 2 meetings, and no rate cuts for 2026.

Before this mass degrossing, stocks were probably the best buy the dip candidate among the major assets.  Now, with precious metals and bonds going down significantly last week, it presents other assets to buy on the dip here.  With a labor market that's too weak to get the Fed to hike rates, these levels are looking attractive for at least a short term bounce in bonds and metals.  

All of this is happening as leveraged loan spreads are widening to near Liberation Day levels, with the SPX only 6% below all time highs.  

The cat is out of the bag for private credit and private equity.  The pensions, endowments, and high net worth individuals already have a big allocation, and are looking to reduce it.  At the same time, they are trying to sucker in mom and pops to buy into private equity and credit, trying to give easy access to private equity and credit via 401k's.  One of the reasons that you had so few IPOs over the years was because of all the money going into private equity.  Companies didn't need to go public to access capital.  It looks like that's going to change.  Now they will need to go public to continue accessing capital, which should increase the number of IPOs, which already had a full calendar with giants like Space X, Open AI, and Anthropic scheduled to go public in 2026.  With more IPOs, it will exacerbate the supply/demand mismatch when investors begin to sour on stocks.   

Just as there appears to be a deluge of IPOs waiting in the wings, looking to suck up risk capital, the Nasdaq and Russell index bosses are suddenly loosening requirements for index inclusion, making it easy for recent IPOs to go straight into the index.  Just a coincidence, right?

Because of the war, and "weekend risk", you've seen a pattern since the start of March.  Selling on Thursdays and Fridays, ahead of the weekend, to avoid weekend risk (trying to avoid a Monday gap down).  With fast money traders having de-risked ahead of the weekend, they go back in and try to catch the bottom by buying on Monday and Tuesdays.  Wednesdays are the turning point, and then you get the selloff in earnest on Thursday and Friday.  That's happened 3 weeks in a row.  We all have reptilian brains, we expect that pattern to repeat.  The continuation of the war is a good excuse to keep believing in that pattern.  Trump tried to break that pattern with a last minute tweet just before the Friday close, that the war is almost over, and traders jumped on the bait, squeezing stocks into the final minutes of Friday, and into after hours.  It was faded in weekend markets, just 24 hours later.

It is fascinating that traders keep believing, hoping that these Trump tweets are actually true.  He's had several of these tweets, trying to push oil prices down, and stock prices up, with variations of the war is almost over, mission almost accomplished, etc.  With his diminishing credibility, the half life of these artificial rallies are shorter and shorter.  But it keeps the hope alive.  That the war will be over soon.  That Trump can stop the war at anytime, at his choosing, that he's the one calling the shots.  But maybe its Israel that's calling the shots, and they seem to want a much more protracted war than the US.  Didn't Rubio say that Israel was going to attack Iran, and that's the reason the US joined in?  If it was just Trump who controlled whether to keep the war going or to stop, the TACO thesis is valid.  But if its Israel that's really the one in control, then the TACO thesis should be thrown in the trash bin. 

Trump's words have been counter to his action.  The bombings continue.  The US are now sending Marines and battleships to the Middle East.  There are barely any ships passing through the Strait of Hormuz.  I would fade any optimistic Trump tweets, as they seem to just be war propaganda and attempts at pumping up the markets.  One of these days, he'll actually be tweeting the truth, but betting on that has just meant buying local highs and bleeding down to lower lows.  

Nothing significant in the COT data for indices, small speculators were buyers of the dip, and increased their net long from March 10 to March 17.  Not seeing any panic in the options market, as the put/call ratios remain elevated, but not spiky.  It looks like investors are tired of buying puts into weakness, only to see the market bounce and their premiums melt away.  Puts have not been paying off, even with the downtrend.  Options remain overpriced, and holding options for more than a few hours is fighting an uphill battle.  

Looking at dark pool data, we still haven't seen the low DIX readings that would show that retail investors are throwing in the towel.  They keep buying the dip, and don't even seem to be afraid of the weekend or the war.  They are all in on TACO.   The market continues down the slope of hope. 

Its been a choppy market will lots of short term rallies since the war started.  Yet here we are, with the SPX futures trading under SPX 6500 cash levels, in overnight hours.  I have a small long, but mostly in cash looking for a better level to add.  I've definitely been too nonchalant about the selloff, but thanks to the tax refunds and the buy the dip crowd has kept losses small.  But those tax refunds and inflows aren't going to last forever.  The bulk of the tax refunds have already been issued, and likely deployed.  Correlations are rising among asset classes and within the stock market itself, so things are feeling panicky.  We are very close to a bottom, so I will stay long, but want to see a bit lower to add.  Post opex often have flush out moves, especially when Fridays are weak.  If we get more weakness on Monday/Tuesday, will look to add to longs.  

Commander in Chief Donnochio

We are in a fog of war where the realities of the war are being hidden.  There have been a lot of lies coming from the White House.  All the good news tweets coming from Trump have just been short term rallies to sell into.  Last Monday, as oil was going parabolic, Trump put out a tweet that the war would end soon causing a huge rally at the close.  That just set up disappointment all week as the market dripped lower from Tuesday to the Friday close.  It was controlled selling without any panic.  Going down the slope of hope.

The market is quite conditioned to believe that Trump can switch things on and off at a whim, like he could with tariffs.  So you had many hoping that last Monday's tweet was a sign that he would back off and end the war.  But the war rolls on, without any change. Those optimistic Trump tweets meant to pump up the market are starting to lose credibility.  Many are underestimating Iran, who have to eat the TACO for it be valid.  At this point, the Iran leadership probably feels like they need to inflict more pain to get a good deal, and for future deterrance.  Unless they are game theory idiots, the last thing they want to do is look weak and surrender quickly, like they did in April 2024 and June 2025.  Their previous weakness is what invited this US/Israel attack.  

I am hearing some comparisons to the current situation with Covid in early 2020.  This feels nothing like early 2020.  Those were scary times.  In hindsight, people say that the market overreacted.  But Covid was killing off lots of the elderly.  There was a lot of uncertainty.  The service economy was cratering.  This feels like a walk in the park in comparison.  I'll take a temporary oil and LNG supply shock over the spread of a new, potentially deadly virus any day of the week.  

Bonds had another bad week as the war continues.  The misheld belief that bonds are a flight to safety vehicle is being de-bunked.  Some investors clamor for bonds because the war seems "scary".  And anything that seems "scary" should be good for bonds.  It led to disaster if you bought bonds because of the Russia Ukraine war in February 2022.  And those that bought bonds right after the start of this Iran war have suffered losses.  The two main factors that affect bonds are central bank actions and inflation.  And war is inflationary, which is bad for bonds.  

As oil prices keep going higher, the market is starting to price in a stagflationary scenario where stock-bond correlations remain high, like 2022 and 2023.  The OBBA is doing a lot of heavy lifting so far in 2026.  With the flood of tax refunds hitting bank accounts in February and so far in March, retail investors have been aggressively buying the dip, keeping the selloff contained to just a few percent.  It is these tax refunds which made me bullish the past few weeks, that is before you had this bond market weakness and oil market madness. 

It feels like the market naturally wants to go lower, but Trump is trying to artificially keep the market higher with positive tweets while the media continues to release headlines trying to push oil lower.  In those cases, I prefer to be on the side with the natural movement, rather than the headline dependent artificial movements.  

You continue to get bad news in private credit.  People are trying to cash out of some of their private credit funds and the funds are saying no.  That's never a good sign.

There has been a lot of malinvestment over the past 15 years as private equity and private credit received lots of inflows as investors reached for yield in the ZIRP era.  As the pool of legitimate investments shrank, so did the quality of the funds' portfolios.  When you are receiving 2% annual fees, you can't just hold cash.  You have to buy something with the money that's pouring in.  Anecdotally, I heard about private equity trying to buy out mom and pop businesses like roofing/landscaping, car washes, veterinary clinics, etc.  They were scraping the bottom of the barrel to put their cash hoard to work.  At current interest rates with this K-shaped economy, a lot of those LBOs and private loans are going sour.  Its nothing like the massive real estate bubble in the early to mid 2000s, but it will slow lending for private companies, and that shrinks the liquidity flowing through the economy.  Private credit is a much smaller market than real estate, so any private credit crunch will be minor compared to 2008, but it will contribute to the economy slowing.   

Retail investors seemingly put their tax refunds quickly to work as they were aggressively buying stocks into the weakness in February.  The STAX index is now higher than any monthly level in 2024 or 2025.  

But that February buying surge looks to have stalled in March.  Equity ETF flows for the week ending March 6 showed outflows.  Investors have been aggressively buying equity ETFs since last October, and it seems the war has finally changed investor behavior.  We got our first weekly equity ETF outflow since April 2025.  

While investors have been aggressively buying stocks and ETFs up until the start of the war, they have been hedging a lot with overpriced puts.  SKEW has remained high since the start of the war, which is unusual when the market is selling off.  You finally did see SKEW go lower on Thursday.  A small positive sign.  

As for retail traders, they haven't thrown in the towel.  The dark pool DIX reading remains stubbornly high relative to other pullbacks. 

There were some big changes in the SPX COT positions as of March 10.  Asset managers and small speculators both made big reductions in net longs.  

 

The speculators are slowly de-risking as the war drags on.  No signs of panic.  There hasn't been a big spike higher in the put/call ratio.  I would say we are in the 7th inning of this selloff, but the last 2 innings are usually the most painful for longs.  Need to see lower DIX, lower SKEW, higher put/call.  NDX is starting to outperform SPX, even in a down market, which is a small positive in the gloomy environment.  

The up moves feel artificial and headline driven, and the down moves feel natural.  Those looking to buy would want to see a string of negative headlines to get investors less hopeful about an end to the war, along with a flush down towards SPX 6500-6540.  Until that happens, it is a treacherous environment for dip buying.  Its also getting risky to hold short positions, as the spring is starting to get coiled up for a rebound.  

The big triple witching opex is coming this Friday.  With so much put volume and hedging tied to that expiry, it could panic some investors that they will soon lose their put protection.  Puts have been very expensive, so they aren't paying off with the slow drip lower.  So fund managers will have to make a decision:  roll over expiring puts to buy more longer expiry overpriced puts, or reduce some positions.  I think quite a few will opt to just reduce positions rather than buy more overpriced puts that haven't been performing even in a down tape.  That could contribute to the last leg lower of this selloff.  

Opex weeks are not necessarily bullish.  They often coincide with short term tops or bottoms, usually from Wednesday to Friday of opex week.  Gut feel is that we make a bottom after FOMC meeting is behind us on Thursday or Friday.  With the overpricing of IV in the current environment, it may be better to short VIX rather than go long SPX.  Sold underwater longs last week.  Waiting for a better spot to go long and/or short VIX.  

Hormuz Selloff

The worst possible scenario for an Iran War was the closing of the Strait of Hormuz.  Its happening.  All eyes are on Hormuz.  With oil continuing to skyrocket, we have cracked the SPX 6700 level overnight.  It looks like the next strong support level is around the November lows of 6520.  We are now entering some pain territory.  Last week, the dip buyers kept coming back, even on Friday, there were some face ripper rallies intraday off the bottom.  VIX kept rising, but it didn't match the controlled price action in the SPX.  Now things are starting to move, with oil blasting through 100 with ease.

With the war, customers are accumulating puts, especially tail hedges.  Customer SPX put delta positioning reached the most negative in history, even more than the tariff panic in April.  This large put position should help buffer the downside, even with the parabolic moves in oil.  

This large put position also explains why you've seen the regular trading hours trade much more strongly than the overnight hours.  With options traded mostly during the cash session, it seems that customers monetizing their hedges last week have been responsible for some vicious intraday face rippers during US hours.  We could see more of that this week.  

 

So far in 2026, you've seen a big inflow into international stock ETFs, as well as emerging market ETFs.   Notable is the EWY, the South Korea ETF with a huge inflow relative to total AUM.  The outflows have come mainly from the fast money US passive equity ETFs:  SPY, QQQ, IWM.  It is probably hedge funds responsible for these outflows, as they reduce their US equity exposure, especially big cap tech.

 

On the other hand, retail trading data from Citadel seems to show retail investors are going hog wild buying stocks in 2026.  Especially on down days.  I am surprised to see them this aggressive when the market has been flat to down, and with most of their favorite names down big.  Long term, this is ominous.  

The dark pool data also shows retail buying the dip, as the DIX hasn't dropped meaningfully over the past several days of weakness.  Usually DIX dropping to lower levels is one of the necessary ingredients to form a bottom.  

 

Nothing really notable in the COT data, although you did see small speculators reduce their net long position in SPX futures.  Its now down towards the middle of the range for the past 2 years.  

The bond market weakness after a horrible nonfarm payrolls number last Friday is bad news.  The last thing the stock market needed beyond skyrocket oil prices is a bond market that can't find any sort of safehaven bid.  Worldwide, bonds are selling off, which is eerily similar to the March 2025 selloff.  The last thing this market needs is bond investors to also be losing money as equities go down.   

We got some news overnight from the G7 nations wanting to release oil from their SPR.  Unfortunately for the US, it already released so much oil from the SPR in 2022, that the US won't be able to release much this time around.  Plus, the fundamental problem of lack of oil passing through the Strait is what has the market worried.  Releasing SPR oil is a short term band aid on a gushing wound.  While Iran keeps getting pummelled, they still have a massive number of drones that can be released towards ships trying to pass the Strait.  US Navy escorts are not going to be a solution.  Only a ceasefire or an end to the war will restart the flow of ships.  While Iran is getting pummelled, they still have plenty of drones that they can use to keep ship traffic from passing through.  

Made a bad call last week about wanting to short oil, but thought twice about it when I saw the strength throughout the week, with headline risk, as well the price levels that were not high enough to provide a good risk/reward.  Luckily didn't go with my first instinct.  The oil market is beginning to get unhinged, so a bit too risky to trade at the moment.   

As for stocks, you need to see more investors de-risk to get a high probability buy setup.  We haven't seen meaningful capitulation, just a gloomy atmosphere where retail keeps trying to buy the dip.  Things to look for that we've seen sufficient de-risking include:  higher put/call ratios (higher than last week), lower DIX, SPX not going down despite oil going up.  

Looking to get out of my longs after the cash open, hoping for a rally in the first hour from retail buying and SPX put monetization to get out as gracefully as possible from bad longs.  Will look to re-enter longs if SPX gets to the 6500-6540 level.  Intermediate term (looking out 4+ weeeks), SPX is likely to have a strong bounce back towards the 6900-7000 area.  Short term, it looks weak without a TACO.  

Iran and AI Extrapolations Gone Wild

Take on the Iran attack:  It was well telegraphed and was a matter of when, not if.  The prediction markets were expecting it to happen by mid to late March.  It happened sooner, which is better than later.  Now that the strikes have happened, everyone acts like they were surprised.  You have your usual fear mongerers talk about more Middle East geopolitical risk, possible closing of Straits of Hormuz, possible bombings of oil infrastructure, etc.  I would fade any coming equity weakness from these Iran based fears.  The market hates uncertainty more than bad news.  Why?  Because its irrational, as it reflects human emotions.  The Iran cloud hanging over this market has been a contributor to the elevated VIX levels with SPX near all time highs.  Now that bad news cloud is going to pass.  Less uncertainty = lower VIX and usually a higher SPX.  

War is like boxing.  A boxing match involving fighters with equal skill levels are competitive and can last long.  War involving those with similar strength and resources are more uncertain and last longer.  US and NATO weapon support of Ukraine military is the reason that the Russia-Ukraine war continues.  Otherwise, the war would have already been over with Russia taking over Ukraine.  

War between a clear favorite and a clear underdog do not last long.  They end quickly as in boxing, with the favorite knocking out the underdog.  That is the case with US/Israel vs Iran.  The most pertinent example is the Gulf War.  Anyway, even in the slight chance there was a protracted war, the market likely shrugs it off.  War doesn't hurt corporate earnings.  On the whole, it is a small positive due to higher military spending, which increases the earnings for defense companies.  

It looks like a good time to short oil, which has been running up on these Iran strike threats, and gapping up on the news.  These Iran strikes are a like horror movies with multiple parts.  Part 1 was April 2024.  Part 2 was June 2025.  Part 3 is now.  The supply-demand fundamentals are weak, as OPEC keeps pumping, without regard for price.  And you have speculator positioning which has gotten much longer in Brent and WTI futures since the start of the year.   

Now to more relevant news for the financial markets.  AI.  

The AI theme has had a few twists and turns.  The market has been focused mostly on the AI winners, and not too concerned about there being losers.  In middle of that honeymoon period, some haphazard conclusions from the growth of chatGPT made GOOG an AI loser, even though they were developing their own LLM models, and developed TPUs to bypass NVDA for a lot of their compute needs.  Of course, later, everyone changed their mind after Gemini became more popular, and GOOG has been an outperformer ever since.  Perhaps the masses are drawing the same haphazard conclusion for SaaS companies as they did for GOOG for much of 2024 and 2025.  Too early to say.  Stocks like CRM, WDAY, and NOW have been beaten up and valuations look reasonable now, although they don't have monopoly powers of a GOOG, so they are riskier plays.  

AI was viewed as a positive for all involved from the advent of chatGPT until October 2025.  Then something changed in late October 2025. As AI related positioning got saturated, the views changed along with the price action.  The view on AI became more nuanced, with the market being more discriminating on what stocks to pump.  The pump is continuing for semiconductors and AI energy related plays.  But the dump is coming for the hyperscalers, AI data center plays, and software.  The AI data centers because they had a horrible business model with low barriers to entry.  The hyperscalers because they were pouring hundreds of billions into AI capex with big hopes and dreams without much tangible return.  It is why META got crushed after their earnings report last October.  Its why ORCL got destroyed after their earnings report last December.  Its why MSFT got pummelled after their earnings report in January.  

As usual, the price action dictates new explanations and rationalizations for the move. You didn't hear much about software stocks until 2026.  Even when they were underperforming in 2025, it was mostly under the radar, because the SPX was going up and up, and a rising SPX covers up bad things underneath the surface.  Then the AI disruption fears came like a heat seeking missle for SaaS stocks, and it seems to have peaked for software last week with the Citrini Substack article.  I don't pay for Substacks, so I didn't read the article, but from all the buzz, it seems like one of his adverse scenarios in the coming AI revolution were massive white collar job cuts and software companies losing business due to Claude and other vibe coding LLM wrappers.  I'm sure the article didn't go viral because it was well written or insightful.  It just hit the spot for the market's zeitgeist, which was AI disrupting the SaaS business model.  

We've reached peak SaaSpocalyse.  The IGV to SMH ratio bottomed right after the Citrini article and has bounced back post NVDA earnings.  

AI has been hyped as the future of hyper productivity, where corporations would be able to reduce labor costs and expand profit margins.  It was the reason that the hyper scalers were using all their free cash flow to spend on AI infrastructure.  But if these hyper scalers get punished for spending so much on AI capex, its not a big leap to predict that they will eventually cut their AI capex to save their stocks.  Big cap tech receive a lot of benefits from having such high valuations.  Mainly the ability to give out stock based compensation instead of cash to employees, without heavy dilution due to the high valuations.  Within the next few months, I expect the next AI scare to come from reduced AI capex, which would put the target on the backs of the semiconductors and hardware space, the ones that have been mostly unscathed during this tech attack.  The XLK ETF short interest has skyrocketed this year, as fund managers are aggressively hedging with tech shorts.  

The last sudden increase in XLK short interest happened during the bond market scare part 2 in the fall of 2023.  It marked a bottom for the SPX.  

In addition to the AI fears in software and big cap tech, you have seen financials underperform the market.  The worries in the banking world now is private credit.  There have been some writedowns in private credit funds, and BDCs have been getting crushed for several weeks.  My default stance when it comes to news headlines is to view it as being overblown/irrelevant for the market.  But I believe the smoke is real.  Nothing like the GFC. But bigger than one off events like Silicon Valley Bank.  Its another potential bear catalyst for the future.

Private equity/credit have gone bananas since ZIRP in 2009.  Private equity has been one of the favored asset classes for IBs to sell to pensions, rich private clients, and to endowments looking for higher returns.  They loved it because they thought it was some private club only they were given access to.  Similar to what they thought of hedge funds in the post dotcom era.  The fact that it was not marked to market made it even better, as it was viewed as being less volatile than stocks.  With all the money pouring in, the private equity guys overbought and overlent.  For the past few years, they've been scraping the bottom of the barrel looking for good acquisitions.  There are few and far between.  So they've been buying and lending to more marginal companies.  Which makes their portfolios littered with more junky companies, more bad credits.  And they are having a harder time re-selling their leveraged up companies, which no one wants anymore.  They are getting more desperate.  When you see Robin Hood launching a private equity fund, run for the hills.  

Its one thing to do LBOs when you have Fed Funds at 13 bps, and a 10 year below 2%.  Its a whole another thing to do LBOs with Fed Funds at 3.63%, and a 10 year above 4%.  It seems obvious, but the higher the interest rate, the less likely these companies can fully repay.  Higher interest rates require higher nominal growth for credit markets to remain stable.  

The government is running huge budget deficits which does keep overall nominal growth higher than it would be otherwise, but its not quality growth.  Its the government borrowing money to pay more to Social Security and Medicare, to pay for unfunded tax cuts and wars, to pay more interest on the national debt because they run an inflationary fiscal policy.  That increases GDP, but decreases productivity.  The fiscal largesse isn't spread evenly.  It creates winners and losers. Those past winners who become losers will have a hard time paying back their debts in the private markets.   

The COT data showed some surprising positioning changes in SPX.  Asset managers continue to add to their big net long positions.  As of Feb 24, asset managers are holding the largest net long position over the past 52 weeks.  

Overall, the inflows keep coming for equity funds. YTD, equity inflows are running at a pace of an annualized $1.1 trillion, which would crush the high inflow numbers of 2024 and 2025, and set a new all time high, greater than the 2021 inflows.  The flows have gone from US market cap weighted indices to US equal weight and international, but the overall inflows numbers are growing.  That's why this market isn't dropping despite the bearish price action in big cap tech.  

Long term, these large net long positions among both fund managers and retail are a huge source of potential selling.  But with liquidity pouring in from the fiscal side, its hard to fight right now.  

Bought some more longs last week, with room to add more.  If we get any Iran related weakness on Monday, I will be looking to buy that dip.  A CNBC guest from the CBOE was talking options positioning and she mentioned that investors were now buying fewer calls, and doing more covered call selling.  Selling covered calls is taking a short term bearish position against your longs, as you are selling partial deltas, lasting about 2 to 4 weeks, against a 1 delta position.  With the big increase in XLK short interest, the hedging has already happened.  It feels really late in the SPX selloff, with war concerns now added on top of the AI fears.  The mere return to normal levels of fear and concern could result in a face ripper.

Fiscal Pump

The refunds are coming.  The bulk of the OBBA stimulus will be hitting the economy over the next few months.  We are just at the beginning of tax refund season, which lasts into early April, with refunds set to be about $100B more than 2025.  According to Wells Fargo, the higher tax refunds and lower tax withhold for 2026 will add $220 billion of fiscal stimulus.  I expect a lot of this fiscal largesse to hit the stock market in coming weeks.

On Friday, the Supreme Court finally made a decision on tariffs, and overturned the Trump tariffs.  Of course, Trump came out with a backup plan and instituted a new set of tariffs under Section 122, which is limited to a cap of 15%, and 150 days.  There are other sector specific exceptions available to put on tariffs, but they will require investigations.  All of these tariffs will likely be challenged by importers, who probably win their cases like last time.  And unlike this tariff case, I don't think the Supreme Court will intervene next time, as they've already made their ruling on tariffs overall.  So Trump tariff threats have lost a lot of bite, and with it, the uncertainty that came with it.  

 

It is unusual to see big cap tech stocks underperform other sectors for so long.  You've seen occasional rotations out of tech into less popular sectors, but they've been brief.  And usually during market downturns.  Not when the market has been this close to all time highs. The last time you saw this kind of extended underperformance near all time highs was in 2000, right after the Nasdaq topped out.  Since 2008, Nasdaq has consistently outperformed the S&P 500, with the sole exception being during the late 2021 to late 2022 period, which was a bear market.  

The MAGS ETF / SPY ratio has been in a downtrend since October.  If you just looked at this ratio chart, you would have expected the market to be down much more than it actually is.  It shows you the effect of heavy inflows into ETFs, which have kept the SPX quite resilient.  These bearish rotations from large cap/growth to small cap/value/defensive sectors have limited effect on the SPX when money keeps pouring in to the market. 

 That's why I don't believe these narrative driven shifts from one sector to the other are meaningful to the overall market.  You need equity inflows to slow down and go in reverse to make it worth shorting.  Just pounding the retail favorite names is not enough to bring down the SPX. 

Looking at the options market, you can see that they are buying lots of puts these days.  Its surprising because the SPX and NDX are just not down that much.  Similar put/call ratio to what you saw last November, when there was a much bigger pullback.  

The heavy put activity in February makes it much less likely that you get any real weakness for the next 4 weeks.  Most hedging occurs with options with less than a month till expiration, so that provides a protective put shield that keeps investors from panicking.  Investors have loaded up on protection against a short term pullback.  I don't see many who expect a big, extended drawdown from here.  When investors are put protected, it makes them less likely to sell or panic, especially when the indices only have small pullbacks.  Its the punch that you don't see that hurts you, not the one you expect.  

For the week ending February 13, when the SPX went down less than 100 points, institutions were selling in size.  Retail continues to be the biggest buyers of stocks and ETFs.  

According to BofA, you had near historic levels of single stock selling, at -$8.3 billion, with total outflows over the past 15 weeks at -$52 billion.  In contrast, they keep buying up equity ETFs, with a total net inflow of $35.6 billion over the past 17 weeks.  Whenever they mention single stock selling, you can assume that it is mostly tech stocks, as they make up the vast majority of single stock volume.  They are selling tech to buy ETFs, both domestic, and more recently, international.  

This is why European and Asian indices are outperforming the SPX, year to date.  This is why the Korean Kospi is soaring.  Investors being bearish on US big cap tech doesn't mean they are bearish on stocks.  They are loving international stocks.  The biggest trend following ETF, DBMF, is massively overweight international stocks, and underweight US stocks.  

A consensus is forming around the market that international stocks will outperform US stocks.  And within the US, small,mid cap, and non-tech stocks will outperform large cap, and tech stocks.  I generally agree with this consensus, because investors globally are so overweight US stocks, and underweight non-US.  But I do think SPX will also perform strongly over the next several weeks as the US is still leading in terms of fiscal stimulus, with the OBBA tax refunds/lower tax withholdings kicking in, and now tariff refunds coming down the pike.  Combined that's about $400B of fiscal pump for 2026, with much of that coming in the next couple of months.  Those are the flows that you are fighting right now if you are shorting the index.  While only a portion of that stimulus will go directly into stocks, a large portion will flow into the broader economy which will indirectly help the stock market.  

The COT data for SPX showed asset managers adding significant amounts to their net long position, to bring it to 52 week highs.  This and the options data are showing opposite positions, so fund managers remain bullish for the intermediate to long term, but are nervous about the next few weeks.  I hold the opposite view, as I am short term bullish, intermediate to long term bearish.  

The bond market has been trading stronger than many expected, with more rate cuts being priced into the SOFR curve, and long end yields going down meaningfully.  It looks like we've reached a level in 30 year yields where demand is enough to take down supply.  The 5% level is a psychological barrier.  Given the shenanigans at the Treasury to try to fund as much in T-bills and reduce the amount of duration issued, I think yields will trend lower in 2026.  The BLS are doing a great job manipulating CPI lower, underreporting inflation, and low oil prices and less immigration are helping to keep a big chunk of inflation under control.  Also, I expect AI capex to slow down from the current pace in the 2nd half of 2026, putting some pressure on AI stocks, and thus the economy.  

Outside of international stocks, gold continues to trade as the strongest financial asset on the board.  After a massive blowoff top, I expected more weakness and deeper pullbacks.  Those pullbacks have been brief, and shallow.  The COT spec positioning in gold has been significantly reduced, and open interest is much lower now.  And China will be coming back from their Chinese New Year holiday.  I expect lots of buying from the Chinese, who seem to have gone from real estate speculation to gold speculation.  The continued strength in gold has surprised me, as I thought the blowoff top would have caused more weakness afterwards.  The dips have been brief, and dips buyers have eagerly bought up any weakness since that parabolic top on January 29.  Not a market that I want to go to battle against right now.   

Entered into a small SPX long position last week, with plans on holding it into March.  The SPX has been range bound between 6800 to 7000 for the past several weeks, and investors seem to be overly comfortable with the range.  Given the liquidity situation, the SPX could be surprisingly strong in the coming weeks.  You have NVDA earnings next week, which brought in a bunch of volatility last time.  If we get a similar dip post earnings, I will be looking to add to SPX longs.