Don Tzu

We are entering the retail capitulation phase of the stock selloff.   Retail investors have been buyers of this dip, believing in TACO, believing that there is a Trump put.  That belief is eroding day by day.   Trump’s attempts at pumping the stock and bond market, and dumping the oil market are losing their effect.  The half life of the Trump pumps are getting shorter.  The lies are becoming obvious.  He is losing credibility.   The pumps used to last 48 hours,  Then it went down to 24 hours.  Then 12 hours.  Then 4 hours.   Now, everyone has caught up to the game.  That these pumps are selling opportunities.  Now the pumps don’t even last 5 minutes.  

 

With each day that passes with the Strait of Hormuz closed, it just adds more fuel to the parabolic oil rally.  And its not just oil.  Its LNG, fertilizer, helium, sulfur, etc.  We are getting closer to the point where oil prices need to get to demand destruction / hoarding levels, which would be $200+ for oil.  It probably takes another month of the Strait being closed for this to happen.  But like bankruptcy, it happens gradually and then suddenly.  The market is sensing this danger.  And losing patience as a result.  

There is a small piece of good news in the gloom and doom.  The stock, bond, and precious metals markets are diverging.  During the post FOMC liquidation from March 18 to March 23, stocks, bonds, and metals all sold off in unison, the correlation going to 1.  After Trump’s pump last Monday, markets started to diverge.  Stocks and bonds continued to trade weak, but gold traded stronger, post FOMC liqudiation.  And on Friday, while oil was going higher, and stocks were getting pummelled, the short end was rallying, steepening the yield curve.  And gold went up signficantly as stocks sold off.  Cross asset correlations are going down, as the market is now rightfully pricing in economic weakness due to stock market weakness.  The bid is returning for short duration bonds and gold.  

This is the first sign that hedge funds have degrossed significantly, enough that they are no longer panic selling their non equity positions when the SPX is going down.  According to latest GS Prime Book data, equities were heavily net sold and net leverage has gone down significantly.  

 

We are finally seeing some dark pool selling (sign of retail selling), with DIX getting down to 41.5% on Friday.  

 

The fast money has left the emerging markets this month.  Huge foreign investor outflows from Asian equities.  

Bigger picture, its still grim.  The charts for retail investor favorites, like the Mag 7 look horrible.  The Mag 7 has underperformed SPX by 10% over the past 6 months.  There is a ton of overhead supply now filled with retail bagholders in big cap tech as well as speculative small cap tech.  

 

 

 Investor cash levels are historically low.  Lots of room to sell.  

From a fundamental economic perspective, investors are overreacting to the effect of higher oil/LNG prices.  To the extent that higher oil prices make central banks more hawkish, it is a negative.  But I can't imagine the Fed hiking rates into spiking oil prices with the labor market this weak.  So there is a floor to how much they can selloff bonds here.  The lower end consumers getting squeezed by higher gas prices don't really matter for the stock market.  Its the high end consumer which matters.  It is the one that's been driving the spending over the past 3 years.  High end consumers don't really care about gas prices.  They care about stock prices. With the OBBA stimulus, extra defense spending, and tariff refunds flowing through the economy in 2026, it will take a lot to weaken the US economy.  I would only expect a noticeable economic slowdown if stocks enter a bear market.  The US is a financialized economy, and oil prices don't matter that much if the Fed doesn't react to it.  They can jawbone to try to sound tough on inflation, but I doubt they'll actually raise rates to fight inflation.  They just don't have the balls to do it with a soft jobs market. 

 

I am noticing a very different tone in investors' views on the market.  There were quite a few hopeful bulls before last week, expecting a quick TACO and an end to the war.  But that hope has been dissipating as all the Trump pumps have gotten sold, with no tangible changes.  For longs, its good to finally see the base case going from quick TACO to boots on the ground and a longer than expected war.  So less downside if the worst case scenario happens, and more upside if there is a TACO.  No one knows what's going to happen.  But if the market gives you good odds for a positive outcome, its worth making a bet.   

 

With so much put protection in the market, and an overpriced VIX, its difficult to get a IV spike led selloff (vanna selloff) because people are well hedged.  Stocks are overvalued and overowned, so the dark cloud of uncertainty over the war is enough to keep the selloff going.  But at SPX under 6400, you are getting close to levels where a strong technical bounce can happen out of the blue.  And it has been a month since the start of the war, so the selloff is very mature.  Unless you are in the middle of a bear market (not the start of one), selloffs that extend beyond 1 month without a strong bounce are rare.  

 

Hedge fund positioning has been pared down and bonds are no longer selling off with stocks.  It feels like you are getting close to a tradable bottom.  Added to longs last week, but have dry powder to buy lower.  The risk/reward favors longs here.  But we may need to go a bit lower before you get the reversal.  With the Easter holiday coming up, its possible the last remaining weak hands sell stocks this week, ahead of the long weekend, making a bottom.  Looking to buy slowly on the way down.