The Strait went from being open to then being closed. The market is looking past it, as this gap down is tiny compared to all of the gains in the past 3 weeks. This market wants to go up. The news is a distraction which often tricks traders into getting into positions at the wrong time. Yes, the Strait of Hormuz is still closed. But those who were worried about geopolitics and higher oil prices have already sold. Some may have bought back in, but a lot have not.
We've replaced a lot of weak hands with stronger hands in the stock, bond, and commodities market. That makes the market much less vulnerable to liquidation waves like we saw throughout March. Once these pod shops and hedge funds liquidate their positions, they don't all come back with the same size when markets go back up. They get back in with 30, 50% position sizes which makes them much less likely to get stopped out. It is a self reinforcing volatility crush. Less size means less market impact from stop losses.
The stairs down, elevator up phenomena is a recent one. It is clear that the market has more FOMO (fear of missing out) than FOLM (fear of losing more). That manifests itself in choppy down moves that take a month to get to the bottom, but a relentless surge higher every day that takes much lesser time to recover the losses.
The options market is definitely trading differently than the cash market. Options traders are fast money. Cash traders/investors are slower money. The options market has entered all in bull mode. On Friday, total options volume was 99.4M, 47% higher than the recent average. Call volume was 61.5M, which is the highest number that I can recall seeing in a long time. The put/call ratio was just 0.61. The ISEE index also shows the rapid increase in opening call transactions vs. puts last week. We are now back to levels seen near the highs in late 2025.
The first group that the fast money have clamored to are the semiconductors. Their favorite group is still AI hardware. April is only halfway done and the semiconductor ETF inflows are the biggest ever. The March outflows that took the whole month, which was the biggest outflow in history, was only half as big as the inflow so far in April. The fast money doesn't wait for the all clear sign from news headlines. They are already piling in to the highest beta sector in the market.
The SPX COT shows asset managers back towards the highs for net long positions. But small speculators, who tend to lag the asset manager positions, have still not gotten even close to their previous big net long positions.
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SPX Small Speculator Net Position |
The VIX closed at 17.48 on Friday. Normally after such a strong rally, the VIX would be under 15. The options market is pricing in a higher volatility environment even after big rallies like it did in 2000, 2007, and 2021. If the VIX sustains below 16 for a few weeks, then I will admit that we've entered back into a boring, grinding higher market. But I suspect that we'll keep this higher volatility environment for the rest of the year, with realized vol catching up with implied vol, with less dispersion as correlations increase with all risk assets acting like one. The positioning is just too big in equities for there not to be a true panic on the way down later this year, not this stair step down, elevator up price action we've seen so far.
Entered in a premature short position last week. Will look to get out sometime this week, as it was only meant to be a short term trade. It was a bad entry point. There will be much better spots to enter shorts in May. Any Iran war related weakness will not last for long, as this market is clearly back in full bull mode. Do not fight it until you see the uptrend flatten out and worries about the war are over. The war could end, or it could not. But the worries about it will eventually fade way regardless, just like Russia/Ukraine. I only want to put on long term shorts after the crowd is no longer looking at Hormuz traffic or discussing the war.
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