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.