Volatility is Flatlining

Over the past week, we got all kinds of news and events, but the market has gone nowhere.  The AI news about slowing the pace of AI investment due to safety concerns, which seemed like a nothingburger, but people made a big deal out of it.  And it ended up being much about nothing.  Ever since that news came out last weekend, NDX has been outperforming SPX.  

The talk of the town this week was the Fed rate hike.  The market didn't seem too concerned, as it didn't really selloff much going into the FOMC meeting, and then you got a stop run after Warsh came out more hawkish than expected.  It seemed like an overreaction to the news.  What were people expecting?  A one and done announcement, a dovish hike?  The Fed never does that.   Especially non-forward guidance Warsh.  A dovish hike is like jumbo shrimp.  Fed reactions are usually overreactions and often reversed in the following day.  That's exactly what happened on Thursday.   

Those looking for a quick strike in this market have been disappointed.  It is quite unusual to see such a dull market when the market is making lower highs and lower lows.  Usually investors get worried when stocks are making lower highs and lower lows.  But the down moves have been small, so investors have shrugged off the weakness, expecting a rally to come to save the day.  And that's what's been happening.  Investors don't want to sell weakness, and they are not heavily hedged with puts, meaning gamma selloffs are unlikely.  So you get weak selloffs, which often reverse.  

One of the best indicators of retail investor flows is the DIX index, which shows dark pool short selling by market makers, which take the other side of retail orders.  They are going higher as the market is going sideways.  A high DIX is not necessarily a bearish signal, as DIX was high for much of the April to October 2025 rally in SPX.  But they are a warning signal of potentially more selling when retail is buying the dip and the market is trading sideways, like now.  Previous similar instances were early March 2026 and mid July 2026.

Last week, for the week ending September 11, BofA flows showed a big outflow from all investor types.  But this just partially negates the big inflows over the previous 4 weeks, as the 4 week flow is still positive.  

A note on the retail flows from BofA and implied by DIX.  BofA private clients are wealthy retail investors, while DIX is a representation of the payment for order flow retail brokers like Robin Hood, Schwab, Fidelity, E-Trade, etc.  

According to GS prime broker data, from Aug. 28 to Sep. 10, hedge funds were heavy buyers of tech stocks.  

Leopold apparently continues to splash around in the options market, buying OTM calls on high beta AI plays.  These options expire within 2 weeks, so he's basically buying expensive short term lottery tickets.  The guy just can't sit still.  Money continues to burn a hole in his pocket.  A degenerate gambler running a $10B hedge fund.  

You got a couple of investor sentiment surveys out this week, showing many more voting bearish.  In particular, the AAII investor survey showed a big jump in bears.  Yes, if you get these bearish numbers for a few weeks, its a good bottom indicator, but its just been one week, which often means more weakness ahead (see February/March 2025, mid March 2026).  

We've seen heavy inflows into TLT, as long bonds have been selling off for months.  Usually this happens in an uptrend, not a downtrend.  Being bullish bonds may seem contrarian, but the crowd has been buying, not selling.

SPX COT data as of 9/15 shows small speculators with a big reduction in net longs, ahead of the FOMC meeting.  

Short term, the market is lulling investors into complacency.  But we are seeing early signs that investors are starting to get worn out, as you have seen put/call ratios slowly rising, more bearish responses to investor surveys, and some investor outflows.  Now that September opex is behind us, we are in a very bearish 10 day period where investors have on less put protection and the stock buyback window closes.   One thing to keep an eye on is NDX outperformance over SPX since last Friday.  If it continues, it would make me less bearish and I will reduce my shorts.

I covered the rest of my shorts before the FOMC meeting, earlier in the week, and have put back on shorts on Thursday and Friday.  I want to be short going into the most bearish 10 day window of the year, as investors are starting to get worn out and more likely to lighten up on stocks.