Topping Process

They say fear is a stronger emotion than greed.  But greed definitely lasts longer.  Bottoms are an event.  Tops are a process.  Retail investors do the most buying around tops, and corporations and insiders do the most selling.  Monster IPOs, secondaries, private placements, stock-based compensation are providing the extra supply.  The supply is being met with retail investor demand.  But retail investor demand doesn't last forever.  Once retail investors get to a big allocation in equities, there is less dry powder to buy.  You get buyer saturation.  That is when uptrends end and volatility increases.  It looks like we are near that saturation point.  

Interesting price action in semiconductors this week.  Over the past few days, you have gotten big earnings beats from ASML and TSM.  Instead of going up on those beats, the semi space got crushed.  After the parabolic up move, this kind of good news, bad price action is an eye opener.  Once again, spring of 2000 vibes.  

The whole AI hardware/semiconductor trade unwind has spared almost no one, and has spread out to all the speculative stocks out there.  Quantum, space, and speculative AI hardware plays have been relentlessly going lower since the start of June.  Lots of money has been lost in those spec names.  Its game over for the fast money gamblers who have flocked to the highest beta, most speculative names. 

 

The momentum bull market has gone through a few stages, and it looks like there are no longer any viable momentum candidates to take the baton and drive this bull market even higher.  It started in 2023, when almost everything went up.  In 2024, it was NVDA and then the rest of the Mag 7 leading the bull market higher.  From November 2024 to October 2025, joining the Mag 7, all sorts of speculative assets moved higher: crypto, AI, quantum, nuclear, space, etc.  From late 2025 to June, as the Mag 7 faltered, it was the AI hardware/semiconductors taking the momentum baton.  What's the next group to lead this market higher?  Back to Mag 7?  I just don't see it happening.  There is saturation across the board in Mag 7.  Its the most heavily owned group of stocks on the planet.  Sectors like financials, health care, energy don't have the growth to justify strong momentum.  I think we've hit the end of the road in the momentum trade, and thus the end of the road for this bull market.  

Over the past couple of months, MU, DRAM, SNDK, AMD, INTC, etc. have dominated the message boards on Reddit wallstreetbets.  Similar to what you saw in gold and silver from December to February, when they made a blowoff top and then sold off.  The wallstreetbets crowd are likely holding big positions in the latest "hot" group, the semiconductors/AI hardware space.  

These retail bros on wallstreetbets and Stocktwits brag about having diamond hands, but they turn into paper hands when dealing with a margin call.  There have been lots of margin calls going around in Korea lately.  Rarely do you hear about Korean stocks in US financial news.  But heard them talking about Korean stocks a few times on CNBC this week.

 

Looking at retail investor activity gives you a bigger picture view of where we are in the cycle.  When retail investors are buying heavily after a long bull market, that usually spells trouble.  They've been buying heavily since January. 

BofA clients were heavy buyers for the week ending July 10.

BofA fund manager survey shows fund managers holding 3.6% cash.  Historically weak over the next month after previous signals.  
 

Old beliefs die hard.  Still seeing people be bullish on the market because of strong breadth.  Since 2020, strong breadth after an extended rally means that the leaders are faltering (momentum stocks weakening), which has preceded corrections (July 2024, January-February 2025, January 2026).  Expect the same to happen this time.

Latest COT data for SPX shows asset managers reducing their big net longs, and small specs adding to their big net long position.  Big picture, small specs are holding nearly their largest net long since 2021.  

Fed funds futures are pricing in a 68% chance of at least one rate hike by the end of October.  

But 83% of BofA fund managers see no Fed rate hikes before midterms (November).  Market is usually right more than fund managers, so probably looking at a Fed rate hike before the midterms.  I would expect that to be a negative catalyst in the coming months.  Also, lots of economic optimism among the crowd, as 54% see no landing, a record number.  

 

Despite lower than expected NFP, CPI, and PPI this month, 30 year yields have stayed above 5%.  Bonds are trading weak.  It appears to be more of an indicator of a lack of liquidity rather than economic strength.  The worst kind of bond market weakness for stocks.  The AI buildout is sucking out liquidity from all over, including the Treasury market.  

You are seeing record dispersion in the SPX, as the jaws widen, between index IV and single stock IV.  You saw something similar in the dotcom bubble in 1999 and 2000.  A lot of this is the rise of the AI trade boosting the average IV levels for single stocks.  Stocks like MU, SNDK, INTC, AMD, etc. are at insane IV levels.  Huge inflows into index ETFs is another factor keeping index vol contained while single stocks get more volatile.  Equity fund inflows are backwards looking, so if stocks start going down, those inflows will go down.  

To determine a market top is more of an art than a science.  There are no formulas or technical indicators that tell you where the top is.  Its a mix of fundamentals, technical indicators, price action, investor sentiment, seasonal flows, and news.  When the weight of the evidence is overwhelming, that is the time to fight the trend, to play for a trend reversal.  You can't just wait for the trend to turn down to get in.  That is a recipe for shorting dips and immediately being at a loss on the position when you get false breakdowns.  Shorting those dips in June was negative EV, especially after such a strong up move in April and May.  Shorting a bull market, especially a bubbly one, is both dangerous and low probability.  To get favorable odds, you have to wait for premium entries.   

From both a time and price perspective, this week provided a good risk/reward entry for shorts.   NDX continues to lag the SPX. Bearish. Momentum continues to underperform everything else.  Bearish.  Bonds trading weak since the end of June despite much lower crude oil prices, weaker than expected NFP, and lower than expected CPI/PPI readings.  Bearish.  All of this is happening as the SPX lingers close to all time highs.   More supply is coming, as a big chunk of SPCX shares are unlocked in August after their earnings report.  While the market is about to enter a seasonally bearish time of year, from late July to late September.  

Put on a large short position in SPX and NDX earlier in the week, trimmed some on Friday to have dry powder to short a bounce if it happens.  Given how much the semiconductors are down this week, a dead cat bounce seems possible early next week.  But I just don't see a resumption of the uptrend happening, so I will be adding to shorts into that bounce.  The war has restarted, and Iran has closed the Strait, so there is now TACO risk for those who are short.  I would be a bit more comfortable being all in short if the Strait was open, as that eliminates a potential short term bull catalyst.  

All the signs are there that we've reached a top in the NDX.  But if the NDX strongly bounces for a few days, that could take SPX back to all time highs.  I am not ruling it out.  I expect any new highs in SPX to be marginal, and manageable for those short a little bit early.  Or its possible this down move that started Thursday could be the start of a 3-4 week selloff that takes the NDX back down towards 26000 and SPX back down towards 7000.  If we get a strong bounce next week, that would delay the start of the big selloff by a couple of weeks, to late July.  If not, then I would expect this selloff to lead to a climactic bottom by mid August.  Due to the quick rally from SPX 7000 to 7600, there is a big air pocket from SPX 7000 to SPX 7350 where very little volume has traded.  The market likes to revisit air pockets to fill in some volume at those levels.  I expect that to happen in August.