Return of the Call Punters

The savage rip higher in SPX this week has reignited the bullish horde.  Last week's momentum capitulation in semiconductors acted as a springboard for this week's rally.  Catch up call buying has added fuel to the fire.  If we were in the middle stages of the bull market, I would say that last week's bottom was enough to fuel several weeks of upside.  But my view is that we're in a late stage bull market where rallies do not last for several weeks.  The price action from early June to late July is more indicative of the future than the price action in the first week of August.  

The speculators are leaning heavily to one side of the boat.  That is a precondition for a long term top, but not sufficient.  You also need to see price action showing fast money/ momentum performing worse than slow money.  Fast money was having a feast over slow money until June.  That's changed dramatically, as SPX has been outperforming, with lower beta stocks outperforming higher beta stocks.  In particular, retail favorite names like TSLA, MU, SNDK, AMD, DRAM, SOXL, etc. have been notable underperformers.  Kospi is at the center of the AI buildout trade.  It has been lagging both NDX and SPX badly throughout the summer.  All of this is happening despite the heavy inflows into tech funds.  The sharp reduction in Mag7 stock buybacks and big increase in supply from IPOs and secondary offerings are taking their toll on the market.  Equity inflows are fickle.  They follow performance with a lag.  When the inflows dry up, the market will be vulnerable to a waterfall decline.   

There are rare moves happening with increasing frequency.  There was historic levels of SPX call volume on Tuesday.  

 Rarely do you see SKEW go down so much when SPX is ripping higher.  Its usually the opposite.  The last time its happened to anything close to this degree was January 2018, right before a 10%+ drop in SPX in February.  

Call speculation has come back with a vengeance.  SPX Call Skew at extremes, even higher than late October 2025, May/June 2026.  Previous 2 extremes were near local tops.  

The torrent of equity inflows continues.  During the 5 weeks leading up to July 31, investors aggressively bought the dip, as tech funds 5 week rolling sum of inflows is highest ever.  

Schwab clients are bullish.  

Record margin levels at Schwab.  

Its not just retail that's heavily net long.  Asset managers + leveraged funds are very long SPX and MSCI EAFE futures.  

This week, as risk assets rocketed higher, it was notable to see MU, SNDK, DRAM, and the Kospi underperform.  While that was happening, software names were booming higher.  There continues to be a squeeze on the hedge funds who are still stuck in the Jan-June playbook of long semis/AI hardware and short SaaS/software.  I can see that those on Reddit wallstreetbets are not having fun while the SPX is making new all time highs.  They are all crowded into the same names:  MU, SNDK, DRAM, AMD, INTC, etc.  The most likely scenario is that they have their Leopold moment in the next couple of months and puke out their AI infra plays when the pain gets to be too great.  

As for the macro/fixed income backdrop, I think people are still too complacent about the Fed hiking.  Yes, you got a weak NFP number, and Warsh is a Trump puppet, but inflation is the key variable, not jobs.  Elevated inflation with a stock market at all time highs and massive investment spending on AI, it is a no-brainer to hike rates.  The Fed always acts too late when hiking, so it doesn't surprise me that they are behind again, and likely forced to re-establish their credibility with some hikes.   The weakness in fixed income despite numerous TACOs is the tell.  The bond market is telling them to hike.  

You will be wrong many times in this business.  How quickly you realize that you are wrong is what keeps losses under control.  Being early is still wrong.  I was too early beginning shorts around SPX 7600.  I was still stuck in my view that the early June highs would act as a ceiling. I recognized my mistake on Tuesday, and slowed down the pace of additional shorts, until this Friday, when there were signs of momentum stalling.  I plan on adding more to shorts next Monday/Tuesday.

I believe this week is a false breakout that will be given back within a few weeks.  SPX outperforming NDX for several weeks after the NDX made a euphoric all time high is reminiscent of spring/summer 2000 and late 2021.  A split market with lots of individual stock volatility is another symptom common at long term tops.  So are heavy inflows into equity funds.  All the pieces of the puzzle are fitting exactly as one would imagine a bubble top to be.