Drip Drip

This is the worst type of selloff.  For bulls, it is one paper cut after another, followed by quick relief, and then another series of paper cuts.  For bears, it is agonizingly slow progress to the downside when all the cross asset moves should have caused a bigger move lower.  The relentless march of time decay erodes the time value of puts, as there is no explosive upside for put buyers as the market drips lower, keeping IV contained.  

When investors are not willing to pay up for put protection, dealer option books are short fewer puts than normal.  This reduces the index delta hedging / IV rise feedback loop (gamma/vanna effect) when the market goes down, making selloffs look meager and lifeless.  But this type of market condition also breeds a dangerous situation where investors have less put protection while also holding large net long positions.  Investors are skydiving without a backup parachute. 

SPX put deltas for customers are showing very light customer hedging.  Very different picture than September 2025.

 

Apparently Leopold of Situational Awareness is back in a big way, and was single handedly responsible for the NDX outperformance last Friday and on Tuesday.  Talk about a price insensitive buyer who has no patience.  Now that he's back in the water, NDX has been underperforming SPX since Thursday.  Probably going to see another Leopold moment, but this time will probably be quieter with call options bleeding premium and deltas going into October opex.  Makes me more bearish NDX than SPX for the next few weeks, especially considering the Anthropic IPO coming up.

 

I believe that stock market bubbles don't burst because of external causes, such as higher bond yields/higher energy prices.  Bubbles burst because perception gets way ahead of reality, too many pile in looking for speculative gains with minimal support from long term fundamentals.  The bursting of the AI bubble will result in the vol event, not a vol event causing a bursting of the AI bubble.  

The price action this week just reinforced my belief that in order to get a sustained selloff, it has to come from AI.  Oil prices surged higher, along with bond yields, as the war drums got louder, but the market could still not selloff more than a fraction of a percent each day.  It was a drip drip slow bleed that was profitable, but frustrating to watch.  In the back of my mind, I know that there is a relief bounce just around the corner.  Oil prices don't grow to the sky.  Same for bond yields.  You could get another BS peace deal rumor.  It doesn't matter.  These kind of moves in oil and bonds are not sustainable.  As soon as they reverse, or even pause, shorts are going to be squeezed.

To get a real correction, you need to see AI stocks continue to lag the overall market, and after that, the AI capex boom to end.  The use of AI (at much lower prices) will probably still rise despite the AI capex boom ending.  It just means that the demand for semiconductors and AI infrastructure drops, which can easily happen while there is still growth in AI usage.  That is what happened in 2001 when the dotcom bubble burst.  I expect a repeat of that in 2027.  

Percentage of stocks in a bear market is very high with the SPX within 3% of an all time high.  

Fed flow of funds data out today.  Shows a big increase in household percentage of financial assets held in equities as of June 30, 2026.  Blasting to a new all time high.  They are all in on stocks.

The inflows into equities continues, according to BofA.  6th largest weekly flow in BofA history (since 2008). This time, its hedgies and institutions leading the buying, while retail sells.  

 

The latest COT data show mixed flows.  Asset managers have been reducing longs in SPX futures, while small speculators have been adding to their net longs in both SPX and NDX futures.  No clear signal from the speculator positioning there.

Asset managers have continued to trim their large net long position in SPX futures, now down to levels last seen in March.  

SPX Asset Manager Net Long Position

 Dark pool index (DIX), which shows dark pool market maker short activity (retail buy activity) shows retail buying the dip this week.  Retail is showing very little fear.

Put/call ratios remain near the middle of its range.  Investors don't seem to show any fear on selloffs, and no real excitement on rallies.  

 

After the CPI, the odds of a FOMC rate cut next week shown by the CME Fed funds futures went up to 90%.  The bond market cares, as it continues to selloff, but the stock market has been very resilient despite the march higher in bond yields.  With the STIRs market already pricing in a hike, its likely that you could see a relief rally after the Fed hikes 25 bps.  Add the rise in crude oil prices this week and the stock market "should" be down more.  But you have to trade the market that you see, not the market that you want to see.  

The big picture remains the same, a very late stage bull market where the uptrend is starting to flatten out, but with investors remaining very complacent.  Investor inflows into equities continue to keep the stock market afloat, even as the enthusiasm wanes, the TINA (there is no alternative) belief remains even as bonds keep bleeding out.  

Have been very patient with the short positions but there just hasn't been enough progress and my short term conviction has gone down.  Less short term conviction = smaller position.  I trimmed my short position after the CPI came out, seeing bad price action after a slightly hotter than expected number.  It feels like the market will just trade sideways until FOMC, and then  have a relief rally/squeeze into triple witching opex.  I will look to re-add shorts if SPX goes back towards 7750-7780.