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.