Fear and The Nile

Vol is back.  The intensity and volume of the selling on Thursday was rare.  SPX futures volume hit 3.35 million contracts, more than twice average volume, and during the first hour of US cash trading, when the index was plummeting, 860K contracts traded.  Total put/call ratio closed above 1.0.  Thursday was a lethal combination of hedge fund liquidations, forced leveraged ETF selling, vol control selling, and even retail investor selling.  Thursday will leave a mark.  

Those looking for another V bottom like late March or late July are likely to be disappointed.  The price action in speculative tech stocks beyond the index has been horrible for months.  It finally caught up to this market.  Retail investors, who have been a huge part of this bull market, are losing loads on money in the AI trade.  It is retail that is pouring in hundreds of billions into the market, providing the endless bid to this AI bubble.  They are now in real pain.  Its a much more serious situation than either late March or late July.  Meaningful financial as well as psychological damage has been done to retail investors and the institutional momo tech crowd.  Going forward, Retail FOMO buying will be difficult to induce like you saw for the past 3 years.

SPX is still only 6% down from all time highs hit in October, so not a great opportunity just yet.  Usually you get strong reflexive bounces after SPX is down 9+%, like you saw in March 2025, and March 2026.  

NDX is down 16% from its October peak at 26629.  Technicals are less important for NDX than SPX, as there is much less options open interest and not the benchmark, so take it for what its worth.  NDX has strong support in the 25500 to 26000 zone, where it traded for much of late 2025 and early 2026.  SPX doesn't have strong support until you get down towards 7000.  

The charts only reveal a part of the story.  Ultimately, its investors who move the market, not chart patterns.  From scanning Twitter and Reddit message boards and watching CNBC, the recent move down in AI tech names has caught many investors off guard.  It is a mix of shock, awe, and denial.  They all say basically the same thing:  How can these wonderful growth stocks go down so much when earnings are so great, when 2027 earnings will be even better?  They have completely bought into the AI growth story.  Without a doubt, they are the most bullish on AI hardware and semiconductor names.  Their favorites are MU, SNDK, NVDA, NBIS, DRAM, AMD, INTC, MRVL, BE, etc.  Now that the price action is questioning their beliefs, they cannot accept that this market has changed.  They are still in denial. 

There are AI data center fears with the Democratic sweep of Congress and winning the governor's seat in Texas and various other states.  They are worried about the AI data center buildout being slowed down because of the Democrats.  That's a supply constraint issue, which isn't that big of a deal.  Democrats aren't that different from Republicans, they are bought and paid for by corporate interests, and will agree to data centers being built if they get a ton of lobby money.  What will really kill the AI trade will be when the demand is just not there at current prices, and that the value gained from AI is not as high as everyone thought.  That's when the capitulation happens and you get waterfall declines.  We are definitely not even close to that point.  

In the 2000 bubble, earnings were coming in great until the latter part of the year, when suddenly the outlook changed.  The Nasdaq topped out in March 2000.  It went down sharply from the top, but then stabilized and chopped sideways for 5 months.  During this chop phase, there were no visible signs that earnings were about to fall off a cliff. No signs that consensus estimates would be completely wrong for 2001.  Then the bear market started in September 2000.  Only as you got closer to the end of 2000, after the Nasdaq was firmly in a downtrend that the bad news in tech started coming out in waves.  

We still haven't gotten to the wave of bad news quite yet.  Coreweave CDS blowing out is one thing.  You need to see hyperscaler CDS blow out if you really want to talk about bad news, and that's unlikely to happen without real fundamental changes.  You need to see big earnings misses at the semiconductors and hardware companies, which hasn't happened yet.  

Last month's Mag7 earnings reports were a disappointment, but not a disaster, and most of big tech's earnings estimates are still stable.  The hyperscalers still have huge AI capex plans, so the consensus is that 2027 will be a continuation of the AI boom.  But as Mike Tyson said, everyone has a plan until they get punched in the face.  The tech CEOs are currently getting punched in the face. 

Stages of grief for investors.  The euphoria phase was from summer 2025 to summer 2026, with the Iran War serving as just a temporary break from the optimism.  The violent chop starting in June brought along some anxiety, which has morphed into denial as the AI trade has weakened.  We are near the end of the denial phase, and soon we go towards fear and panic.  That's when volatility picks up and you get big down moves.  Perhaps we've already entered the fear stage, as we had a monster down day on Thursday. 

BofA client flows for the week ending October 30.  An acceleration of the selling that's been ongoing for the past 4 weeks, led by hedge funds.  

DIX readings hit 40% on Monday, November 2, and went to a multi year low of 37.9% on Thursday, November 5.  Low DIX readings have been coincident with some meaningful short term bottoms in 2026.  

You are beginning to see outflows from retail, which has been uncommon so far in 2026.  

Retail flows into single stocks turning negative in recent months (Vanda Research).  Seems like retail is now just piling into equity ETFs instead.  

Vol control funds were a big part of the selling on Thursday.  Now near levels seen in March 2026, March 2025, and August 2024.  

Vol control selling estimated at $80B for Monday to Wednesday, as many funds usually delay their selling after the vol spike by a few days to lessen market impact.  

Put skews are elevated for the AI names.

GS Prime Book L/S fund net leverage near 5 year lows.  Hard to believe given all the hedge fund blow ups happening.  I suspect they are long high beta AI names and short SPY or QQQ, which is basically still a very aggressive long bet.  L/S hedge funds are now a small fish swimming in a big pond, with index ETFs, systematic funds, and pod shops now dominating the flows.

SOXL Fund flows (updated as of Friday, Nov. 6).  Retail keeps buying the dip, which is turning into a trench.  Friday had the biggest inflow ever for the ETF.

The near term fate of the markets is in the hands of Dario.  If Anthropic tries to force feed its IPO down the throat of tech investors, then you can see a real panic leading up to the IPO date.  Currently estimated to be during the week of Nov. 16 to 20.  If Anthropic pulls its IPO, then that serves as a short term positive catalyst and you can get a tradeable bounce.  Ironically, you probably need to see more pain in the stock market to get Dario to delay the IPO.  

The AI bubble which peaked in June, with a secondary peak in early October, has now officially popped.  That has huge ramifications not just for NDX, but also SPX.  So far, the SPX has been acting as a relative safe haven in the AI storm.  But that changed on Thursday, and you are now seeing how important AI is to the overall stock market.  AI is the leader.  It can lead the stock market both higher and lower, but the sector has become toxic.  With the amount of retail participation that you see in AI stocks, expectations remain high.   Its getting closer to put up or shut up time for the hyperscalers.  They've been given a green light which has turned yellow.  They need to show that AI capex is leading to greater operating profitability (not just stock gains from Anthropic/OpenAI  stock) or its going to be a bloodbath out there. 

Since this is the first real pullback in SPX since March, there should still be a considerable number of dip buyers waiting to buy once you reach a bottom, but that buying momentum should be short lived.  The AI trade which acted as a turbo booster for the SPX for all of 2024, 2025, and half of 2026, is gone.  It leaves behind a gigantic pool of bagholders in its wake, who will serve to be overhead resistance to put a ceiling on rallies.  

Sold the small long on Friday and took the loss.  Thought that we would get your typical post election rally in November and was completely wrong.  Market conditions always take precedence over seasonality and event-based trading.  Only in weak markets do you see this type of reaction after an election.  Will look to buy a deeper pullback in SPX.  Buying a pullback of 6% doesn't offer enough potential reward considering the AI weakness out there.  A pullback that is 9-10% is where the risk/reward gets good enough to buy with significant size.