Last week definitely shook up the system. On Thursday and Friday, it appears that all the podshops decided to suddenly unwind their long NDX, short RUT trade. With last week's Russell 2000 outperformance, you have a bunch of market "experts" who are suddenly bulled up because small cap stocks have outperformed large caps for the past 2 trading days. CNBC was about as bullish as I've heard from them in recent memory, as they were touting the suddenly strong breadth in the market. Seeing the strong outperformance of heavily shorted stocks last week, it looks more like a de-grossing of hedge fund positions than a new trend of high demand for small caps.
You will often see these violent moves up and down at inflection points, where eager buying is met with eager selling. This is not only happening at the index level, but at the spread level between indexes, as uncle points get reached and stop losses get hit. These are classic signs of an imminent trend reversal. You can feel the tension as the FOMO fast money gets hot and heavy, being met with supply from corporate insiders and longer term players gladly selling into these high price levels.
We're now near the end of a positive seasonal tailwind that lasts until July opex which is this Friday. Considering the low put/call ratios and the rampant call option speculation over the past few weeks, I expect a big hangover as you get close to this monthly opex. The ISEE index showing the call/put ratio of opening transactions reveals the stretched nature of the options activity. The ISEE index 20 day MA is now the highest in its history, higher than even the go-go speculative days of 2021.
I am seeing similarly high levels of opening transactions in calls vs puts in the OCC data that comes out weekly. Options speculators are heavily betting on more upside, aggressively buying call options in the most liquid, high beta names. Here is the call activity in IWM on Friday, the highest daily call volume ever for this ETF. The net deltas and overall premiums paid for IWM call options were extreme.
The overbought and overextended charts in SPX is a powder keg, waiting to trigger at the slightest hint of weakness. The markets often trade in symmetry, so when prices go up rapidly, they are apt to fall rapidly. Its been quite a steep uptrend over the past several days, and big picture, for most of 2024. A couple of markets this reminds me of are July 1998 and January 2018. Sharp blowoff tops that reversed even more quickly than they went up.
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| SPX July 1998 |
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| SPX January 2018 |
Over the weekend, after studying the Commitment of Traders data in more detail, it was an eye opener to see how long the asset managers have gotten in SPX futures, with the net long as a percent of open interest much higher than even the highest levels in 2021. And those asset manager net long levels in 2021 were much higher than previous highs seen in early 2018. Most of the increase in asset manager net long exposure has come from a huge decrease in the number of short positions. SPY and QQQ short interest also keep going lower and lower. The Street is very lightly hedged for downside at the present time. I didn't think it was possible so quickly after the everything bubble in 2021, but in many ways, this current AI bubble is more frothy and dangerous for long term stock investors. For sure, the positioning in SPX futures and SPY/QQQ ETFs is definitely more ominous than in 2021.
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| COT SPX Asset Manager Short Position |
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| SPY/QQQ Short Interest |
A confluence of indicators are lining up to present a high risk/reward opportunity on the short side for SPX and NDX. Technical, seasonal, and positional indicators are flashing amber lights here. I am hearing many traders and investors who view July as a slam dunk up month, pointing to seasonality, and many of them are planning to sell at the end of the month. I would not be surprised to see a sudden rush for the exits over the next 2 weeks as the uptrend tops out and post opex forces come into effect after a huge call buying spree over the past several weeks.
Add to the mix the suddenly bullish news flow (Trump assassination attempt bumping up his election odds) and you have the ingredients for a good news topping process (cooler CPI, more Fed rate cuts priced in, Trump odds of winning going up, stronger breadth, etc.). This it's "so bright, you have to wear shades" kind of news flow over the past week with the volatile price action catches my attention. Based on pure instinct, I want to short more. I plan on adding more SPX shorts early this week to get to a max short position. I have not seen such a good risk/reward opportunity on the short side in SPX since late 2021.
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51 comments:
MAGA!!!!
Sold NKE calls @ 1.25 from 1.70. Small position.
Sold RUN puts @ 2.61 from 1.97
Long IWM 216 8/23 Puts @ 4.92
3 things everyone should take away from the events over the weekend:
1) God exists and divine intervention is real
2) Deep state exists
3) Since they tried to get rid of him legally, and now physically, expect another attempt. DJT will be risking his life everyday by trying to be president again.
4) They won't be able to crash the market before the election now for sure. An expected democratic win could have lead the may for a nice correction pre-election. Now that that is not in the cards, expect them to keep the index near the highs until the day after the election.
Investors are making the opposite mistake that they made in 2016. In the fall of 2016, valuations were much lower and the market wasn't technically overextended and positioning was more neutral. Now, valuations are very high and technically overextended with very long positioning. Its a totally different environment. Valuations matter. The market will have trouble going higher over the next 4 years no matter who the next president is.
Long more IWM 216 8/23 Puts 3.55
@marketowl what probability do you assign that we dont see a correction in coming weeks at all? this looks like a slow grind higher and I am getting worries a bit
There is definitely a probability that we get a slow grind higher in the coming weeks. I've lost enough money being overconfident to know that my predictions could be wrong. But this game is about probabilities, and the signs that I am seeing are not normal, and usually happen at or near tops. I could definitely be early by a few weeks, but I don't think this market will go without a meaningful pullback beyond the summer.
The call speculation is very high, sentiment is very bullish now that small caps are rallying hard, and you have VIX going higher with the market and you are seeing more intraday volatility with Nasdaq underperforming. The Nasdaq is the leader. They lead the market up, and they lead the market down. Those riding the IWM train will get off quickly, unlike those riding the tech train which has much more long term momentum.
IWM is up 10% in 4 days.
Sold ZIM calls @ 3.33.
Load up moar IWM Put @ 3.44
Tom Lee says IwM going up 50% here to 260 or something like that. LOL
I think 240 maybe possible but I don't think the economy will support shitty little companies that are in 3rd place.
Added to SPX shorts. Now max short.
I hope we see a big reversal today will help than just wait it out
The strenght of IWM really surprised me today. Wasn't not expecting this much strength. But all good things must come to an end.
Unfortunately I think the SPX will do what the DIA has done today. Either today or tomorrow. But that will end too this week.
Dawg, I thought you were going to start trading the trend. Every single trade is a countertrend trade.
Yes I made an exception for IWM because it was up 7% in 3 days. Now 10% in 4. I will trade this on the long side after I cover but at around 215.
is shorting iwm the right trade or leave that alone as it is showing crazy strength?
Short this bitch. Go half size if you're afraid of another up day tmrw. The bigger they come the harder they fall.
Added some
my gut says this rips again tomorrow. not going to play that but cautious on shorting. may miss the boat but prob needed
Top is in. Between today and Friday we will print 217.
Do u plan to exit ard 217 or hold ur aug 23 puts another week or two?
I'm out. I sold the IWM puts at 3.10.
Long SOXL 8/23 60 calls at 3.73.
IWM is not going down hard enough for me.
Technically it looks like IWM can go back to 240 this year. Going to wait this out and try to get long at lower prices. If it can go to 215, that would be ideal. In the meantime, hoping for a technical rebound in the semis until friday. Monday should rotate back into the DAQ soon.
I am holding onto all shorts including iwm and spy. No point going through so much pain and then exit at first opportunity. Hoping for another big doen day this week
IWM is one of the stocks that go up during trump economy. Small US based businesses that benefit from protectionism.
https://ibankcoin.com/flyblog/2024/07/17/i-have-the-documents-from-the-future/#sthash.TPjLczbe.dpbs
Dawg, you are overtrading. One minute you're calling for IWM to go to 217 by Friday, the next minute you think SOXL has bottomed.
You should just hang on to the IWM puts and stick with the short side. We got a classic, euphoric blow off top in the market and you're buying the dip way too early.
And don't assume that Trump is good for small caps. He's good for his cronies and himself. You're making big assumptions that 1. Trump will win. Although likely, its not anywhere close to 100%. Probably 65-70%. 2. That valuations don't matter for stocks. 2024 is not 2016. Not even close.
It's trading. You can't trade based on your calls. You trade based on the market. Market is showing me right now that IWM is strong as shit. The only way Trump will not win is if he gets taken out or somehow Kamala wins. He can get taken out but you can't price that in. The latter has zero chance.
I am planning to hold onto all shorts untill next week min or another leg lower possibly more
Haven't seen CNBC and Twitter so bullish on stocks since late 2021. Everyone thinks there will be a soft landing and are bullish because of Fed rate cuts and Trump winning in November. It's consensus that Trump will get elected and will be good for stocks because of tax cuts and less regulation. The regulations don't matter, and tax cuts will just cause 10 year yields to go higher, so probably a net negative for stocks if they try to lower taxes and blow out the budget deficit even more. Tariffs will just cause a trade war, and squeeze consumers.
@marketowl what is your short term outlook - this week and also next week? shorting requires somewhat exquisite timing and while no one knows, interested in your thoughts. i have spy 555 puts for july 19, spy qqq and iwm puts for aug and qqq nvda arkk for jan 2025
We going back up. Yup. In all indexes. This bull aint done
@marketowl?
Very bearish for the next 2 weeks. My initial target for the downside is the SPX 5450-5470 area. But I think 5360-5380 is doable on the downside by early to mid August.
Seeing a lot of call buying still despite the nasty down day yesterday and Nasdaq weakness. Options players are still buying the dip. Don't think you get a sustained bottom until you see the call players go away and you see put hedging. So many excesses have built up over the past several weeks that I think its going to take at least 2 weeks to unwind this, but could take up to a month.
wonderful I find this much more plausible. wont be a straight line but definitely down
Looks like Biden is going to drop out soon and its going to be Harris vs Trump. Market not liking the rumor. Opex forces going to work here on the selloff as lots of call deltas getting vaporized into the monthly opex tomorrow. And there was a ton of call buying in the past 4 weeks.
do you think we can get another leg lower tomorrow or deals squaring off mostly today
I think we get another leg lower tomorrow but its hard to predict day to day movements, I think its easier to predict week to week movements. And I think we'll be lower from here by middle of next week.
Big ass face ripping short fucking bounce tomorrow.
A rip was possible if we moved lower into the end. The way we ended the day, the most likely move tomorrow is lower again. But may be volatile with swings. Looking to trim shorts marginally on a big down move. Flat or up will just hold everything into next week
Bonds weaker today a good sign for index shorts. With all the call buying, lot of deltas will be rolling off today. Post opex weeks are a seasonally weak time period, especially after such heavy call buying the previous 4 weeks. It is quite possible that we get a short term flush down move by next Tuesday/Wednesday, taking the market down towards the SPX 5450-5470 support zone. About 80-100 points away right now.
At 5500. Should one trim or 5450-5470 is a done deal. And only question is if we get to 5300s?
I will wait till next week to consider covering my shorts. I may have even been a bit too conservative with the 5450-5470 initial price target. But I'll probably cover some at that price level. With the heavy speculation and overbought nature of this market, I do think we'll break 5400 by early/mid August. Might have a 2-3 day short term rally before we do.
Cool decided to hold few more days min
Biden pulls out. Does that change anything for the short term outlook?
No, it doesn't. Harris is even more unpopular as Biden, and actually less likely to win against Trump than Biden. Democrats fumbled a golden opportunity to pick a viable candidate and they picked probably the obvious, but worst one possible.
The market was already basically pricing in a Trump win, and this doesn't change anything.
My market call is not based on politics, except for the fact that there are fast money players who temporarily distort markets and allow good fading opportunities. I would fade any rally off this news.
Interesting. Trying to minimize pain while i am short. Dont like rallies
I'm writing a blog post which I will release on Monday morning, giving out my reasoning for being even more bearish after what I saw last week.
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