War

What a difference a month makes. In my last post I mentioned how the market structure suggested more downside was in store and lo and behold we got the downside I expected and then some. Unless you've been living under a rock, it's obvious why the market has been going down. Since the start of the year I've been more or less  been saying that the market was overheated...running on fumes is a term I had used. With the market down about 10% from the recent peak, we have seen a very significant reset in sentiment. In fact, some sentiment indicators have reset to levels seen near seen near major market lows. Here are a couple of them:

It should be noted that the CTA positioning chart was as of March 23 and so it is probably at an even lower reading right now. At the very least, it would appear that the market is near a ST low. Having said that, it would not surprise me to see further downside Monday...at least initially, just given how the market closed at the lows of the day on Friday making a new low for this move down. 

So, let's talk about this war. Why did the US invade is the question a lot of people are asking. In my opinion it was because of Israel. Israel always wanted this war because Iran has been a threat to them directly and though the proxies they support. They just needed an excuse to attack. Given Trump's "success" in Venezuela in toppling a regime and installing someone who was co-operative with the US, he was probably convinced by Israel that he could get the same result in Iran especially given the protests earlier in the year which suggested that Iran was ready for a change. There's no shortage of criticism about the US administration's handling of this war pointing out how they don't appear to have a gameplan and they keep changing the narrative. I have little faith in Trump's decision making ability during this war, but I'm more hopeful of the Israelis . These folks are sharp cookies when it comes to tactics. Just look at how they got to to those Hezbolah fighters with the explosive pagers and how they have been able to assassinate Iranian leaders so quickly. Most pundits are saying that the US underestimated Iran's capabilities, but do you think Israel did? I don't.  Given that Iran is their largest enemy they must have known all about Iran's missile cities and drone capabilities and so if they decided to strike them, they must have calculated that with the help of  the US, they can defeat Iran. You have 2 vastly superior forces against 1. Yes, the asymmetric attacks are a problem, but they can't be sustained given that the US and Israel have total air and Navy dominance knocking out targets at will. Iranian Ballistic missile attacks have slowed to a trickle and drone swarms are still a problem, but have slowed down significantly.

With 3500 US marines arriving in the Gulf,  a lot of people are worried that this signals an immanent ground invasion, perhaps of Kharg island. I seriously doubt that.  It's more likely they are being brought in primarily to secure the straight of Hormuz. If that can be established, Iran loses its only bargaining chip and so that suggests they would be more willing to come to the table sooner rather than later. 

Regardless of how this war turns out, one thing that is almost a certainty is that this will be a major boon for safe US, Canadian, and Australian energy i.e. LNG and oil as the war exposed the vulnerabilities of energy supply from the Gulf region. So, assuming that this war doesn't end up spiraling into a total catastrophe, Trump could  end up looking like an evil genius even though he probably didn't it plan to.  

December NYMEX oil futures are trading at $77 which is a significant discount/backwardation to spot price of $99 and tells you that the oil market expects oil prices to decline significantly longer term. This doesn't mean oil prices will drop tomorrow and there's no guarantee that the market gets this right, but when you see such a disconnect between spot and futures prices in commodities markets like this, in my experience I have found that the market does in fact get it right more often than not and the stats prove it. The last time we saw this degree of backwardation in the oil market was at the peak of oil spike in 2022 after the Ukraine war broke out. After the COVID meltdown the opposite condition was in place whereby longer term futures prices were much higher than spot. 

Final comments. It would not surprise me if we see further downside action early this week given the downside momentum that is in place and the scary headlines. However, given the condition of sentiment indicators, if we get some sort of downside puke, that would suggest we are close to or at a bottom. I certainly have a nauseating feeling about this market which suggests we may be close. I'm also not underestimating the seriousness of the current situation. It's terrible and things could get really worse, it's just that I see some possibilities/signs for things to get better even though the media is suggesting the opposite. 

Software glitch

The market structure right now is quite unusual. The average stock is doing well but the Big Cap Tech stocks have not thanks to the meltdown in the software sector sparked by fears that AI will be able to replicate what these firms do which started when Anthropic released  new AI tools. This has similar vibes to the "Deep Seek" sell-off from last year. One could suspect that a sector wide sell-off like this would present opportunity as the baby is being thrown out with the bathwater. This could very well be the case here...but is it? Dan Ives, arguably the most widely know AI bull says that the decline in software sector is the biggest disconnect he has seen in his career. According to Ives, switching costs, embedded workflows, and long‑term contracts make it impossible for AI agents to displace major platforms overnight. I asked co-pilot to analyze the situation and it agreed with Ives' assessment but also stated that there will likely be causalities in the simpler, basic level services.  It also recognized that Ives is a noted permabull and to take his views with a grain of salt. My first instinct was to agree with Ives' take because the software sell-off was so widespread and knee-jerky. That doesn't mean we can't see further downside however. Tech has been the market leader for so long which means there was no doubt a notable amount of momo/trend following money on board. These group of "investors" are weak handed and will get flushed out in situations like this. Has selling from this group ran its course yet is the question.  

I'm going to take a look at the chart of the S&P 500 and the VIX and analyze it from a "waking up from a 5 year coma" point of view which means, no knowledge and hence no biases from recent events....just looking at things from a purely objective technical point of view. 

My coma take of the S&P 500 chart is that it looks top heavy threatening to break below 6800. The market has failed to make higher highs recently. A healthy uptrend would have seen  a higher low on that early Feb pullback  but instead the low was made at about the same 6800ish level in mid-Jan and now we are threatening 6800 again. The more times you test a certain level, the less likely it is to hold.  Meanwhile the VIX  is in a nascent uptrend, making higher lows and looks poised to break out to 25 at least  So, the bearish  message I get from both charts corroborates each other suggesting we are on the cusp of at least a 4% pullback from the recent market peak. This is my unbiased view of these charts. Some may disagree I'm sure, but that's how I see it. If I'm right, then we need to brace for some more downside. 

Now let's bring back the narratives. If we indeed have a throw the baby with the bathwater situation here with the software sector\ a flush below 6800 makes it likely to be the final stages of the pullback/correction rather than the start of something worse. Let's see how this plays out....  

What's up with Gold and crypto?

The day after my previous post the market had a 2% drop due to the escalation I had pointed out, but then Trump walked back his Greenland threats by announcing there was a "framework" in place between the US and Europe to have joint co-operation in Greenland to allow for increased military presence and perhaps other things like resource extraction.  As the result, the market recouped all the losses in short time.

We've seen a parabolic run and now sharp correction in Gold and its more speculative sibling Silver. I've been meaning to discuss Gold for while. This run in Gold has been underpinned by 3 forces. The first one started 4 years ago after the US weaponized the US dollar by freezing  Russian US dollar reserves. As a response to this weaponizing, central banks around the world ramped up their Gold reserve purchases. The next force has been the decline in the US dollar which is arguably mainly due to concerns about excessive deficit spending. The 3rd driving force has been Trump's obnoxious actions which as created, to use one of his favorite words, "tremendous" uncertainty and disdain of the US from foreigners. Gold took a dive Friday shortly after it was revealed that Kevin Warsh was chosen by Trump to be the new Fed Head. Since Warsh is considered a monetary "hawk" by Wallsttreet, that would imply less chance of rate cuts which supposedly is supportive for the US dollar and hence weakens the 2nd driving force that has been driving gold higher. This is quite a weak excuse for a correction. First of all, this idea that the level of the interest rate is a primary driver  of a currency's value is simply false. Most of the weakest preforming currencies over the past several years have the highest interest rates.  Secondly, Warsh has indicated he is actually receptive to the idea of lowering interest recently because of lower inflation pressures, but since he has this reputation of being hawk, people seem to be more focused on that. It doesn't take much of an excuse to trigger a correction when something has been running red hot like Gold has...I just have serious doubts that the trigger - the nomination of Warsh -  is going to end up being the reason that the gold bull market or bubble has ended. By the way, why isn't anyone calling this Gold run a bubble?  The parabolic nature of its rise suggest it is one. Regardless, I have my doubts this Warsh sell-off is going to end up marking the end of this gold run just yet unless we see other things happen in the near future that truly weaken 1 or more of the 3 mentioned driving forces of Gold.  

Now onto crypto. I'll be quick to admit that I severely underestimated the length and heights of the BTC run. I have been on record to state that BTC and all other crypto are simply being underpinned by greater fool buying. BTC, having been the OG of crypto has been able to recruit the greatest amount of greater fools, far more that I thought possible. What is BTC actually useful for aside for criminal activity? Fuck all.  I'm sure someone can create a crypto coin superior to BTC when it comes to things like  power consumption, costs, scalability, ect. just how how the first computer or any other tech product was never the best one.   But even creating a better version of BTC doesn't make it worth anything  unless you can convince the masses that it does just like BTC did when if first came out, just like the meme stocks did in 2021.  It's essentially the same as a religious belief.   Ultimately though reality prevails.  In the case of BTC, it had the same reasons to go parabolic just like Gold did but it didn't. Why? It's probably because it may have finally ran out of greater fools whereas with Gold, it did not attract the greater fool crowd until just recently. Gold was actually money, not just in ancient times, but in recent times going back to 1970s when the US dollar was backed/convertible to gold.  So, if there's going to a be true crisis in confidence in paper money, i..e the US dollar,  Gold  is likely to be the winner, because it's been used as a currency before and the reason for that was because it has a tangible aspect to it that everyone around the world recognizes and uses. Gold would not be the only winner, other commodities, and tangle assets like land, real estate, food would appreciate notably. You could argue that in really dire economic collapse scenario it would be only the essential commodities that hold value the best. How much do you think your BTC would be worth in that scenario? Less than nothing.   

Anyhow, I could once again be under-estimating the persistence and pool of the greater fool buyers of BTC and this ends up being just another temporary downturn but I gotta tell you ,the action in BTC is not a good look here given what should be a bullish environment for it.  There's no shortage of buy the dip crypto bros on twitter. but you need NEW greater fools to keep the party going longer term not just circle jerking. We'll see what happens...

Escalation

The Maduro capture turned out to be a non-event as far as market impact goes. My parents used to own a condo in Venezuela back in 90s in Margarita Island to which I have fond memories of. My initial reaction to Maduro's capture was one of positivity as this tyrant has clearly caused tremendous misery for its people. Although I knew the US didn't do this out of the kindness of their heart, I figured it was a good thing to see this guy go. But then I learned that the VP and its military/militia/police  who are loyal to her are left in charge continuing with the same oppressive regime while the US doesn't support the truly elected opposition leader. Given the ease to which the US was able to secure Maduro, I would not be surprised to learn that the VP had a hand in it with the understanding that she would be allowed to become in charge. Sadly, without a full scale change of the loyalty of the military/police away from dictatorship and towards a democratically elected government, Venezuelans will continue to live in misery. The level of corruption woven into the fabric of Venezuela's political and economic system may be too great to undo as is the case with similar basket case,  authoritarian regimes. You know I'm not a doomer, but I gotta tell it like I see it. Let's hope I'm proven wrong. 

I am all for the use of force by a foreign country to remove an oppressive dictator but it has to be done right. First of all, the argument of "don't meddle and just let the people overthrow the government" doesn't hold water in many cases because the people are often powerless and are effectively prisoners in situations where the military/police are loyal to the oppressive government.  And when in comes to authoritarian leaders, you have to fight force with force. Diplomacy does not work. If however, an oppressive government is removed by force,  there needs to be proper plan in place to ensure a successful democratic transition and that's clearly not easy.  It would require the use of the foreign country's resources including their own military and people for several years  It is also difficult to uproot enough of the corruption and those who are still loyal to the oppressive government who are lurking in the shadows just waiting for their moment to usurp.. It doesn't seem the US is not interested in making the type of  commitments needed to ensure Venezuela becomes a free and democratic country. As we all know, the US failed in their attempts to reform Iraq, Libya, and Afghanistan when they ousted their dictators 

Now there's talks again about Trump wanting Greenland. Throw Iran tensions in the mix and it would seem likely that Trump is not done meddling around. He  appears to be serious about acquiring/occupying Greenland. Treasury Secretary Scott Bessent recently said Trump will not back down from acquiring Greenland, arguing Europe is too weak to ensure its own security. This reminds me of the tariff situation last year at this time. We all knew Trump wanted to implement significant tariffs but most of us thought this was largely a bluff and that he would settle for a lot less. Although that eventually ended up being the case, it sure wasn't initially when the "liberation day" plan was unveiled.  It would appear that this rising geopolitical tension is going to eventually hit the stock market given the market has a running of fumes feel to it.  As I've stated before, the longer we go without a sizeable 3-5% pullback, the greater the chance a larger 10% type pullback ends up occurring at this point. I can see that the futures are down 1% as the market is closed today. The recent comments from Trump and Bessent are giving me a clear sense of escalation and it looks like the markets may be feeling it too....we'll soon see.   

 

Quick follow up

The following chart pretty much captures why I have mixed feelings about 2026. It shows US financial conditions.  This indicator should be used as a contrarian indicator. As you can see, when conditions are very accommodative, i.e. above 1 for at least a few months, the markets were close to making a significant peak and conversely, when conditions were tight, i.e. below -1, the market was close to making a significant low. 

This is not a perfect indicator (no single indicator is).  It will not give advance warning to declines as a result of exogenous shocks like COVID and "Liberation day" because these are negative events that essentially came out of nowhere. It should also be noted that in 2014 when this indicator flashed red, the market still had a good year returning 14% with the largest correction being 8.5% . Then, in 2015 the SPX had a flat year with the largest correction being 12.5%. So, it would have been best to have ignored the warning in 2014. Currently, we are just below the 1 level after having touched it very briefly in October. This suggests the market is much closer to a top than a bottom but also that there's still room for the market to go higher  before reaching redline territory, although that shouldn't be taken as a given. This pretty much sums up my feelings of the market based upon my observations of several intermediate term sentiment indicators which is this: there is still room to run but we would be redlining should that happen without a correction of at least 5-10%. which would  then set us up for a even larger decline. 

News flash: The US has captured Maduro and made military strikes in Venezuela. Let's see how markets respond on Monday. 

Outlook 2026: I have mixed feelings

Since last post the market had a moderate dip, rebounded back to the highs and for the past 5 days has been dripping  lower. This is the time of the year when I look back and look ahead. It's been yet another  crazy year. If you told me that the SPX would finish up 17% in 2025 after the liberation day meltdown I would have said you must be smoking the really good stuff. Even the most bullish of  bulls must have been surprised by this. We came into 2025 with complacent conditions as I had pointed out at the time and it made me cautious.  But the liberation day meltdown created the sentiment reset that paved the way forward to allow for the market to recover and soar to new highs the way it did. We went from Trump euphoria to Trump deep pessimism by mid April 2025. Sentiment has now however shifted back towards complacency...not euphoria, but complacency. Let's examine why. 

Wallstreet's average SPX year end targets for 2023 and 2024 were for gains of 5% and 2% respectively. It would  be far better to have this type of low expectation than what we have now given the average 2026 year end target of about 7600 which implies a 11% gain from here. That's not what you would call  wall of worry conditions especially coming off the back of 3 consecutive years of strong returns. Optimism is mainly centered around  rate cuts, AI adaption, and earnings growth beyond the Mag 7. Coming into 2025 we saw similar optimism from strategists with rosy year end price targets centered on bullish implications of Trump's tax cuts and de-regulation. By April the optimism towards Trump turned to deep pessimism thanks to Trump's threat of punitive tariffs and year end price targes were aggressively slashed. The lower expectations provided the necessary rebuilding of the wall of worry for the bull market to resume. It would appear that we need to see a similar rebuilding of the wall of the worry at some point in 2026 which implies a significant correction would be required. In 2025 it required a 20% decline to rebuild the wall.  That doesn't necessarily mean another 20% drop is required again this time.... it would be quite rare to see 2 consecutive years of 20% drop..., but if we don't get much of a correction in the coming months and the market instead just simply keeps going higher we would then see the market go from complacency to euphoria setting us up for an even bigger decline. Aside from rosy price targets, here's other evidence showing we have a complacent/overheated market.

Despite the bearish implications of the above charts which warrant at least a 5-10% correction, we have not yet seen the euphoric conditions that mark a major bull market peak . One classic sign of that would be a flood of IPO activity centered on AI. It seems unlikely that the so called bubble in AI is going to imminently burst without major flood of IPO activity which has not occurred as of yet.  Open AI is slated to IPO in 2nd half of 2026 at the earliest and so I'm looking at that event as to when the AI peak would be immanent. Obviously, there's no guarantee of that. Here's some other charts which suggest the bull market, albeit overextended, still has legs.

Bottom line for me is that current market conditions are not favorable in the short to intermediate term. Sure, markets can keep marching higher from here and possibly enter a blow-off phase which would be lucrative to capture , but when there's no wall of worry to climb it becomes a question of when, not if, the market hits a major air pocket and gives back all the gains and then some. It would appear to me that the market is in need of a reset.  Despite my concerns, it would appear that longer term the market still has a ways to go before hitting a secular peak. Just look at that last chart I posted which is consumer confidence. It would be inconceivable to see a secular bull market peak with confidence near record lows, benign IPO activity., and more favorable monetary conditions forthcoming. Let's see how it goes...

Bubble talk and warning shots

I've been noticing a lot of handwringing again on twitter and elsewhere about how the market is overvalued, about how there is an AI bubble. A few days ago we had CEOs from MS, Goldman and JPM echo such warnings.  The reflexive contrarian response to this would be that this is evidence of a wall of worry for the market to climb higher still. Well, it's not always that simple. It could be that these worries are justified but early. Despite the bullish contrarian implication of the cautious narratives out there, there are pockets of excessive bullish positioning as well as poor market breadth which suggests the market may indeed be vulnerable to a correction and perhaps a sizeable one, but as mentioned, with all the hand wringing out there, perhaps the correction happens a litter later on as a watched pot doesn't boil so to speak.  Let's go over the evidence. 

I've mentioned how AAII sentiment has not been showing excessive bullishness in the weekly surveys but this contradicts how they are actually positioning themselves. According to the monthly allocation survey, AAII investors now have 70.5% allocated to equities. Anything above 70% is considered "excessive" territory. Now, a single month reading above 70% is not an automatic bull killer by any means; it may only suggest a correction is forthcoming as  was the case in the summer of 2024 which was the last time equity exposure hit 70%+ which first occurred  end of May, remaining at 70+ until end of July. Then, in early August the market had a sharp  correction due to a growth scare and the unwind of the Japanese carry trade. Prior to 2024, AAII equity exposure hit 70%+ at the end of March of 2021 and stayed above 70% for the remainder of the year....we all know what happened starting in 2022. Prior to 2022, equity allocation hit 70%+ for 3 straight months starting at the end of December in 2017 leading up to the 10% correction in late Feb 2018.  So, based on history, hitting 70%+ for the first time is indicative of late stage rally behavior precluding at least a significant correction  but it also suggests that the market may still have a bit more more time and room to go higher first before the major downside happens! If we go by history on this indicator alone, it suggests the likelihood of a  significant, 10%+ correction would be 2-3 months from now. Of course, you should not hang your hat on any single indicator, so let's look at some others. 

Sentimentrader posted a chart on twitter titled  "Titanic Syndrome and Hinderburg Omen"  which captures the weakness we've been seeing in the internals. As you can see, this had preceded some  nasty corrections.

Investor's Intelligence bull/ratio is a lobsided 4:1 which is quite excessive. This is in stark contrast to AAII bull/bear ratio which is neutral. It's quite odd how these 2 surveys are diverging so much like this...which one do you believe more? 

Despite the above mentioned warning signs, there are still plenty of good reasons to believe that despite what appears to be a forthcoming correction, it wouldn't signal the end of the bull market because longer-term sentiment isn't excessively bullish enough. I've mentioned the BofA bull/bear indicator many times already, so here's another 2 charts which gives the same message

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You can see that positioning is bullish not stretched and if we did see a significant correction, it would probably reset positioning to  bearish quickly. 

Let's talk about this "AI is in a bubble narrative" again. The fact that you are hearing this everywhere to me indicates that it's either not a bubble or if it is, this call is early. As I said earlier, this doesn't mean that there's no froth out there or strong warning signs of at least a correction....there is....but to me it says that if we get one, no matter how bad it looks, somehow, someway it will not be the end of the bull market because we've haven't seen the narratives which embrace an optimistic outlook,  which embraces AI fully - not half ass like now where it's pretty much a 50-50 split of optimists and pessimists.  We've also have not seen a flurry of AI IPOs including the big kahuna Open AI which apparently won't happen until second half of 2026 at the earliest. Again, I'm not saying there's no signs of overheating in AI or the markets in general, but we are far from the euphoria of the dot com bubble. Back then, the giddiness was palpable and you could hardly find anyone who was bearish.