Violent Ping Pong

If you ever watch ping pong pros play a long point, you see how much effort it takes to hit a small ball back and forth.  The ball just goes from one side to the other, but there is a lot of energy expended.  This stock market is violently going up and down.  But it ends up in the same place.  Its a ping pong match.  Sectors are making big moves, but the index is relatively calm.  Correlation is low. Intraday volatilty has gone up, even day to day volatility has gone up, but week to week volatilty remains low.  

It reveals supply and demand equlibrium at the index level, but disequilibrium at the individual stock and sector level.  Tech stocks, in particular software has been weak.  Consumer staples, industrials, energy, and materials has been strong.  Combining -8 with +8 is zero.  Sectors are ignoring the index, moving to their own beat.  The index is also ignoring the sectors.  

Passive inflows are keeping the beach ball afloat. There is still risk seeking capital entering the system via retail investors, but it is being offset by reduced stock buybacks due to AI capex.  Before the AI capex boom, stock buybacks were the axe.  Now its passive investing flows via retail investors who have been conditioned to believe that equities are the best long term investment, no matter what.  FYI, equity inflows are the greatest from January to April, and then tail off into the fall, where they are the lowest.  

Hyperscaler capex has gone from $200B in 2024 to an estimated $600B in 2026.  Corporate buyback trends have made a big down move since 2024.  They are reflection of big cap tech doing less buybacks in order to fund capex on the AI buildout.  

Some counterintuitive moves are happening among retail favorite stocks.  While retail continues to pile into individual stocks (see below), its not having the expected effect of higher prices.  Instead, Reddit Wall Street bets type investors are experiencing tough times.  Even with the SPX just 1% below all time highs.  

Bitcoin/ether are trading like they have the plague.  TSLA and PLTR continue to lag badly.  Same goes for nuclear, quantum, drone, and AI data center plays.  Even the beloved space theme has been weak lately.  Its a world of pain for retail, even at SPX near all time highs.  This is an ominous sign.  Their disregard for valuations is hitting back, as the market now is less friendly to bets on obviously speculative and overvalued tech stocks.  

Once again, this reminds me of spring and summer of 2000.  After a huge influx of retail money into stocks the previous several years, the index entered a stall period, unable to go higher.  Semiconductors were the hottest sector.  With the SPX near all time highs, lots of retail favorite stocks were lagging, except a few select internet related favorites like CSCO and MU.  Consumer staples and energy were outperforming tech.  And in 2000, you had lots of dispersion, with many Hindenburg Omens signals firing off.  Lots of new highs and lows as the index was near the highs.  Like we’ve seen the past several days. 

On that list of signal dates, there are quite a few that are around significant intermediate to long term tops.  July 2007, January 2018, September 2018, January 2020, December 2021. 

There are many bearish long term signals in the market, which I have noted earlier this year.  Last week you had a mini flush out of risky assets, in particular precious metals, bitcoin, and SaaS stocks.  There a couple of bullish short term signals coming from hedge fund shorting activity and the options market.  

GS Prime book saw the biggest increase in short trading flow among US single stocks over the past 5 years.  

You also have seen elevated put activity, similar to November 2025 levels, which saw lots of short term volatility but eventually led to a V bottom.  ISEE index is back down towards the levels seen 3 months ago.  

Investors are getting well hedged for further downside, which will mitigate any reflexive effects from investor selling.  The ISEE index 20 day moving average is still not close to the November lows, so it may take a few more days of a choppy down move before you get a tradeable bottom.  

Big picture, the bearish long term signs continue to be confirmed by market price action, with activity very similar to early 2000.  For the short term, you have bullish fiscal flows from the OBBA bill which will counteract the bearish long term signals.  Income tax refunds in 2026 are going to be about $1000 more than the past few years, which will be a short term stimulus.  Some of that is priced in, as OBBA is one of the reasons investors are so bullish for the start of 2026.

 

The talk of the Street has been Anthropic's Claude taking over the software world.  Now everyone is extrapolating an LLM wrapper as a cheap replacement for coding and software development from engineers.  The SaaS stocks are getting obliterated.   LLMs are probabilistic engines, and they are only as good as the data that is fed into the model.  And there is a lot of junk data out there.  No matter how fast and expensive the LLM is, it doesn't change the quality of the data.  

Investors are extrapolating the current trends and improvements into infinity.  But AI doesn't get better like semiconductors did following Moore's law.  There is an S curve in technological advancement, and AI seems to be much further towards the flattening out stage than people believe.  ChatGPT is a perfect example of diminishing improvements with each edition.  The jump in performance was much bigger from GPT2 to GPT3, than from GPT4 to GPT5.  Many complained that GPT5 was almost like GPT4, and were massively disappointed.  You didn't see that in CPUs until the 2010s, when Intel CPUs couldn't make anything much faster, so they just overclocked their previous CPUs to improve performance.  It took Intel over 30 years to reach that performance wall.  Its taken OpenAI less than 3 years to see that wall.  And while  some people may think Anthropic is now the top dog and OpenAI is a runner-up, these LLMs are very similar to each other.  You can tweak OpenAI's model to make it look like Anthropics.  What Claude can do now will be similar to what it can do in 5 years.  Those extrapolating the AI improvements over the past 3 years due to more intensive compute are trying to fit Moore's law into a technology that doesn't apply.   

Software companies were loved due to the SaaS revenue model, but they got tremendously overvalued.  And they issue tons of stock based compensation, which inflates their earnings.  These big down moves in growth stocks happen because of overvaluation.  And people say that valuation is not a timing tool.  It is not a good short term timing tool, but it is a very good long term timing tool.  

The COT data didn't reveal much for the indices.  It did reveal that the blowoff top and subsequent violent pullback in gold caused a big reduction in long positioning.  Open interest is down huge over the past 2 weeks.  Lower open interest means that you have taken out a lot of weak hands/scared money.  It also means lower volatility because you will see a lot less forced buying/selling going forward.  I expect a range bound market for gold and silver for the next several weeks.  

Last week, you saw violent price action ending with a strong Friday rally in SPX.  CNBC Fast Money experts seem more bearish than usual.  That usually signals a short term bottom in bull markets.  But it is an aging bull market, and it has shown its age in the past few months.  In bear markets, CNBC "experts" being bearish doesn't mean much.  The best buy the dip assets out there seems to be gold/silver, followed by international equities, and then SPX.  The worst is bitcoin/ether.  Bitcoin is trading like a classic post bubble asset.  I expect a milder version of what is happening to bitcoin to happen to precious metals in a few months.  Still remain long gold, but with plans to exit this week.  

Six Sigma Metals

 We are living in interesting times. Talking about the SPX or Mag7 earnings is like talking about the weather as World War 3 begins. The precious metals is where the action is. Its where fortunes are being made and lost. Its where longs and shorts are involved in a bloody battle. Last week, shorts finally capitulated and FOMO bulls overstepped their bounds.  

Hindsight is 20/20. Given how long and strong the uptrend in gold and silver were, it was likely to end in a highly volatile and spectacular fashion. The precious metals have stood out as the strongest of the speculative assets since September. By then, China was also catching the fever. China has only added fuel to the fire. 

Unlike stocks and bonds, China is a major player in commodities. They are not just a tail wagging the dog. They are one of the big dogs. They were the ones inciting a short squeeze in silver with their rampant speculative buys in the Shanghai futures market. COMEX shorts in silver were getting squeezed indirectly by the speculative longs in Shanghai. The Shanghai silver premium has been hovering around $12-14, way above the low single digits in the fall. China caused the blowoff top. 

It was about as extreme a parabolic move as I have seen in a major asset since Nasdaq in 2000. While a lot talk about the crazy move in silver, the move in gold is more spectacular from a monetary view.  Silver is much more speculative, much smaller, and easier to push around than gold. Gold going up 12% over 3 days and then dropping 14% in 1 day is literally off the charts.  I am a counter trend trader, but instinctively, I knew that it was dangerous to short silver and even gold. I did try last Monday and was too early and bailed out for quick losses. 

Before the blowoff top, the upside potential was still unknown. The risk in being short was high because of the unknown upside. Because of the weak shorts out there, waiting to be taken out by sharks smelling blood. Investment banks have a full view of all the positions in the futures market. Word spreads quickly among bankers. They know who is running low on margin. They know who are feeling the pressure and about to stop out. It doesn't mean that shorting before the blowoff is dumb. Just high risk. Of course, this risk comes with big rewards. The big reward was the six sigma down move on Friday. 

To get these kind of moves, major players must have been throwing in the towel. It was a super deep cleanse and flush out of positions. It changes the calculus moving forward. Weak shorts have been taken out in full. This will make short covering pressure nearly non existent. 

On Friday and Monday, the tables were turned.  Friday and Monday combined was a savage 1-2 combo aimed straight at leveraged longs who stayed with the trend.  Longs have finally experienced some serious pain.  You also had extreme volume at the top, creating tons of bagholders. They will act as future resistance. With the shorts taken out, it will be longs that will have total control of the market for the next several weeks.  That is not a good thing.  Short covering was one of the main drivers of this move higher from the fall to now.  Now short covering will no longer be a factor going forward.  

Following a blowoff top, you usually get a reflexive bounce that retraces 50 to 70 percent of the down move from the top.  Investors who don't like to chase or buy near all time highs come in to buy, and they support the market for 1 to 2 weeks. After this latecomer led rally, with shorts already taken out, saturated long positioning and bloated prices weighs on the market.  You make lower highs and then suddenly the market cracks again, dropping sharply.  This usually happens 1 to 2 months after the blowoff.  

The SPX and NDX markets seem uninteresting by comparison.  As they say, nothing ever happens.  The action overnight was not in SPX futures, but in precious metals, and Asian indices, in particular, the Kospi.  The Korean stock market is now one of the hot, crowded markets filled with fast money longs.  They got a deep cleanse on Monday.  Its still only back to the previous all time high levels of just 10 days ago.

For the US market, you still have the occasional Trump news bombs but the market is getting used to it, and reacting less and less.  The VIX remains bid, but there haven't been big one way moves to justify it.  Its been choppy, but going nowhere fast.  Put/call ratios are rising, and you can sense the nervousness.  I see very little edge and its unpredictable.  I am watching on the sidelines.  It is notable that the big down move in MSFT was due to AI capex spending concerns.  We are now seeing the market punish big capex spends in AI if there are no increases in revenue to justify it.  META got a pass this quarter because it was already beaten down for it 3 months ago.  We are getting closer to the end game for the AI circle jerk.  I give it 6 months, at the most before the house of cards come crumbling down.  

When you get panicky moves in markets like you saw on Friday and Monday, you see where the fast money is.  You locate where the biggest pain points are in the market.  1. Precious metals.  2.  Asian indices, in particular, the Kospi.  3.  Cryptocurrencies, which has had all the downside but none of the upside.   

Got a small long in gold bought on Friday, will look to buy some more if it dips some more.  This is to play for a short term bounce.  It could last 1 to 2 weeks.  I will look to reverse to a short after a bounce.  Not looking to make any moves in SPX or NDX.  Tax refunds will be pouring in hot and heavy due to OBBA.  February and March will be the 2 biggest tax refund months, and that liquidity will be a positive for US risk assets at the margin.  So don't want to fight those inflows.  

The Herd is Moving

The herd has found greener pastures and are moving.  US stocks have been the go to asset for risk taking and capital appreciation since 2009.  US stocks have consistently outperformed non-US stocks year after year.  That changed in 2025.  Non US stocks, in particular Asian stocks have handily outperformed the SPX and NDX over the past 12 months.  

Investors are starting to notice, and they are chasing performance.  In 2026, the vast majority of equity ETF flows are going to international stocks.

Part of this is the annual ritual of investors getting bullish on previously underperforming risk assets, such as small caps, European and emerging market stocks, non-tech, etc.  In the previous times, investors stopped going international, US stocks started to outperform, they all went right back into the old reliable Nasdaq and SPX.  This time feels different.  Maybe its because US outperformance has lasted for so long, and the valuation difference has gotten so big.  It seems US stock allocations have reached a saturation point, and investors don't seem eager to increase it.  Foreign investors are at record high allocations to US stocks as a percentage of US assets.  They are way higher than in 2000, the last time we had a similar technology based bubble.

Over the past 3 months, you have seen record breaking inflows into equity ETFs.  It is almost double the rate of inflows in 2021, when all the Covid stimmies were being piled into US stocks.  Investors are complacent and are piling in.  Anyone who says this is the most hated bull market is clueless.

The record breaking inflows still have not managed to push the Mag 7 higher over the past 3 months.  In fact, the Mag 7 has been doing quite poorly relatively to everything else.  Even as most investors still believe in AI and have not given up on the AI trade.  Its just that they already have a lot of AI exposure by being so long the NDX and SPX.  Retail investors are up to their eyeballs in NVDA, TSLA, etc.  Any additional AI exposure is now going towards more tertiary AI plays.  They are the memory and storage names, like MU, SNDK, STX, WDC, etc.  This is an even bigger bet on AI, as they extrapolate continued AI demand spilling into memory and storage, and continuing for a while.  That is why the Korean stock market is on fire.  Even as the Nasdaq lags, the belief in the AI capex boom remains.  

This is where as a speculator, you have to make a call.  You either believe in AI, or not.  If you are an AI optimist, you will believe that AI continues to expand, improve productivity enough to make AI investments profitable, which will fuel further growth in AI capex, benefitting both the hyperscalers and the hardware producers.  If you are an AI pessimist, you believe that AI investments will continue to be money losing, that AI doesn't improve productivity as much as its hyped to be, and all the AI capex ends up being malinvestments, causing future AI capex to shrink.  

If you are an AI optimist, you should be long the Mag 7, long AI tertiary names, long Nasdaq and SPX.  If AI proves to be quite profitable for big cap tech as well as the OpenAI and Anthropics of the world, then SPX will keep going up.

If you are an AI pessimist, you should either be short a bunch of AI names or be looking for a good spot to put on long term shorts in them, including the NDX and SPX.  Being an AI pessimist, I am looking for a good spot to put on long term shorts in the AI stocks as well as the SPX.

Last week, it was Greenland and Trump's TACO on Greenland.  It was a rather quick TACO.  Once we get the Supreme Court ruling on tariffs (waiting for Godot), that should take a lot of bite out of these Trump tariff threats.  The latest incident shook the confidence of some investors, but not retail.  Retail investors went on a buying spree on that small dip on Tuesday.  

Bigger picture, retail investors have been aggressively buying stocks over the past few months.  Their confidence is increasing, even while their largest holdings, which are big cap tech, continue to lag the overall market.  Given the price action, their aggressive buying is surprising.  

Systematic funds, which include CTAs, vol control, and risk parity, are hovering at high net long levels.  Systematic funds chase trends and like to load up when volatility is low.  With such high equity exposure, a higher vol regime in a downtrend will unleash a lot of systematic fund selling in equities.  

While retail and CTAs continue to buy aggressively, corporations are buying less, way down from their peak in mid 2024.  When so much more of their free cash flow is going towards AI capex, less is available for buybacks.  This is one of the reasons why aggressive retail buying hasn't been able to drive the market higher.  

Last week, Space X hired investment bankers and have entered a quiet period in preparation for an IPO.  This will probably be the biggest IPO in US stock market history, so it will suck up quite a bit of liquidity from the market.  I would imagine Musk fan boys will now be looking to either sell some TSLA to buy Space X, or just stop buying TSLA and buy Space X instead.  Just from a quick view of the fundamentals, Space X appears to be a much superior company to TSLA.  After Space X, Anthropic and Open AI are likely to follow not much farther behind.  All these mega sized IPOs, and the huge lockup expirations that follow will unleash a torrent of speculative tech supply onto the market.  At a time where investors will be looking for some profitability to show up for these AI names.  Higher supply, and waning demand is a deadly combination.  

Last week, you got a little scare from the JGB market, as their 30 year yields spiked higher, but went right back down as the BOJ seemed to go in there to support their long bonds.  Some investors are still fighting the last war, worried about a big rise in bond yields to cause the next bear market.  I don't see it coming.  Unlike 2022, you don't have a giant fiscal impulse causing an inflationary wave.  The OBBA is peanuts compared to the Covid stimulus.  The 2026 job market is much weaker than 2022.  Same goes for housing.  The next bear market will not be like the last one.  It probably will just be a classic bust cycle after a big investment boom, this time in AI.  

Precious metals continue to squeeze higher, as this is the biggest commodity short squeeze since 2008.  Silver in particular seems to be almost a pure short squeeze, as managed money has been selling into the rally over the past few months.  It seems like producers and swap dealers with big short positions are getting margin called, being forced to cover their shorts.  Add to that eager retail traders looking to short silver, and you keep getting shorts squeezes over and over.  But this one takes the cake.  The parabola is steeper, the social media buzz is the hottest since the start of this bull run.  With silver breaking the psychological $100 level, it looks like we are in the last leg of this parabolic rise.  Investors are much longer gold than silver, and its trading relatively weak compared to silver.  Its risky to short these kind of parabolic moves, but when they reverse, the down moves happen quickly and bigly.  Overnight, I put on short positions in gold and silver.  This is a short term play, I will be quick to exit, looking for a 1-2 day pullback.  I need to see some weakness and signs that the vicious short covering cycle is over before I put on longer term shorts in the metals.  

As for stocks, the trading is lackluster.  Not enough reward out there.  There just isn't enough range.  It doesn't incite FOMO, either long or short.  There is some nervousness about a possible government shutdown and upcoming big tech earnings. Its not a time where I want to be short.  There will be better spots to put on long term shorts than now.  Big picture, it is a bearish set up for the indices.  But if forced to trade, I would rather buy dips than sell rips for the next 2 weeks.  Most likely will just watch and wait.  

Trump Trolling Europe and Lagging Nasdaq

The market is starting to get nervous.  Last week, there was quite a bit of put buying as investors got nervous about an attack on Iran, which caused a small spike in oil prices, which gave back much of the move after Trump backed down.  Also the lingering uncertainty about the Supreme Court decision on tariffs is keeping VIX higher.  Plus, over the weekend, we got a Trump burger on Greenland.  That has pummeled the SPX futures lower.  

You can always count on the Europeans to overreact to Trump.  Its just the way it is.  From an amateur observer, this just looks like a classic Trump troll on Europe.  A nasty one, but still just a troll job.  Overnight, you saw a lot of chicken little selling from European investors as they fear Trump.  They are also likely selling ahead of Trump's upcoming Davos tape bombs, which have been foreshadowed earlier this month.  This actually makes the Supreme Court decision even more important, and bullish if they repeal the Trump tariffs.  It would essentially make Trump's tariff threats toothless, as he will have to use more obscure and less permanent measures to enact future tariffs, which will also likely be contested by corporations.  This Greenland bomb by Trump also puts more pressure on the Supreme Court to repeal the tariffs, as they were never intended to be used as threats against allies.  

Switching to market moves.  The NDX continues to lag the SPX amidst the broadening theme.  The signal is more meaningful during an uptrend.  And it gets more meaningful the longer this continues.  Since the October 29 top in NDX, it has lagged the SPX by 3.0%.  The difference is even bigger when you compare the Mag 7 vs. the SPX.  The Mag 7 is underperforming SPX by over 6% since October 29.  

Since 2008, the NDX has continuously outperformed the SPX, and this amount of underperformance in an uptrend is unprecedented.  This is happenening even though the AI bubble has not popped, and while you have semiconductors as one of the hottest sectors in the stock market.  This is happening while retail investors continue to pour in billions into stocks, at the fastest pace in the past 9 months.  

Despite retail continuing to pile into the market, it is unable to lift the NDX higher.  Amber flashing lights in the background as the SPX grinds slowly higher.  

Investors have been brainwashed by financial media and old data that a broadening market is bullish for stocks.  That is the case when the stock market and the economy were more closely related.  It doesn't apply to a stock market dominated by big cap tech stocks and AI hype.  

The lagging NDX vs SPX after a long, extended bull market is reminiscent of 2000.  In late March 2000, the NDX made a gigantic top that would last for years.  The dotcom bubble was on its final legs, but it didn't pop right there.  The SPX continued to trade in a volatile, sideways range for the next 5 months, even challenging the all time highs in early September 2000, as the NDX continued to lag.  From September 2000, the NDX and SPX both entered a long downtrend that would continue for 2 years.  

I believe we are in that window where NDX continues to underperform the SPX, while the market goes sideways.  There could be marginal new highs in the SPX, but a continued uptrend is unlikely.  Within a few months, it should turn into a bear market.  

Usually investor sentiment is noise, and it doesn't provide much value.  It is only useful when sentiment is opposite of the price action.  AAII investor survey shows investors the most bullish in the past 52 weeks, and way above the historical averages.

There is growing economic optimism as the OBBA stimulus hits the economy this year.  The bond market is starting to pay attention.  The 10 year yield, which has been in a tight 10 bps range from 4.1% to 4.2% since early December, finally broke out to the upside, closing at 4.23%.  Some of the stimulative effect of the OBBA and likely tariff repeal by the Supreme Court are being offset by higher bond yields.  You cannot underestimate the willingness of retail speculators to pump their tax refunds straight into stocks, so I don't expect a sharp down move during this stimulative window in February and March.  After this brief stimulus pump, we'll be back to more normal flows and a fundamentally driven market, one that is vulnerable to a weakening tech sector.  

The magnitude of the gap down does remind me a bit of the big Sunday night/Monday pre-market gap downs from early 2025 on the Deep Seek news and the downgrade of US government debt.  Both of those gap downs were bought, rallying straight from the US cash open on Monday.  And the market continued to rally for a 2-3 more days.  If we don't see that this time, it would be a change of character.  With the post Jan. opex environment, with a lot of options open interest coming off, we could see a bit further of a down move before a sharp reversal.  But, base case, I would expect the market to be higher by Friday than current levels, if past is prologue.  

With the coming tax refund wave, there will be ample liquidity for dip buyers to tap into.  I would not force short trades in this uncertain environment.  A drop on news headlines and uncertainty over upcoming events is a higher probability buy setup than a similar drop on no news.  After the news bomb over the weekend, and the big gap down, I am looking to buy the dip.  There will be a time to short again, but I will wait until the longs are more comfortable and the market close to all time highs before I pull the short trigger.  

The Dotcom vs. AI Bubble

The dotcom and AI bubbles are eerily similar.  Those bubbles were preceded by an extended bull market that convinced the crowd that stocks are much better investments than bonds and real estate.  From January 1991 to the start of the internet bubble in the beginning of 1998, the SPX went up from 330 to 970.  From the January 2019 to the start of AI bubble in the beginning of 2024, the SPX went up from 2450 to 4800.   Both of those run ups before the bubble phase involved massive outperformance of tech stocks.  

Unlike the AI bubble, the internet bubble started with the companies using the internet.  Instead of pumping up the internet infrastructure plays first, the market pumped up the companies using the internet first.  In the beginning, the hottest internet stocks were the companies online, YHOO, AMZN, EBAY, AOL, etc.  This was the time where stocks like the TheGlobe.com and numerous unprofitable companies were at the center of the action.  Eyeballs was the measure of attractiveness, not future profitability.

That was the first stage of the bubble, which started in 1998.  The frenzy was over B to C (business to consumer). The internet based companies doing business directly with consumers were going parabolic.  Even low barrier to entry companies like a Geocities (bought out by Yahoo), which was the MySpace of the time, and Broadcast.com (bought out by Yahoo and made Mark Cuban a billionaire) were deemed to be the internet winners.  Profitability was an afterthought, it was all about eyeballs and growth.  The parallel for AI is a bit difficult, because the AI pure plays using AI are OpenAI and Anthropic , which are both private.  But I would imagine that if OpenAI was public starting from 2022, it would have rocketed much higher than NVDA from 2023 to 2024, but would have likely peaked out by the beginning of 2025, way before NVDA and the semiconductor names.

The second stage of the bubble was much more broad based, starting in 1999, and it focused on B to B (business to business) and internet infrastructure.  Nortel, JDS Uniphase, Lucent, CSCO, JNPR, and various internet software plays (most which no longer exist).  This was when the dotcom bubble truly went into overdrive.  It was when online brokers sprouted up like weeds, and retail investors were pouring in to the market.   Jeff Bezos was Time Person of the Year for 1999.  The obvious parallel to the AI Bubble is the Time Person of the Year cover for 2025, showing the Architects of AI featuring CEOs of NVDA, AMD, META, OpenAI, xAI, etc.  

By early 2000, the B to C names like YHOO and AMZN had already peaked, and were going lower as the Nasdaq was going higher.  We entered the final stage of the bubble, where investors threw all caution to the wind, ignored fundamentals and looked to put money where they could have the most juice (quickest, most explosive moves higher).  This is when the OTCBB market heated up and you saw crazy moves in suspect, scammy names run by get rich quick stock peddlers starting internet based businesses just to sell stock.  

The parallel to this is the altcoin market in cryptos, as well as the quantum computing names.  The altcoin market, along with quantum names, were raging hot in late 2024, took a break during the tariff tantrum in the spring of 2025, and then heated up again in the summer and fall of 2025.  But its been straight downhill since that October 10 bucket shop drive at the crypto exchanges, when bitcoin flash crashed.  Liquidating retail buying cryptos on shoestring margins was like taking candy from a baby.  Just like they did at the bucket shops back in Livermore's day.  

One thing about the final stage of the bubble was that ordinary tech stocks, that weren't considered to be internet focused, exploded higher out of nowhere. In that final stage of the bubble, non-internet tech plays started to ramp up, like biotechs that were focused on genomics, which was a hot thing at the time.   That feels like the space sector now.  Some of the hottest names at the peak of the bubble were not pure internet plays, but semiconductor names.  These stocks were not thought of as internet boom beneficiaries until late in the bubble, as capex kept ramping higher.  The parallels to the AI bubble are the memory makers like MU, Samsung, SK Hynix, as well as the storage companies STX, WDC, and SNDK.  If you look at MU's chart in 2000, its eerily similar to what it did in the 2nd half of 2025.  

There are quite a few investors who recognize that we are in an AI bubble.  But I see very few investors, other than permabears like Michael Burry, preparing for an imminent popping of the bubble.  Most think its still at least a year away.  The common belief is that AI capex will be very strong for 2026, as orders are already booked, so the bubble won't pop this year.   They don't have any urgency in selling before the bubble pops.  The dotcom bubble popped in 2000 even though there were huge capex plans for all of 2000.  Investors don't appreciate how quickly corporations can change their investment plans.  

 

Comparing the stages of the dotcom bubble with the current AI bubble, it is clear that we are in the final stage of the AI bubble.  That final stage hit its zenith last October, and its been sideways since then.  The final stage of the dotcom bubble hit its zenith in March 2000, and the market went into a  volatile, choppy range for the next 5 months.  After that choppy sideways move, the bear market started, in September 2000.  If the AI bubble follows the internet bubble timeline, there is not much time left.  The AI capex growth expectations are sky high.  Investors have already been piling money into the supposed winners of the AI boom for over 2 years now.  But the practical use cases haven't kept up with the hype.  No one likes Microsoft Copilot.  Chat GPT and Gemini are popular, but not transformative.  There will be good uses for AI.  But given the huge power consumption of running these AI data centers, will the benefits outrun the costs?  

Unlike the internet infrastructure buildout, the AI buildout requires a lot more energy, and it seems like AI will be a net energy consumer rather than an energy saver.  For example, the internet drastically reduced the use of paper.  You replaced paper bills, confirmations, documents with electronic documents.  It reduced the need for transportation, the need to talk to a broker, etc.  It doesn't take much energy to run a network, and build out fiber compared to building and running AI data centers.  The internet is an energy saver.  AI is an energy consumer.  AI is supposed to make work more productive, but it seems to just be adept at copying content on the internet.  A lot of it is factually wrong.  Its not completely reliable.  

When the internet came out in the late 1990s, most could tell that it was revolutionary, how it would change everyone's lives.  Just from a trader or investor's perspective, online trading is infinitely better than putting in orders over the phone.  Same goes for sending an email vs. postal mail or fax.  It simplified the ability to get data in real-time.  You could check an up to the minute box score for a current game, with play by play summaries.  Before the internet, you had to watch ESPN for the highlights a few hours after it happened.  To get a box score, you would have to wait for the newspaper the next day.  And you wouldn't get any play by play summaries.  If you didn't use the internet in 2000, you were a dinosaur.  The quality of life difference from using the internet and not using it were huge.  Whether you use or don't use AI in 2026, its not going to make much of a difference.   Its just not comparable.  Its like comparing mass use of electricity to the smart phone.  Yet, you have prisoners of the moment stating that AI will be bigger than the internet.   

While the majority believe that AI will change the world and massively increase productivity, I think it will end up just being a niche product like Siri is for Apple.   Sure there will be more use cases for it in the coming years, but since AI just produces output based on a probabilistic algorithm from large data sets, its not using logic or doing any reasoning.  AI is good at generating cheap video/graphics, so it will replace a lot of graphic designers.  It will be good at replacing Google search results with a Cliffs Notes version that provides a quick summary of what one is looking for, with occasional hallucinations thrown in to keep the AI zombies honest.  

It could add productivity by automating some manual tasks, but we already have tons of software that do the same thing.  That's probably why software companies have been so weak during this AI bubble.  AI is a legitimate threat to overpriced software.  Companies saving money on software costs by using AI instead doesn't add value to the economy.  It just takes profits away from software companies and gives it to the current users of software.  

There are downsides to AI.  I am seeing an exponentially increasing amount of AI slop in Twitter and Youtube.  This is polluting the internet with more content and data that the LLMs will eventually be training on.  AI training on AI slop is like a snake eating its own tail.  I can see it in Twitter posts and replies, that are obviously LLM generated.  You can smell an LLM written post from a mile away.  Same goes for AI generated videos on Youtube.  Can't explain exactly what AI slop looks like, but from pure intuition I can tell its not created by a human. 

Recently, Citrini, a popular Fintwit / Substack subscription seller, has said that bullshit jobs are the ones that are in danger due to AI.  I agree somewhat.  Because AI is good at bullshitting.  AI can displace some white collar jobs, but it will be inferior because even the white collar bullshit artists add some value beyond the BS through basic reasoning and know-how gained from work experience.  It can replace some mediocre and low value workers, but the cost of running and using AI will probably actually be more expensive than just paying the low value workers, or offshoring the work.  

The incremental benefits from AI just don't match the hype or stock valuations.  It will soon be show me time for these AI related stocks.  The stock market will want to see better profitability from all that AI spend.  That could be a disaster.  Even as the SPX hits new all time highs, we are seeing cracks form in the AI data center builders.  ORCL is down 40% from its highs in September.  And its CDS spreads are much higher now than it was a year ago even though the stock price is higher.  Same story for CRWV, NBIS, IREN, and the other AI neoclouds.  Even so called beneficiaries of AI like META are now getting scrutiny over their huge AI capex spend.  META peaked in September at 790, when the SPX was trading at 6450.  The SPX is now almost 7000, and META last traded at 653.  

There is a huge disconnect between the hype around AI and its actual value to business and society.  Its a mass delusion of the crowd.  As a famous Nazi propagandist said, if you repeat a lie enough times, people start to believe it.  The repeated AI hype has convinced a lot of Wall St. that AI will change the world and make companies even more profitable.  

The government released the latest household allocation to equities as a percentage of financial assets.  This is as of September 30, when the SPX was at 6688.  SPX is a few percent higher today, so the equity allocation is even higher now.  At 47.07%, you are nearly 10% higher than at the top of the dotcom bubble, and nearly 5% higher than at the December 2021 market top, which preceded the 2022 bear market.  There is a lot of downside fuel for the next bear market.  

 

 

Start of year fund flows poured in last week, which was greater than the selling from delaying capital gains sellers.  The buying has been focused in small caps, and spread out more broadly towards non-tech stocks.  This broadening out of the market has been cheered on as a good sign by the financial "experts" at CNBC.  Nasdaq has been lagging the Russell 2000 since the late October highs.  Its been over 2 months of underperformance.  The prelude to the start of the dotcom bust was the Nasdaq underperforming the broader market.  

That is what's happening now.  In 2000, it took 5 months of Nasdaq underperformance to finally lead to a bear market.  So this can go on for a few months before you see the market really crack.  The interesting thing about last week was the relative weakness in NVDA and TSLA, the 2 most heavily owned stocks by retail investors.  If retail investor holdings continue to underperform, you are adding more and more pressure.  If this trend continues, which I expect (COT data shows small specs with large net long positions in SPX and NQ futures), the closer you get to the waterfall decline.  

Surprisingly, GS Prime broker data showed hedge funds going on a buying spree in info tech, the largest long buying in the last 5 years.  That buying wasn't enough to keep Nasdaq from lagging the SPX and Russell 2000.

 

Covered shorts on Thursday, as markets are trading stronger than expected and due to the likely bullish reaction to NFP and the Supreme Court tariff decision on last Friday.  Well, the Supreme Court delayed their decision, which briefly caused a dip around 10:00 AM ET, before rebounding and rocketing higher for most of the day to an all time high close.  This delay of the decision is probably a good thing for the bulls, as it will likely delay the top of this move for a few more days.  It is better to get short when prices are higher after the news events and uncertainties are behind us.  

Overnight, we got news of the DOJ going after the Powell Fed.  This is a tempest in a teapot, and I am surprised to see the SPX react so much to an inconsequential news item.  The independence of the Fed is treated like the holy grail, even though its obvious the Fed is politicized.  The Fed governors are picked by politicians.  Which make the Fed governors political, even if they try not to act like it.  Why else would Powell delay rate hikes when inflation was raging hot in 2021 before his term was renewed by Biden?  Its the reaction to the news that's more important than the news itself.  And the SPX dropping overnight on this shows that we have some weak hands in stocks.  It doesn't make me want to short right away, as I don't want to be short ahead of probable bull catalysts in CPI(will be manipulated lower) and the Supreme Court tariffs decision, which will make Trump's tariffs illegal.  But after those events clear, will be looking to short any relief rally.  

The next shorting chance for the bears is around January opex, which is this Friday.  January is the biggest non-triple witching expiration, with lots of LEAP open interest.  A lot of put protection in single stocks, especially big cap tech, will be expiring.  Seasonally, January post opex is a weaker time of year.  Will be looking to re-enter shorts later this week to play for post opex weakness.  

Retail Saturation and the Big Picture

A sign of retail investor saturation: investors are bullish but price action is not.  Let's first identify what's been driving this bull market.  It has been tech stocks, in particular AI related stocks.  Next, what type of investors have been the most bullish and putting the most money into those stocks.  Its retail investors.  Let's look at the stocks that retail investors have been buying the most over the past couple of years.  Its bitcoin/ether, AI names, robotics names, quantum, nuclear, and space.  We can then look at the stocks in those groups that retail is most heavily invested in.  Bitcoin, ether, NVDA, TSLA, PLTR, META, MSTR, BMNR, RGTI, IONQ, OKLO, NBIS, IREN, ASTS, RKLB.  There are a few more names out there, but the above list covers a big portion of retail investor long exposure.  

Looking at the list of retail favorites and comparing them vs. the SPX since late October, you can see the retail pain, which is masked by the index.  While the SPX is down only 1% from the October highs, most of the retail favorites are down double digit percentages.  The most damage has happened in crypto, AI data center, and quantum names.  The crypto pump in 2025 and the subsequent equity issuance from the bitcoin/ether treasury companies have sucked up a huge chunk of retail cash, leaving those investors both heavily invested in speculative stocks, and deep underwater.  Those investors also happen to hold other speculative names which are also down big.  Yet, most investors remain bullish, and some groups, like those surveyed by AAII, have gotten even more bullish since the October highs.  

The bears in the AAII survey are now down to early 2025 levels, before Liberation Day.  

Another weekly investor survey from Helene Meisler shows investors are stubbornly bullish while the index goes sideways, even more bullish than when it was trending higher from the spring to the fall.  

More importantly, retail investors have continued to pile into stocks, with various measures showing heavy inflows.

Ever since 2020, retail investors have poured into US stocks.  And by a couple of measures, that retail inflow accelerated in 2025.  In particular, foreign retail investors, the most fickle investors out there, have a knack for buying the most at tops, have bought massively over the past 12 months.  

It is one thing to keep buying and be rewarded for risk taking, but its another thing to keep buying and be punished for it.  Buying that takes prices higher is self-reinforcing, especially as it gives retail investors more margin buying power.  But when that buying no longer is rewarded, and is being punished, then margin buying power decreases.  Retail has managed to take up these speculative stocks to such high levels that in order to sustain these nosebleed valuations, even more money has to be pumped in to keep the Ponzi scheme going.  At these valuations, fundamentals don’t support buying.  Only FOMO does.  

This is scary because 2026 will likely bring on 2 gigantic IPOs in SpaceX and Anthropic, with opening day valuations likely around $1.5 trillion for SpaceX, and $300 billion for Anthropic.  OpenAI is not too far behind with their IPO, which likely happens in 2027.  The float will be small at first, but you can bet within 6 months of the IPO, insiders will dump en masse huge chunks of stock.  SpaceX, in particular, will be a game changer.  It is the hottest space name out there, and with its huge market cap, will be sucking up enormous amounts of capital from Musk fan boys, space loons, and speculative zealots out there.  That is bad news for the current group of retail favorites, which will have to share in the trough with a couple more giants trying to get fed by retail.   Eventually, stock supply will overwhelm demand and prices should crater for the retail favorite names.

The CFTC has finally caught up to the delay in COT reports, and as of December 23, we have data for equity index futures positioning.  As its a new year, let’s take a big picture view of where we sit in 2026. Below is the positioning for ES and NQ for the past 5 years for small speculators, asset managers, and dealers.  

E-mini S&P 500 Small Speculator Net Position

E-mini Nasdaq 100 Small Speculator Net Position

 

We can see that small speculators are near their 5 year highs for both ES and NQ net positioning.  Also, it has been steadily increasing for the past few months. 

E-mini S&P 500 Asset Managers Net Position

E-mini Nasdaq 100 Asset Managers Net Position

We can see that asset managers are also near their 5 year highs for both ES and NQ net positioning.  
 

E-mini S&P 500 Dealers Net Position

E-mini Nasdaq 100 Dealers Net Position

We can see that dealers are near their 5 year lows for both ES and NQ net positioning.  

Open interest in the ES and NQ contracts has been declining over the last 5 years.  After December 2020 opex, the OI in ES was 2.46M contracts.  After December 2025 opex, the OI in ES was 1.91M contracts.  So the net % positioning is actually higher for small specs and asset mgrs.  On a net % positioning basis, we are around all time highs for small specs and asset managers, and around all time lows for dealers.   Futures positioning doesn't tell you where the market is going, but it shows you which way they are leaning.  Right now, we are at historically bullish positioning among small speculators and asset managers.  There is not much more room for investors to get even more bullish, while there is a lot of room for investors to get less bullish or even bearish.

Options flows also show a similar picture.  The ISEE index measures the ratio of opening long call volume vs, long put volume.  A ISEE number of 150 would equal a ratio of 150 long call contracts opened for every 100 long put contracts.  The fall of 2025 reached levels that are the highest in ISEE index history, which goes back to 2006.  Even higher than the bubbly days of 2021.  It has fallen down some, but still at very high levels.  

When investor flows and positioning get this bullish, as the trend flattens out and speculative stocks weaken, you are sitting on a powder keg.  There is a long term cycle in the stock market that has repeated since 2008.  You have 3 to 4 positive years of up trending markets followed by a sharp drawdown that leads to a flat or down year.  2011, 2015, 2018, 2022 were the 4 flat to down years since 2008.  Its been over 3 years since the last real washout in US stocks.  If the pattern of the past 17 years holds, 2026 should be a flat to down year.  Given how heavily invested retail is, the potential downside is huge.

The same thing that happened to investors from 1991 to 2000 has been repeated from 2016 to 2025.  Investors got used to double digit returns with short drawdowns as investor inflows kept the party going.  When the market peaked in 2000, foreign investors were pouring money into the US market, and retail investors were heavily invested in the most speculative stocks of the time.  The internet was AI.  CSCO was NVDA.  Semiconductors were semiconductors.  History is not only rhyming, its nearly a carbon copy.  Some knee jerk contrarians say that its not a bubble if so many say its a bubble.  Well there were tons of people in 1999 and 2000 who were saying that there was an internet bubble.  And that bubble popped.  We underestimate the intelligence of people in the past.  Humans haven’t gotten smarter.  Technology improvements does not equal human intelligence improvements. 

The beginning of the year is a time to reflect on the previous year and to look at the big picture,  Looking back, I was too bearish and tried to pick too many tops.  As someone whose formative years covered the dotcom bubble and GFC, I became conditioned for a volatile stock market with lots of ups and downs.  Not a grinding bull market with brief, shallow pullbacks and continuous new all time highs.  There have been some valuable lessons about fighting a strong bull market.  Its better to either go with the flow or trade as little as possible.  Even though I traded the least out of the past 10 years, still took some hits.  

But if as expected the market goes into a choppy range with marginal new highs, I will be more active.  It should be a good market for counter trend traders in the first few months, which should be mostly range bound.  After that, starting from April/May, I expect volatility to pick up and the SPX enter into a downtrend.  

We got some news over the weekend, as Trump attacked Venezuela and took out Maduro.  Now, suddenly everyone is a 15 minute expert on Venezuelan oil.  Short term, it doesn’t matter.  Long term, it opens up the potential for a massive increase in Venezuelan oil production.  It will take several years to happen.  It may not happen if there is no political change.  It would somewhat reduce my long term view on oil stocks.  Overall, its a nothingburger that has gotten precious metals investors even more excited, while the rest of the market doesn't really seem to care much.  

Entered into shorts last week, looking for a pullback this month, perhaps down towards SPX 6700.  I expect the pullback to be bought.  Market should ping pong back and forth between around 6700 to 6900.  Will look to play that range for the month.  

Silver Buzz

Silver is currently at the center of the financial universe.  The buzz in silver corresponds with a blowoff top move on the charts.  On Friday, CNBC Fast Money talked continuously about silver and the precious metals.  While some of this is latecomer speculative buying, its seems more like shorts getting squeezed out and throwing in the towel.   Surprisingly, the put/call ratio in SLV was 0.83, and net deltas were not that high.  So you had quite a lot of SLV put buying by speculators and hedgers.  In comparison, the put/call ratio for GLD on October 16 when it had its blowoff top was 0.35.  

With so much less call options speculation and more skepticism about silver than gold, there is a chance that there are still too many shorts in the trade, and you could get one more leg up later this week before you get a sharp reversal of the trend.  If we do get another move up later in the week, it could be worth a shot to go short or buy puts.  With the IV sky high, I think shorting offers a better risk/reward.  

The move in silver and other precious metals only happen during complacent, heavily speculative market environments.  Its not as if we needed more proof that investors have very little fear.  The go to rationalization for being long silver is currency debasement.  And then some will talk about AI demand, etc.  But those rationalizations could have been said 5 years ago, 3 years ago, 1 year ago.  I think its just pure greed driving the move.  

Over the past week and through the Christmas holiday, you got the Santa Rally in the S&P 500.  It was about the most expected Santa Rally that I can remember, which could set up a post Xmas hangover now that you are almost at year end.  Since the Santa Rally was front run a few days early, it would not be surprising to see the end of the Santa Rally front run a few days early.  Last year, you had a short, vicious selloff after Christmas.  I don't expect it this time around, but I think a move that takes the SPX back down towards the levels it was at during triple witching, around SPX 6870, looks doable within the next few days.  

You also saw a lot of selling in the high beta, speculative sections of the market, with space, quantum computing, nuclear, and AI data center names taking big hits on Friday even though the SPX was flat on the day.  Those stocks appear to be saturated with retail bagholders who are underwater and causing a lot of overhead supply to come out after up days.  

We are now in the corporate stock buyback blackout window, which lasts until late January.  We also have delayed capital gains selling that takes place in early January after big up years.  The price action in speculative tech, bitcoin, and overly bullish sentiment are signs that a pullback seems ripe to happen at anytime.  It may not look like it on the SPX chart, or from what you hear on CNBC, but the bears have a lot of things in their favor for early 2026.  I will be looking to put on shorts in stocks and maybe silver this week, to play for January weakness.  

Santa Rally

People are looking for a Santa Claus rally.  All it took was a quick bounce off a 2% pullback for the bulls to come out and say I told you so.  But we are seeing chinks in the AI armor and Nasdaq has been lagging for the past 2 months.  The long term sustainability of this bull market depends on Nasdaq continuing to lead the market higher.  Whatever BS you hear from CNBC regulars about a broadening market being healthy are just Wall St. cliches.  When investors are looking to add more equity exposure, it is to capture upside, not to protect downside.  A broadening market that goes from big cap tech into defensive sectors like health care and consumer staples is not a sustainable formula for a continued uptrend.  That is what has been happening since the late October top.  Going into defensive sectors out of offensive sectors is what fund managers do to lower beta but stay fully invested.  

Last week, you saw Blue Owl pull the plug on ORCL, refusing to fund another AI data center boondoggle.  We are getting closer and closer to the point where all the AI capex needs to start showing some real tangible results.  Open AI no longer has a free pass to unlimited capital raising.  META got punished for their bloated AI spend.  They must be getting metaverse vibes after the post earnings reaction in October.  With the hyperscalers less able to raise debt to build AI data centers, it will make it that much harder to meet the lofty AI capex expectations for 2026 and beyond.   That hurts NVDA, AVGO, and the semiconductors, as well as all the AI data center/utility plays.  It could get ugly once the Street starts to price in this new reality.  

It is also not a good sign to see so much investor optimism while the AI names lag the index.  The NAAIM poll of investor positioning is above 100%.  Past readings above 100% were near short term tops.  

You also have very high bullish readings from other investor surveys, including II and AAII.  A popular Twitter poll by Helene Meisler shows most looking for more upside.  

 Investor flows into equities confirms that investors are still piling in:  

According to BofA, there was a $78B inflow into US stocks last week, which is the 2nd biggest ever.  Just as the uptrend in the Nasdaq is looking tired, you are getting heavy inflows into the stock market.   

It has been an extremely frustrating time for bears and fundamentally based investors, as valuations don't seem to matter.  Numerous attempts on the short side have either resulted in quick losses, or drawn out battles without much to show for it.   But it appears that we are close to an inflection point.  In addition to the above signs of very high optimism, you are seeing high beta themes like bitcoin, quantum computing, AI data centers, nuclear, and AI power related names showing weakness.  These are the conditions that you want to see before getting short.   

The AI story is going from the view of can't do anything wrong to show me results.  That transition will put greater scrutiny on companies blindly pouring capital into AI, which will likely result in less AI capex spending than many expect.  That would be a game changer, something that would really put the market to the test, as AI spending is the main reason this market is so overvalued.  

Seasonality has not played out as many expected.  Investors were cautious about August, September, and October, and those were 3 very strong up months.  The typical seasonal rally in November and December didn't happen.  Now there are only 7 trading days left in 2025, and we are starting to front run the Santa Claus rally.  It would not surprise me to see this Santa Claus rally stall out before the end of the year.  With so many expecting this year end rally, and with Nasdaq lagging the SPX, we are getting a similar setup to the end of 2021.  January could bring market weakness from delayed capital gains tax related selling, stock buyback blackout period, and more skepticism on AI capex.  

Holding off on putting shorts due to low volume, thin holiday trading for the next few days.  Starting next week, if we are above SPX 6900, I will be looking to put on shorts for January.