Sticks of Support

Post opex weakness came as advertised, even as oil prices and bond yields went lower. A blowout MU earnings report resulted in a huge gap up that was aggressively sold at the cash open.  Good news, bad price action.  

We continue to see a very split market, with lots of highs among the semiconductors and lots of lows spread out among a variety of sectors.  Semiconductors continue to outperform  the Mag 7.  The semis have held up the SPX, but their strength has wobbled this week.  Another Hindenburg Omen fired off this week.  There is growing evidence that we are making a significant market top.  

As the market is showing topping signs, $119B went into US equity funds for the week ending June 17.  Easily the biggest weekly equity fund inflow since 2015. 

Retail is aggressively participating in this market, as of June 15.  

Starting this week, retail investors have been on a buyer's strike.  You are seeing less buying in the dark pools, meaning less retail buying this week.  The DIX index has plummeted.  Low DIX readings have often marked short term bottoms as retail sells. 

This week, investors finally pulled money out of US equity funds for the first time in 3 months.  Its a drop in the bucket compared to the deluge of inflows over the past 3 months.   

 

As of June 16, hedge funds have historically high beta exposure.  

As of mid June, GS Prime Broker data shows hedge funds have accumulated heavily in US equities and macro products over the past 20 days.  

It is unusual to see such heavy inflows into US equity funds while the market is chopping violently from the top to the bottom of the range (SPX 7300 to 7600).  Perhaps it is the Iran-US peace talks and opening of the Strait that is getting investors more bullish.  It could just be investors seeing the strong uptrend since the end of March and feeling like 2026 will be like 2025, where the market bottomed in the spring and went up continuously for 6 months. They are feeling FOMO.  

Realized volatility is increasing, but the VIX is well behaved.  The put/call ratios have been increasing since early June, as the uptrend has turned into a violent, choppy sideways range.  Options traders have gotten much less bullish.  ISEE index is now back down to more normal levels.  

We had a big drop in the net position of commercial traders (dealers) after June opex.  Before June triple witching expiration, there was a huge amount of calls that dealers were short (customers were long) that they hedged by going long SPX futures.  The unwind of that position resulted in commercial traders having the biggest net short position in SPX since early 2025. 

SPX Net Position of Commercial Traders

The US stock market is going up because of the AI boom.  Hyperscaler AI capex spending is driving economic growth.  But the current situation is unsustainable.  The ridiculous prices for memory, GPUs, storage, etc. are not compatible with hyperscaler profitability.  MU, SK Hynix, and Samsung's profits are coming at the expense of OpenAI, Anthropic, SPCX, MSFT, NVDA, AMZN, GOOG, META, and ORCL.  These mega tech companies will not continue to burn cash in a bottomless money pit if their stock prices keep going lower.  

The Mag7 continues to lag the Nasdaq 100.  The Mag 7 is down 7% YTD while the SPX is up 8%. It is wild to see the Mag 7 down 7% this year considering how much money has flown into US equities YTD.  I finally heard CNBC commentators mention this Mag7 underperformance this week.  It probably means we are near the end of this trend.  I expect the hyperscalers to begin to rein in their spending on AI capex, as well as AI token use.  That's likely to happen as soon as the next earnings report season in late July.  That would be bad news for the semiconductors if that happens.  

You are already seeing a shift in the share of tokens used from more expensive US models to cheaper Chinese models.  The Chinese models are rapidly catching up with the US LLMs, and I expect more companies to use slightly worse models that can get the job done for much cheaper.  

Into the post opex weakness, I covered my short tech short positions.  We are now around the start of a seasonally strong period for the market, near the end of June into middle of July.  Given the big unwind in long call positions from speculators, evidence of retail selling in DIX index, and higher put/call ratios, we could see a bounce towards the upper end of the SPX 7300 to 7600 range.  Bought some gold into the weakness this week, looking for a technical dead cat bounce next week.  Big picture, seeing classic signs of topping.  But I expect the speculators will give one more push higher before we get the big move lower in late July/early August.