Blockading the Blockade

Here we go again.  The markets thought we were on the cusp of a deal and then Trump flips over the negotiating table.  If you think this blockade will last, then you haven’t learned a thing over the past 6 weeks.  Trump keeps bluffing like a loose aggressive maniac at the poker table.  He thinks everyone will believe him, even after all those TACOs.  And he keeps doing it because the market reacts like its not a bluff.  This time, he’s using the George Costanza strategy of doing the opposite of what he wants, with a full US blockade of the Strait.  Trump is treating this war like a made for TV drama. 

As the drama continues, the global oil inventories go down 13M barrels a day, take another step closer to the breaking point where demand destruction pricing is necessary to ration oil.  Time is on Iran’s side.  The longer this drags out, the worse it is for Trump, and the global economy.  I did not expect Trump to score on his own goal.  People still expect Trump to act rationally,  which is the basis for the lingering hopes that this war will end soon.  Because its so bad politically for him.  However, second term Trump has a different reaction function than first term Trump.  He can’t get re-elected, so he does what he wants, and cares less about public opinion.  Its hard to explain, as he's acting more like the President of Israel than the President of the United States.  The conspiracy theory about Israel blackmailing Trump with the Epstein files seems plausible now.  

As a bonus for all the chaos he creates, him and his family and friends are making a killing with insider trading.  Yet the exchanges still can’t figure out who did the suspicious trades ahead of his “Truths” throughout this war.  The CME zealously goes after small time "spoofers" who are harmless, yet can't seem to track who did those giant, suspicious trades a few minutes ahead of Trump's Truth bombs.  The system is completely corrupt.  The grift is done in plain daylight and the cops on the beat are acting like nothing happened.  

Before the weekend events, the market made an emphatic statement.  It stated that you can’t hold back this bull.  They say that the stock market takes the stairs up, and the elevator down.  Well, that's flipped for this market.  It takes the stairs down, and the elevator up.  That is why its dangerous at this stage of the cycle to position for a bear market.  The bull market has lasted for so long, and with so many staunch believers, that its going to take time to transition to a bear market.  The FOMO is so deeply entrenched that stocks actually go up faster than they go down!  It won’t last forever, and the longer this market goes sideways, the more explosive the move will be afterwards.

 It is amazing that in a choppy market that has trended mostly lower in 2026, we've seen over $500B in US Listed ETF inflows YTD.  This dwarfs the inflows from any of the previous 5 years, and those were some very big inflow years.  Investors can say they are bearish in the sentiment polls, but their actions are completely opposite.  There are a lot of fully invested bears out there.  

 

When stocks are in an uptrend, investors either chase stocks at higher and higher prices or get left behind holding cash, underperforming the index and their fully invested neighbors.  This relentless uptrend reinforces investor behavior to buy stocks as soon as they receive their paycheck.  The sooner they buy, the better the entry price.   It rewards aggressive allocations to high beta stocks.   It rewards use of leverage:  the more they buy, using margin or call options, the more they make.  All of these psychologically reinforced behaviors have taken stock valuations to excess.  It leads to investor saturation.  It appears we've reached that point in the cycle.  

Once you get to the saturation point, the uptrend transitions into a choppy, range bound market.  It started in October 2025.  As the stock market chops violently at the top, you change the psychology of stock investors, who are very heavily invested in stocks as a percentage of their net worth.  Instead of greed, you introduce fear into the equation, as more and more investors are underwater on their stocks.  Instead of getting rewarded for buying as soon as they get their paycheck, they sometimes get punished.  And they really get punished for buying call options and buying stocks on margin.  And to make matters worse, their favorite, high beta names which all their buddies have crowded into underperform. Popular leaders, like the Mag7, as well as retail favorite stocks like PLTR have lagged badly.  

The psychology slowly changes from FOMO to sell the rips to have cash to buy the dips.  With the market chopping sideways, it rewards patience and waiting to buy lower, rather than chasing at the highs.  And when the market gives you more opportunity to buy at lower prices, it reduces the urge to buy when the market is going up.  This reinforces the chop pattern.  Out of this sideways chop pattern, you get a new trend, either up or down.  Based on all the long term indicators showing a very overvalued, aging bull market, odds are high that a bear market emerges once the chop phase is complete.  A rough estimate is that we are 75% through the chop phase of this market.  

Retail behavior is changing, as Citadel notes in their retail trading report. 

Retail cash flows into equities went from very high for January to negative by early April.    

Vanda Research confirms the much lower retail flows.

Just like the dotcom bubble, this bubble is driven by retail investors.  It is their fervor for stocks which has kept the bull market going.  When they become less eager to buy stocks, watch out.   

CTA exposure to equities has plummeted.  This is a bullish thing, as you can see that the markets rallied strongly after each of these purges, except in 2022, when the selling pressure was so intense that positioning didn't matter.  

 

The DIX from Squeeze Metrics has once again proven to be a great indicator for spotting bottoms.  The bottom on Monday, March 30 was the bottom of the downtrend, at SPX 6343.  The DIX hit a 52 week low at 39.3% on that day.  Since then, the SPX is up 480 points in less than 2 weeks, and the DIX on Friday, April 10 closed at 47.6%, the upper end of the range for 2026.  

 

There has been a lot of put buying (opening transactions) since the war started in early March.  Traders are very well hedged with puts, and not doing much call speculation.  You did finally start to see more call buying on Friday, as ISEE went up to 124. The ISEE index 10 day moving average has plunged down towards 100, which is equal amounts of puts and calls opened.

Sold remaining longs last Wednesday.  Holding cash waiting for a dip to buy, around SPX 6600, or waiting a few weeks to short around all time highs if it goes there.  Don't see a compelling trade at this point.  Given how much CTAs and hedge funds have de-risked over the past month, I would lean towards the market grinding higher in the coming weeks.  Seasonally, its a strong time of year, from now until mid June.  I am only interested in the short side after investors put this war behind them, which will probably take weeks to months from now.  I expect a lasting TACO soon, even with the latest threat of a Naval blockade.  Those betting on escalation are betting against TACO, which is usually a bad bet.