The Straw and the Camel

The Friday Trump tweet was the straw that broke the camel's back.  Its easy to forget about all the other straws that were added onto the camel, but they had much more to do with the big drop than the tweet.  Lots of excesses were building up in the system, one straw at a time.  The massive inflows into equity and crypto ETFs, the rampant call buying, the lack of realized volatility.  People were talking bubble, but with the view that the blowoff top was ahead of us, not behind us. These straws already were placing a lot of stress on the camel.  It just took a Trump tweet to collapse the camel's back.  

Now all the Monday Morning QBs will say that Trump took the market down, and that the TACO will bring the market right back up to where it was before.  That's unlikely.  This move down wasn't about tariffs but a return of volatility.  We could get a 1-2 day bounce, but I think this will last until more puts are bought and investors are more protected.  After that, we could have a reflexive rally later this month.  I would guess this pullback is at least 5 days in length, although I don't expect it to be very deep because investors will likely see through the tariffs, and there is still a lot of greed in this market that will remain until you get more signs of weakness in AI + high beta spec names.  Those stocks are still very strong relative to the market vs. where it was the last time SPX was under 6600.   

While there are still some tariff bears out there, a lot have been taken out and shot, with much less in their pockets.  And the remaining ones aren't so loud and proud.  Tariffs are a paper tiger.  They won't last.  The Supreme Court starts arguments on Trump's tariffs in early November, and should come out with a decision before year end.  All the lower courts have rescinded the tariffs by wide margins.  That already signals that odds heavily favor Trump's tariffs being ruled illegal.  The Supreme Court has a conservative majority, but these judges definitely care more about their equity portfolios than Trump's ego.  Besides their selfish desires, they have legal reasons to rule against tariffs.  Many of these conservative judges tightly follow what's stated in the US Constitution.  There is nothing in the Constitution that gives the President the right to tax.  Tariffs are a tax.  That's the power of Congress.  

On Kalshi, odds are at 38% that Trump's tariffs remain.  I would say the actual odds are much lower.  You have to realize that lots of these bettors have a political bias, and many Trump fans/Republicans will vote that Trump's tariffs are going to stay.  That's the reason a lot of these 80/20 scenarios on politics end up being 60/40, or 55/45 like the Trump/Harris election odds in 2024.  A lot of people vote their political bias when it comes to political betting.  That skews the odds closer to 50/50, which is the approximate ratio of Dems and Repubs in the US.  

If I had a Kalshi or Polymarket account, I would bet heavy on the Supreme court ruling against Trump's tariffs.  I view it as almost a slam dunk, similar to Trump's victory last November.  If the Supreme Court upholds the lower court rulings and rule against Trump's tariffs, that makes Trump's tariff tweets toothless.  And all of that tariff money has to be refunded, which would end up being a huge corporate tax refund that would be stimulative for stocks.  This is the one bullish catalyst I don't want to be short ahead of.  Its also why I think this trade war is basically over.  Yes, Trump can use other legal sections to put on tariffs, but they will be limited in duration and scope.  So basically future tariff tweets will be nothing burgers.  And I bet corporations will sue immediately to get future Trump tariffs repealed and outlawed.  

The one force that is more powerful than the US President is the corporate lobby, which rules over Washington DC.  Corporations are the main financial engine for politicians and their campaigns.  Politicians will not bite the hand that feeds them, especially when it would also hurt the stock market.  

Friday did show where the weak hands were in this market.  Clearly, the weak hands are in the crypto space.  Bitcoin flash crashed down almost 20% at the end of Friday.  Lots of alt coins went down over 50%.   It was a massacre for those leveraged long cryptos.  The insiders at the crypto exchanges must have had a field day picking off retail traders and buying the liquidations at fire sale levels.  Crypto exchanges are modern day bucket shops.  When there is no inherent value, volatility can rise quickly.  Because there are no value buyers.  

Its disappointing to miss the index short waiting for the perfect setup but that's the price for being selective.  Missing trades is part of the game.  We have a big gap up on the TACO trade.  I see very little upside from this gap up, but I will not fade it.  I may put on a small short later in the day if we get a gap and go scenario after the cash open, perhaps around SPX 6660 to 6680.