You are now 2 months into the Iran war, with just a ceasefire and no deal, with the Strait still closed. Yet here we are above 7200 on SPX. The market has shown its hand. It wants to go higher. Its counterintuitive, but the stock market will be more vulnerable to a drop after the Strait is open than before. Having a shut Strait keeps that carrot in front of the donkey. That donkey will keep going trying to eat that carrot, just in front of it. All these Iran deal pumps by Axios are the carrot. The anticipation of an exciting event is often better than the event itself. Once the donkey eats that carrot, there is nothing to look forward to. It relaxes. It rests.
I don’t think this market will make a top until after the Strait is open. The opening of the Strait is a bull catalyst. Shorting in front of a bull catalyst is dangerous. Even when the market looks overextended.
This war is a good way to filter out those on Fintwit and the financial media. Those still talking about the Iran War, oil prices, and supply disruptions affecting the stock market are stuck in the rear view, always looking backwards. These are likely the ones that you want to fade. Those who have moved on and realize that the market is focused on other things, mainly the ongoing AI boom, are looking forward. These are the ones that understand markets better, and are flexible and listen to the market instead of CNBC and Bloomberg.
Last week was filled with big tech earnings and the FOMC, events that could have stopped the uptrend, but ended up being a wall of worry that the market climbed over. There was nothing new in these earnings reports. The hyperscalers are still pouring massive amounts into AI capex. But they are getting less bang for their buck, because of the ridiculously high prices for semiconductors. At some point, big tech companies will want a return on that investment. And while they are less price sensitive now, the closer they get to the end of their AI buildout, the more price sensitive they will become.
This grace period for reckless spending on AI is going to end sooner than people think. It looks like its already ended for META. Who is the next Mag7 to join that list? The SMH (semiconductor ETf) has outperformed IGV (software ETF) by over 60% in the past 6 months. This is dotcom bubble territory for tech divergence.
There is a generational short opportunity building up in semiconductors/hardware. It is loved by the investment community. The rally is getting parabolic. Timing the top is the hard part. If you have a long term view and lots of risk tolerance, you could short now, and profit handsomely a year later. But if you short now, you may have to sit through a painful rally for the next few months. The options market isn't showing signs of excessive pricing of calls vs puts, which led to reversals in previous rallies in the SOX index.
You have now seen a return of the call buyers into this market for the past 2+ weeks. The risk appetite is returning, but its been much less broad, as semiconductors and AI centric energy names have been the outperformers. The ISEE index is now back towards late 2025/early 2026 levels, so investors are definitely feeling more comfortable speculating on further upside.
Hedge funds have not fully embraced this rally in tech. They were big sellers of Info Tech from April 17 to April 30. Hedge funds definitely act differently than they used. Now they seem to be less trend following and more mean reversion / trend fading in their behavior. There is less dumb money in the hedge fund space these days, so their positioning information is not as useful as before.
Bigger picture, you have very high allocations to stocks. Not a great timing tool, as this level has been elevated for the past 2 years. But it gives you an idea of how much potential weakness is possible when the bull market tops out.
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