No More Excuses

After a long string of fake headlines and market manipulation, the US and Iran have finally signed the MOU.  Oil is now in the 70s.  The wall of worry over war, high oil prices, and supply chain disruptions has been obliterated.  There are no more excuses for this market to go down.  No, a hawkish Fed doesn't count.  Warsh put out some tough talk on price stability, but its empty words without real action.  Most don't believe he has the balls to hike rates.  I tend to agree.  But if this bubble doesn't pop this year, Warsh could definitely do a couple rate hikes.  The SOFR curve is pricing in about 2 rate hikes for the next 12 months, so even if he does hike, its mostly priced in.  

On Monday, after Trump confirmed that there was a deal over the weekend we got a huge gap up in SPX/NDX.  I was a bit surprised by the size of the gap up, and it held for all of Monday.  But just as I was getting ready to add on Wednesday FOMC day, it started to weaken on Tuesday and didn't give me the premium entry to add to shorts.  Most of the non-AI tech stocks that I was looking to add shorts to had topped out on that Monday gap up, and were lagging the market badly by Tuesday.  With some short exposure already, I will not chase weakness to add.  Still staying away from the strongest AI momentum stocks, as those are the most dangerous to short in this environment.  Stocks like MU, SNDK, WDC, STX don't trade like speculators have a full allocation yet. 

This market still trades narrow, and the winners continue to be concentrated in non-NVDA AI names that have gone parabolic since April.   You would have expected the market to broaden out with oil plunging.  But it continues to be the momentum stocks that continue to lead this market.  Unlike 2025, the Mag7 are not leading this market higher.  

The most popular and heavily owned names among retail investors are lagging.  That is definitely a sea change from how the market has behaved since the Covid lows in 2020.  Your average retail investor is loaded to the gills with Mag7 stocks.  There is no urgency to add more.  Big cap tech is spending all their free cash flow on AI capex, not stock buybacks.  Without buybacks and retail investors piling in, the Mag7 are a shadow of their former selves.  In the 2nd half of 2025, the Mag7 was outperforming the NDX.  But that outperformance has reversed to underperformance vs the NDX this year.  

 

In the meantime, we are seeing near record levels of dispersion in the stocks in the MSCI All Country World Index.  

April and May 2026 are right up there with December 1999 and February 2000 in dispersion rank.

 

This is what Robert Shiller described as the "gambler's excitement", where a few assets go up huge, attracting gamblers to the market.  It is those huge winners which drag the index higher, while the majority have mediocre returns.  

This gambler's mentality is causing more leveraged buying of equities, leading to surging funding rates.  

 

Funding spreads are spiking, something you saw around the local tops in January 2018, December 2024, and October 2025.  

Firsthand, I see the rampant speculation by market punters every day in premarket trading. Random low float stocks, many of them Chinese, have been going up 100s of percent in the premarket on no material news.  

Wall Street is feeding the ducks while they are quacking.  Huge equity supply projected for 2026 and 2027.   

We are seeing token costs drop significantly over the past 2 weeks.  There is news that the hyperscalers like META, AMZN, and MSFT are now emphasizing more efficient use of tokens, tightening token budgets, and no longer rewarding employees for mass, indiscriminate token usage.  Also hearing that more cost efficient LLMs, like DeepSeek are gaining popularity.  This has negative ramifications for the AI capex buildout, as the Anthropic and OpenAI LLMs are more hardware intensive.  

After this week's FOMC, the market has changed their view on Warsh.  They think he will try to talk tough on inflation at the beginning to gain some credibility from other Fed board members.  That could mean that the July FOMC meeting could be hawkish and lay the groundwork for a September rate hike.  Warsh also will issue less forward guidance, making the FOMC meetings that much more volatile.  There will be more uncertainty going into those meetings, so likely more selloffs going into FOMCs than in the past.  

The Iran deal bull catalyst has now been used up.  This is significant as there is no longer positive headline risk to deal with if you are short.  It also makes investors more complacent.  We are now in the post June opex seasonal window of weakness.  Post June opex and post September opex are the 2 most bearish times of the year for stocks.  A lot of put protection has expired.  If we do get a dip next week, will look to cover shorts to re-short in early to mid July.  

There will be a substantial partial lockup expiration of SPCX shares after their earnings report in early August, so that could be another catalyst for an August decline.  Base case is that we chop up and down between SPX 7300 to 7600 for the next 3-4 weeks.  I expect that chop period to end by mid July, and a potential waterfall decline towards SPX 7000 from mid July to mid August. 

Nonchalant Investors

Last Friday, after the NDX went down 5% in one day, I was expecting to hear some concern from those on CNBC, Bloomberg, and Twitter.  Instead, most were quite nonchalant about the big down day.  They were sticking with the same sales pitch, that I keep hearing over and over again.  They said earnings are growing faster than stock prices, that the AI capex boom has a long ways to go, economy is strong, etc.  You had a similar sized pullback from late February to mid March, and traders were much more fearful back then.  Its quite clear that investor positioning has gotten much more bullish vs. 3 months ago.  You did get a bit of fear on Wednesday as SPX broke below 7300, and US/Iran exchanged some strikes but it disappeared right after you got another Trump TACO on Thursday.  

They don't ring a bell at the top, but the amber flashing lights come on more often at tops.  One of those amber flashing lights is the Hindenburg Omen.  Its one of the few multivariable indicators that have a good hit rate in picking meaningful tops.  They come when there are lots of new 52 week highs and 52 week lows on the same trading day with negative market breadth, with the index above the 50 day moving average.  Since the start of the month, we've had a cluster of Hindenburg Omen signals.  

The Hindenburg Omens are popping up just as speculative breadth is getting weaker.  Speculative breadth is the breadth of speculative stocks and assets, such as AI related names, meme stocks, bitcoin, gold, etc.  Basically anything that is popular among the Reddit wallstreetbets crowd.  Speculative breadth has gotten much weaker this year compared to 2025.  In other words, only a few giant companies that are putting up big earnings growth due to the AI capex boom are rising.  Stocks like MU, SNDK, WDC, STX, INTC, AMD, DELL, etc.  One of the exceptions is NVDA, which continues to lag its AI hardware/seminconductor peers, despite strong earnings growth.  NVDA has reached investor saturation, so those looking to buy it already have a sufficient allocation in their portfolios.    

Looking at how much inflows the DRAM ETF is gathering, as well as levered single stock ETFs in stocks like MU, we are quickly getting to the saturation point for the recent parabolic names as well.  

Speculators are also looking for more juice when buying the popular momentum names.  Leveraged long and inverse single stock ETFs AUM are up huge over the past 2 months.  Most of the AUM is in leveraged long ETFs.  Inverse ETFs only make up a small portion of the single stock AUM.  

Once you get the speculators fully loaded up on the recent AI parabolic movers, its probably game over.  I can't imagine investors rotating back to previous speculative favorites like bitcoin, gold, and non-profitable speculative tech (space, quantum, etc.).  So many momentum investors have gotten burned chasing those assets and stocks, I just don't see them repeating the same mistake they made less than a year ago.  Plus, there is lots of technical resistance above.  There are plenty of bagholders in those assets/stocks looking to unload their bags on any strength.    

Trend following CTAs are now heavy net long SPX and MSCI EAFE futures, and near max short Treasury futures.  This is even after the big pullback over the past week.  DBMF, the biggest trend following ETF, is very long stock index futures.  I don't remember seeing them this long SPX futures, or this short Treasury note futures.  

The bigger their position, the more they have to unwind when the trend turns.    

With all the IPOs planned for this year, equity issuance will almost be equal to equity buybacks/purchases for 2026. That hasn't happened since 2021, when we had the big SPAC boom.  Add to that the huge increase in the free trading float as insiders at SPCX, Anthropic, and OpenAI sell stock after lockup expirations.  Just those 3 stocks will probably unlock over $3 trillion in equity supply from now till 2027.  

The put/call ratios went up after last Friday's selloff, so you have cooled down the call option punters looking for big fast gains.  But the greed runs deep in this market, and just today, the put/call ratios have fallen right back to levels where they were before the 5% drop in NDX.  The BTFD forever mindset remains as they come right back looking to catch a rally.  Only after they've been burned a few times betting on quick rebounds in SPX and NDX will they get more cautious, setting up a waterfall decline later in the year.  

We got Iran deal headlines again, and it appears we are finally closing in on a deal this time.  There have been several head fakes regarding a deal, but the crude oil market trades quite weak, and that is the biggest signal that those putting money on the line are betting that the Strait will be open reasonably soon.  Even if we do get a deal announced, they've squeezed so much juice out of a potential deal that I doubt you get a big up move after the deal is formalized.   

Inflation fears and optimism on the US economy are driving a big push to short SOFR.  SOFR futures are pricing in 37 bps of rate hikes by early 2027.  Speculators have the biggest net short in the history of the contract.  

SOFR 3 Month Speculator Net Position

 

The market is heavily leaning towards further weakness in bonds, and strength in stocks.  The US and Asian economies are dependent on the AI boom to continue to maintain growth.  Any disappointment in AI capex growth could fuel a massive short squeeze in bonds and a market going from pricing in Fed hikes to pricing in Fed cuts.  

Overall, it feels like we are now in the topping process.  During the topping process, I expect lots of volatility but in a range bound market.  We could see marginal new highs in SPX and NDX in early to mid July, perhaps 1-2% above the early June highs.  But I expect any new all time highs to be a false breakout setting up a big down move.  

Bottom line, lot of things are lining up now for the short side.  

1. Very bullish investor positioning.  

2. Unfavorable supply/demand picture starting from now, well into 2027.  

3.  Bearish price action underneath the surface with many speculative stocks trading weaker than the index.  Hindenburg Omens firing off. 

4. Extremely high valuations in a bull market that is now almost 4 years old, dependent on an AI capex boom, which has yet to generate profits for those building the AI infrastructure. 

Covered some shorts into the dips this week, still short some speculative tech.  Looking to put some of those shorts back on sometime next week, if SPX > 7480.  I expect a choppy month, so should get another playable dip later this month after this short term rally plays out.  

An Exclusive AI Party

As the bubble gets bigger, the speculators are getting more selective.  In 2020 and 2021, the government handed out trillions over 18 months and the result was a giant speculative frenzy.  During the Covid money spew, SPACs were popping up left and right. Most of them acquired sub-par companies and took a big slice off the top, making the after market SPAC buyers absorb all the risk.  Crypto was going crazy, as were meme stocks, bought up by a bunch of herd chasing, inexperienced investors.  Stocks like GME and AMC were the poster childs of that bubble.  You had NFTs, which was a ridiculous idea in the first place, going for huge amounts.  Sports cards, Pokemon cards were rocketing higher.  That all ended with the bond market rout in 2022.  

Then the second wave of this never-ending party started in late 2023 with AI.  The first beneficiaries of this AI boom was NVDA and the AI power infrastructure plays.  They were the most popular names in 2024 and 2025.  This speculative wave got another boost that was non AI related, with Trump getting elected in 2024.  Crypto pumpers and HODLers got all excited about a "crypto-friendly" government.  I remember hearing about how stablecoins were going to go mainstream, about how crypto would allow financial transactions to be tokenized, and you could buy parts of a share of stock, or even a house.  The idea is ridiculous, but speculators were coming up with any reason to buy bitcoin, ether, and alt coins.  The real reason they were buying was because it was going up, and they thought it would keep going up.  

In 2025, everyone was participating in the party.  At the core, you had AI and AI adjacent names going straight up.  Crypto was going crazy with bitcoin/ether treasury companies raising tens of billions to buy more coins.  People were talking about alt season.  Super speculative concept stocks in quantum, space, nuclear were up over 1000% in less than a year.  The speculation was broad, indiscriminate, and caused massive short squeezes.  That phase of the bubble topped out last October.  

2026 is a different animal.  On the surface, it may seem like more of the same animal spirits as 2025, with the Nasdaq going up almost every day, and SPX following along.  But this market is much narrower than 2025.  The breadth of the speculation is poor.  Not as many names are working as 2025.  This year, its been the previously overlooked AI beneficiaries that have squeezed higher.  MU, SNDK, WDC, STX, AMD, INTC, MRVL, DELL, etc.  Semiconductors of all types are working.  AI hardware companies are experiencing huge earnings growth as the AI capex boom continues.  But beyond that, buyers are notably absent.  

The 2 main barometers of US stock speculation are NVDA and TSLA.  When they are stronger than the market, you know that your average stock investor is doing well.  While NVDA is holding up relatively well, its not rallying with the other AI semiconductor names.  It trades heavy.  NVDA had great earnings a couple of weeks ago and it sold off on the news.  Having a market cap of over $5 trillion will do that to a stock.  

TSLA trades worse than NVDA.  It is another household name that is one of the staple tech holdings among your average retail investor.  It is lagging the Nasdaq badly since it topped out last October.   NVDA has been popular among retail since late 2023.  TSLA since early 2020.  Investors already have enough NVDA and TSLA in their portfolios.  There are not enough new investors coming into the market to bid up those names.  

TSLA vs NDX

Same can be said for bitcoin as for TSLA, but to a bigger degree.  Unlike TSLA, which gets a steady stream of buying from inflows into index funds, bitcoin is a pure spec play with no passive flows coming in.  In fact, bitcoin miners are a steady source of bitcoin supply.  In 2025, you had bitcoin/ether treasury companies, in particular MSTR and BMNR, buying up huge amounts of bitcoin and ether.  That caused a big rise, but it wasn't sustainable.  The bitcoin flash crash on October 10, 2025 changed everything.  That was the event that marked the end of the post Trump election crypto boom.  After that, the bitcoin treasury company stock prices got crushed, making it difficult for them to continue to sell stock to buy more coins.  That iterative cycle of investors buying the crypto treasury company stocks forcing more buying of the coins was frozen in its tracks.  At that point, investors who were going to buy crypto had already bought it.  There were not enough new buyers (suckers) coming in to prop up an inflated meme asset.  Bitcoin got crushed this week and went down to below $60K, as the Nasdaq is still up big on the year.  That is what happens to a pumped up meme asset that is saturated with bagholders.  

As the market is getting more selective on what tech stocks to pump, you had GOOG coming to the market this week to raise $80B of new equity.  And on Friday, you had META headlines about looking to issue tens of billions of equity.   

With all this liquidity getting drained from equity markets with equity issuance, you have a very different supply/demand situation than 2025.  From a supply/demand perspective, this AI bubble is rapidly catching up with the dotcom bubble.

This is the backdrop as the SPCX IPO is coming up next Friday.  They are looking to raise $80B.  Preliminary IPO pricing is at $135/share and a $1.8T market cap.  If that's the IPO price, there will be very little upside for retail investors buying into this IPO, as the valuation is already so high that its hard to imagine buyers bidding it up to even a bigger nosebleed valuation.  $1.8T is a bigger market cap than META.  The earnings gap between those 2 companies is enormous, and SPCX is the more expensive stock!  SPCX is a space play, which doesn't have the earnings growth that speculators want these days.  It is a pie in the sky stock with xAI attached to it, which is a glorified AI data center company.  xAI has essentially given up on competing vs. Anthropic and openAI, and are just renting out their data center capacity to others who have the demand to actually use it.  

The put/call ratios continue to show lots of call buying.  In particular, retail traders are buying a lot of calls.  

The COT data as of June 2 showed both asset managers and leveraged funds reducing their SPX net exposure.  After the index went up.  That is uncommon behavior.  

 

Dealers took the other side of that trade, as they significantly reduced a big short position. They are going back to similar sized positions of the 2nd half of 2025.  It just so happens that the put/call ratios are also down to 2nd half of 2025 levels.  Dealers are likely delta hedging their short call positions by buying futures.  This matches the recent retail options activity data which shows lots of bullish call positioning.  

SPX Dealer Net Position

This week, you finally saw the AI hardware/semiconductor trade get taken for a big hit.  

On Friday, MU, SNDK, AMD, INTC, DELL, INTC as a group were down more than double that of the NDX.  For the more speculative AI stocks, they were down more than triple that of the NDX, which was down more than 5%.  Realized volatility went through the roof this week, but VIX only closed at 21.5.  This as oil was going down, which is a new development.  Up until Friday, the SPX/NDX and bonds have almost always rallied with oil going down.  That changed in a big way on Friday.  A change of character for this market.  

With the strong NFP number, bonds took a hit, and that seemed to be the initial trigger for the selloff.  But SPX kept going down, an extra 150 points even after yields had stopped going up.  Short term Treasuries look interesting after the selloff on the stronger NFP.  I will consider slowly building up a long position as I believe the Fed will be late to try to hike even with high inflation.  As the Fed delays rate hikes, the AI trade likely goes bust in the meantime.  And there is no way the Fed hikes as the stock market is imploding, I don't expect Warsh to do what Powell did in late 2018 by hiking into a falling stock market.  

I added to non-AI tech shorts earlier this week, and remain short.  I am still not interested in index shorts, as I would rather target the weaker speculative tech stocks than the whole market.  I will look to hedge some of those shorts with AI longs next week.  While Friday's selloff looks scary, they usually don't last for long, especially after such a strong uptrend.  I expect the uptrend to flatten out and get choppy with big down days followed by big up days.  That could last for a few weeks before you get the big move lower.  By July, it will probably be time to go short NDX along with speculative non-AI tech.  Until then, I will look to put on more non-AI tech shorts after rallies, and hedge with AI longs on dips.