Trust the Plan?

Things are not going according to plan.  At the start, the war was supposed to take 4 weeks.  Its been 5 weeks.  The war continues, even as traders keep trying to anticipate its end.  Trump is doing his part to keep the hope alive, that the war will be over soon.  He's been saying that the war is almost over for the past 3 weeks.  Trying to keep oil prices down, stock prices up.  After listening to his Wednesday night speech, it didn't seem like a person looking to end the war soon.  And the US keeps sending more soldiers to the Middle East.  I would actually be surprised if the war ended in 2 weeks.  But who knows? Trump flip flops regularly.  

You can't think rationally about this war.  So many analysts are trying to get inside Trump's head, assuming that a very unpopular war, with no real purpose, leading to higher gas prices would mean he would end it quickly.  But it seems he has some deep hatred for Iran.  He's attacked them 3 separate times.  One in 2020, one in 2025, and one in 2026.  This time, he's trying to send them to the Stone Age.  I doubt he'll get the deal he wants, so it looks like boots on the ground soon.  Polymarket shows how the odds have been rising for boots on the ground in Iran, as of April 3.  

Big change in trend this week for stocks, bonds, and metals.  It was mostly a one way train down from the end of February until the end of March.  Now its a different ballgame.  The market feels like it wants to rally.  A big gap down after Trump's war hawk speech was bought up ravenously after the cash open, even with oil up big.  Bonds also recovered all of their pre-Trump speech losses on Thursday.  Perhaps we've built up a big short base and they didn't want to be short ahead of the 3 day weekend, with the possibility of a Trump pump.  We have now shaken out a lot of weak hands, so you are no longer seeing sustained selling.  At the same time, with war uncertainty still high, you are likely to see some chop as there aren't many willing to buy at higher levels.  

You have purged a lot of speculative long positions.  Some of the more aggressive funds have gotten short.  The biggest trend following ETF, DBMF, is short a sizeable amount of SPX futures.  I've tracked this fund over the years, and it is rarely short SPX futures.  

GS Prime Book shows a massive amount of selling at funds in March.  Similar levels to the selling around Liberation Day in March/April 2025.  

BofA fund flows also show lots of selling in the last week of March.  The 4 week avg. for total flows is -$2.2B, compared to the 52 week avg. of -$0.4B.  Most of the selling has come from hedge funds and institutions.  Retail continues to HODL.

We saw a lot of put buying this week.  The put/call ratios have consistently stayed high, even with 2 big up days this week.  The ISEE index has plunged lower, and stayed low even with the big rally this week.  

The Iran war has scared a lot of investors.  You can see it in the flows and in the options data.  The main talking points I hear are that higher oil prices will weaken consumer spending, cause the Fed to be more hawkish, leading to weaker growth and thus a weaker stock market.  That hypothesis has a lot of holes.  The stock market isn't driven by the lower end of the K.  Its the upper end of the K that drives asset prices.  And higher prices for food and energy aren't going to change their behavior.  Only much lower asset prices will.  The SPX being 6% down from all time highs won't do it.   

As for the Fed.  I don't see the Fed doing anything but being mealy mouth and trying to support the stock and bond markets while not sounding cavalier about the coming higher inflation readings.  They won't say transitory, but they'll use other words to describe their view is that the higher inflation will be transitory.  So if the Fed is on hold and higher food and energy prices don't affect the upper end, then it shouldn't hurt economic growth.  The lower end will feel a bit of a squeeze from higher inflation, but they don't matter to asset markets.  The fiscal stimulus from the OBBA should keep the economy afloat for the next few months.  

Reduced my longs after the rally this week.  Mostly in cash.  The funds have heavily de-grossed in March.  That sets up a stock market where downside will be limited.  But the upside is also limited, due to high valuations, SPX down just 6% from all time highs, and equities at a historically high percentage of financial assets among households.  It also looks like the Mag7 trade is over, as AI seems to be the boondoggle that the Big Tech CEOs are obsessed with, even if it means taking down their stocks.  Eventually they'll face reality and cut AI capex.  Reduced AI capex means lower growth, taking down the biggest stock in the world NVDA, leading to a cascading domino in the AI space, which would signal the end of the AI bubble, like the end of the dotcom bubble in 2000.  

Markets were choppier with more W bottoms than V bottoms back in the day.  You still have a lot of old school technicians who have been left behind who can't adjust to the new environment, and need to see a retest of bottoms for confirmation.  I don't want to be that guy, the retester, but I am hoping for a retest to get more aggressive on the long side.  @RealStockCats with a nice illustration:

  

Short term, I expect a choppy market, where dips down towards SPX 6300-6400 will be buyable.  It could keep going higher towards SPX 6800, but I would rather miss the train than chase it here and bleed out if the war in Iran drags on for longer.  Not interested in shorting in this environment due to the reduced fund positioning, heavy put activity, and a more resilient tape.  Optionality is valuable in this environment.  I would continue to fade Trump pumps.  Having dry powder to take advantage of short term dislocations is essential here.