This reminds me of November 2021, which was the 2nd wave of speculation in the Covid bubble after the 1st wave happened in January/February 2021. The 1st wave of the AI /debasement/Trump bubble happened in November/December 2024. We are getting the 2nd wave now in October 2025. You can judge these speculative waves by watching the Russell 2000, which really only comes alive and bursts higher when speculation is hot. The Russell 2000 is filled with speculative, nonprofitable, high beta names that only catch fire when the gamblers are on the prowl. And they are definitely on the prowl.
The bearish catalyst that popped the Covid bubble in 2022 was inflation and Fed rate hikes. Inflation was rising but the Fed remained dovish in 2021 which encouraged speculators to chase after speculative names that are prevalent in the Russell 2000.
Now, the Fed is tilting dovish and will likely get more dovish with a Trump appointed Fed chair in May 2026. So what will be the bearish catalyst this time? It has to be the popping of the AI bubble as reality sinks in that a lot of overbuilding and malinvestment has taken place. The first signal of that will happen when stocks stop going up on announcements of more AI capex. We may be seeing the beginnings of that as ORCL and META are not trading as well as the SPX in recent weeks. Its still early, and you need to see more signs of AI fatigue before the rats jump ship. But you can't wait too long or you will miss the first big drop from this bubble. The first drop is always the quickest and most vicious.
What makes picking this top so difficult is seeing the hedge funds not actively playing this bubble. Leveraged funds are holding large short positions in SPX futures, as well as not increasing net leverage. In fact, Goldman prime broker data shows fundamental L/S funds sharply reducing net leverage in late September. This makes it less likely that you see hedge funds mass liquidate on weakness like they usually do when they are fully long.
While systematic funds are near max levels for equity exposure, the fundamental funds are closer to neutral. It's much better to fade a market when both systematic and fundamental funds are maxed out for equity exposure. Tough.
On the other hand, retail investors are piling into equity funds as well as call options. Call volumes have soared recently. This can be an early warning sign that a market top is coming around the corner. It was way too early in January 2021, when the first wave of call speculation hit the market. The SPX kept rallying for several more months. It was spot on though in nailing the top of the 2nd wave in November 2021. It was also a bit early in December 2024, but if you shorted in early December 2024, you would have been able to cash in on a brief, but sharp dip later that month.
These type of 5+ month rallies without at least a 4-5% correction are not common. You did see one in 2021, and almost saw one in early 2024, but they are unusual. Usually the stock market is choppier than this. But this uptrend has been quite smooth, with small dips being voraciously bought, giving bears little time to monetize shorts or put positions. Usually these type of lengthy rallies end with a sharp selloff. They aren't always deep, but they tend to be sharp enough that you get a notable VIX spike.
But the rally in recent days has been accompanied by a rise in the VIX, which is puzzling. Usually you don't see this kind of persistent bid for VIX when the SPX keeps going higher, in a non-volatile manner. The realized vol has been very low, but the implied vol keeps going up. It makes no sense. And its not as if there is a big future event that is feared keeping IV elevated. No, the government shutdown is not a feared event. It could be buyers of VIX ETFs and ETNs which are keeping the VIX well bid. There has been a lot of buying in VXX, UVIX, and UVXY ever since the market bottomed in April. But the amount of buying, which is nearly $2B combined over 6 months, is just not enough to distort such a big market. Usually a rising VIX with a rising SPX is bearish, but there are so many other signals that are flashing bullish right now.
The market is just too strong to fade here. Too many risk on signals are firing which make the rally more durable. I prefer to short a market when SPX is flat to rising while bitcoin and other speculative favorites have topped out and are going down for several days to weeks. I also prefer to see Nasdaq weaker relative to SPX and RUT. That isn't happening. And you still have the government shutdown, which keeps a fair number of chicken little investors on the sidelines. This means when the government shutdown ends, you have chicken little money coming in to lift the market. So the government shutdown is actually a future bullish catalyst. And I don't like shorting ahead of bullish catalysts. Perhaps the market tops despite all the strength in speculative tech and bitcoin. But to survive as a short seller in a raging bull market, you have to wait for perfect setups to short. And the current setup is far from perfect. Watching and waiting, probably on the sidelines until the government shutdown ends.
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13 comments:
Would u buy long term puts jan 2027 or dec 2027 here? I am seriously considering them on qqq, spy and large size otm put spreads spreads on nvda and tsla as a hedge and just leave them there for a year
I would wait on buying LEAP puts for SPY or QQQ. The IVs for SPY puts are 1.5 to 2% higher than at the top in February. That really adds up for LEAPs. LEAP puts are not cheap. When puts are not cheap, you have to delay buying them unless you feel like a big reversal is much closer. While I do think we'll get a sharp pullback this month, I don't think it will be that deep. And I expect a reflexive BTFD bounce after that sharp pullback. So not worth it yet. I am avoiding shorting NVDA, but I do think TSLA is worth shorting/buying longer term put spreads. It feels like retail is overly long TSLA and way too bullish on it.
Thank you
Long SPY 1/16 670 Puts
Will likely wait till next week to put on any shorts. Prefer shorting SPX during opex week when you see more short term tops.
Out spy puts long CLSK
Over 700+ for THE top
Looking like chop before short term top again
Agree. Thinking short term top in the middle of next week. With so many calls being bought as well as index puts expiring on Oct. 17, I think that provides an initial boost early in the week, and then a post opex hangover starting from next Friday.
There it goes. MIssed the short. Too risky to short in the hole. But it looks like the October pullback has started. Could last 1-2 weeks.
If you were short where would you look to cover, would you also add to short here?
I wouldn't add to shorts. If short, would probably look to cover some around SPX 6500, and then hold the rest of the shorts for a few more days until monthly opex/post opex Monday.
Bang 6625.
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