Let’s do the unseemly thing first…

Last time I wrote, the S&P was in the 6600s, consensus was that the bounce had already gone too far, and I said the path of max pain was 7,200. Spot as I write this is 7165, 7,000 in Q2 was my call. We are past it, and we are past it on the exact set-up I described.

The trades have done the talking while I have been inactive on the writing front (although I do plan to release the Zero to Options Hero post soon)

• SPX 6500/7000 risk reversal for 6/18 put on at -18 now marked at 265

• SPX 5900P for September sold for just shy of 200, now trade at 65

• Phase 2 basket continues to do its job

• Phase 3 still a smidge off where I would like it

• CRDO (purple cable go brrr) at 6% nearly approaching 200 (I shared this in the mid 40s last year) now a 3% weight after taking some gains off at Friday’s close after reaching the $200 price target.

• The list is, frankly, too long to keep going - there’s some pain in the software names I hold, but overall, the book is outperforming, and that’s what matters.

I leaned the right way when CTAs were “max short” and the doomers were lining up for their oof moment. And I also leaned the right way through the lazy “the bounce has been too much too fast” consensus that we saw in the first half of April.

But the trade has changed. The market did what I wanted. Now I'm doing something different. And I think most people are about to give back what they just made even if index keeps trading higher.

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Process

A bunch of you asked variations of the same thing: how do I know when we’re overbought vs. oversold, how did I hold through the recent dip, how did I stay long into the Iran headlines, and does max pain actually work. I’m going to treat these as one question, because they are effectively one question.

The honest answer is that reading the tape isn’t one signal, it’s a stack, and the art is knowing which layer of the stack matters in which regime. CTAs for the most part of last year were totally irrelevant, but this year became relevant again.

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Two weeks ago I called this a buyers’ strike, and I still think that was the right description at the time. The market had stopped behaving like a place where people were looking for opportunity and started behaving like a place where nobody wanted to be first. Hedges got put on, macro took over, every bounce felt rented, and every headline felt like a reason to take off risk rather than put it on.

While the debate has been about whether the market has bounced too much, I have been leaning the right way. Last week’s SPX 6600/6650 call spread, put on the week before, risking 20bps of NAV, closed at max gain. I traded the 6800 calls on 9 April risking 5bps, paid 13 and sold at 39. Friday’s 6850 calls for 5bps died worthless. The direction has been right while this market has been working very hard to confuse people. That doesn't mean it's fixed. Nor does it mean people are back to believing the way they did before the Iran headlines hijacked the tape. What it means is that something important has shifted: the market is trading better than people feel.

We are well off the lows. The weekend talks didn't deliver some grand resolution, and futures are a touch softer again as I write this. This market has just lived through a geopolitical scare, a relatively violent squeeze, and a proper confidence wobble, and it was never going to glide back to all-time highs in a straight line.

What interests me here is not that the market bounced. It’s how it bounced, and more importantly, what still does not seem to be fully believed underneath the surface.

That is where this starts to get dangerous. Anyway. Let's get into it. This is the post where I put my cards on the table. You might think I've lost the plot. Or you might think I'm early. Either way, I think the pain trade is about to become very obvious to a lot of people who are currently sitting on the wrong side of it.

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Capitulation is broad and is when people stop pretending different tickers equal different risks. Correlation jumps, gross gets clipped properly and the market stops caring what you own because all anyone wants is less of it. I don’t think this has really looked like that. It has looked more like a market where people have brought net down, added hedges, trimmed exposure, and still refused to fully let go of the longs they think they will want back the moment the headlines calm down. This is what has made this market feel so awkward.

There has been a solid amount of pain, but the structure underneath it has been very different from a true washout. A lot of systematic selling had already happened. People’s books are a lot cleaner than they were entering the month of March but sadly cleaner does not mean healed.

Once a market gets this hedged, you don’t necessarily need great news to get a sharp move the other way. You just need less bad news - be that lower oil, slightly calmer rates, a pause/slowdown in headlines. Even a simple absence of fresh sellers can be enough when people are leaning on shorts, gamma is unstable, and nobody really trusts the downside as much as they did a week ago.

Macro remains very much in control for now, with oil and rates setting the tone. Growth expectations still have not taken the kind of hit that usually comes with more durable lows. But I’d argue you’re seeing some change in growth pricing when you look at the front-end of the curve… see SFRH7 the trade I recently put on and shared with subscribers which is up 20bps from where we entered.

I think where we are the easiest way to look at this market is one that has reduced risk without fully giving up, which is exactly why the next move can be bigger, faster and much harder to trust.

CTAs are finally relevant. I know I haven’t spoken about them for a while, and there was a reason for that - for most of the past year, they were just passengers (as they should have been), adding to a trend that was already working. Now they do matter, and I think this is where it gets interesting and is one of the most underappreciated dynamics right now.

Over the past month, this small cohort has sold roughly $184B of global equities and is now short in a meaningful fashion according to GS flow estimates. In US equities specifically, they are estimated to be short ~$28B S&P. When you go from long, to getting stopped out, to running negative momentum signals across multiple lookback periods, the character of the selling does change.

I think the supply that has been driving this move a lot is approaching exhaustion. GS modelled flows forecast that only a few billion dollars of selling over the next week under a flat tape, against the tens of billions per week we have seen through March. That deceleration is substantial and changes the market dynamic even before you think about the upside case.

On an up tape - CTAs flip from sellers to buyers with $142B of demand sitting in the wings if price cooperates. I would like to be clear on this though. I am not particularly enthused about this asymmetry because the critical word is if. You actually need an up tape to trigger it. The 142B does not show up because positioning is extreme. It shows up because price moves first, and the momentum signals respond to that. Conditional flows are conditional.

It is also worth remembering that this asymmetry is nothing special despite the expected number being in the top %iles. We had the exact reverse of this setup during the 2025 rally. CTAs were huge buyers on the way up, adding fuel to a move that was already working and would have been enormous sellers on any meaningful down tape at that time. That is simply how trend following works. Large buying on up tapes and large selling on down tapes - pretty standard for the community.

Something circulating right now that I want to address directly, because it is leading people to draw the wrong conclusions from the positioning data. You will have seen it on X… “CTAs now max short”. The implication being that CTAs have hit some kind of capacity ceiling and that they literally cannot sell anymore, thus a violent reversal is imminent. I pushed back on it later night and I want to explain it properly

The percentile ranking that banks publish alongside CTA positioning data is a lookback, not a capacity signal. When GS or Morgan Stanley flag that CTA equity exposure is at the 99th percentile on a five year lookback, all that means is that current positioning is as extreme as the model has observed over that window. It does not mean that CTAs are out of ammunition. It does not mean that they are physically unable to add to the position. The models are not pegged to industry AUM, but momentum signals. If the momentum signals push further negative, the models respond. The positioning can go further from the historical distribution suggest, because history is not a constraint on future behaviour. Another point worth understanding is that the percentile ranking is not scaled to the actual size of the CTA industry. A reading of “max short” today may translate into a very different notional dollar exposure than the last time the same %ile was observed. A 99th %ile short in 2026 may represent more notional than a 99th %ile in 2021. The %ile simply tells you about signal intensity relative to history and tells you very little about flow capacity that sits behind it.

What the extreme percentile does tell you, however, and this is worth taking seriously, is something about the asymmetry of moves from here. At positioning extremes there is simply less room to add in the same direction and can signal that the trend is becoming exhausted. A “max short” reading does not mean the short cannot get bigger, but it does mean the marginal signal required to add further is harder to generrate than it would be from a more neutral starting point. It is not the same as the market being about to rip, but is a real structural consideration when thinking about how future price action might interact with CTA flows.

The honest framing is that the extreme positioning is relevant context for thinking about the conditional flow picture and what could happen. It is not by itself a catalyst.

I have said all of this before. Not a new position for me. In Sept 2025, when CTAs were on the other end of this, the same language was doing the rounds. “CTAs are max long” - same implication just opposite direction.

Percentile rankings are lookback observations, not capacity limits. Models are pegged to signals. At extremes, the asymmetry shifts but capacity does not disappear. The incremental buying power is limited when you are already heavily long, but that is a statement about the risk/reward of the position, not about whether CTAs can add. Ya di ya da. What made this moment worth paying attention to was not that CTAs were “max long” and therefore due to reverse. It was that the positioning asymmetry at that level meant the potential energy from this cohort on the downside was disproportionately large relative to the remaining upside fuel. If markets rolled over from that point, the unwind would have been huge (similar to what we have seen recently).

So. Similar to now… The energy will only convert into actual market force if price gives the signals something to respond to. The machine does not move because the %ile on Goldmans models lookback is extreme. It moves because price moves first. That is the part that keeps getting lost in these “max short” tweets floating around. Positioning is a loaded spring, not a self-releasing mechanism.

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That is not a rhetorical question. It is one of the most important questions in markets right now, and the answer is worth a lot of money to the people who get it right.

The prevailing narrative says AI kills software. That foundation models replace enterprise platforms, vibe-coding startups displace incumbents and the world’s largest companies rebuild their operational infrastructure from scratch and legacy software vendors slowly get left behind. I have spent the last few weeks going deep on this theme and I have come away thinking the market may have it backwards.

I think that narrative is wrong because what I am seeing is not AI replacing software. It is AI being absorbed by it.

And if that is right, the winners of the next phase are not who the market currently thinks they are.

The full thesis, the basket architecture, and all fifteen names are below.

Let’s be honest about the backdrop first.

Software has been ripped apart this year. IGV is down more than 20% year to date, and the median software stock is more than 40% below its 52-week high. Sector valuations have compressed to roughly 40% below their 5yr average on forward sales, while free cash flow multiples are more than 75% off the peak. The broader tape is not exactly offering comfort either. As I write this, the S&P is sitting on key support with the moving averages starting to roll over. There is a very real chance this gets worse before it gets better.

I am launching Phase 3 into that weakness deliberately.

This is not a trade for the next three weeks. It is a multi-year position being built at a point of maximum dislocation between sentiment and reality. If the market deteriorates further, the basket will feel pain in the short term. That is the cost of the entry point and I want to be upfront about it.

The question that really matters is whether the thesis is right.

The Thesis

The software selloff has bundled together two completely different stories, and that confusion is the opportunity.

On one side you have weak, sponsor-backed private software businesses from the zero-rate era. High leverage. Weak vintages. Over-earning point solutions. Businesses underwritten in 2021 on aggressive assumptions, thin moats, and cheap capital that no longer exists. Some of those companies deserved to be re-priced. Some of them face real disruption risk. The fifteen names in this basket are not those companies.

These are incumbent platforms that run the operational backbone of global enterprise. They sit inside payroll, finance, planning, compliance, customer workflows, security, logistics, and supply chain. They are well embedded into the machinery of how large companies actually function. And rather than being threatened by AI, I think they are the primary mechanism through which AI gets deployed at scale.

The market is treating all software as one story. It isn’t. The mistake starts with how people think about software in the first place. The bearish case may sound neat in theory. AI writes code, code becomes cheaper, thus startups build faster. Legacy vendors lose their edge but enterprise software is not just code. In many cases, code is the easy part. The hard part is everything around it.

It is architecture. Workflow logic, regulatory scar tissue, auditability, the integration with dozens of other systems. Customer retraining. Reliability under stress. Years of edge cases discovered the hard way. Years of decisions made by people who actually had to keep these platforms running inside live businesses. And that is where the moat lives.

The market keeps talking about foundation models as if they can simply be dropped into the core of enterprise systems and take over. I do not buy that. A payroll system cannot be mostly right. An enterprise resource planning system cannot hallucinate its way through compliance. A financial workflow cannot produce two different answers to the same question depending on how the model feels that day.

The closer you get to real enterprise workflow, the less tolerance there is for probabilistic nonsense. That is why I think the “AI replaces software” narrative breaks down the moment you move from demos to mission-critical systems. These platforms need to be repeatable, auditable, reliable, and deterministic.

The second mistake is assuming that faster code generation somehow collapses incumbent moats. It doesn’t. The market is acting like vibe-coding equals instant competition. It does not. Writing code faster is useful, but only if you know exactly what needs to be built, how it needs to behave under stress, how it fits into the broader workflow, and how it interacts with the dozens of other systems surrounding it.

A startup can generate code quickly, but that does not mean it can recreate decades of architecture, customer trust, workflow depth, compliance readiness, implementation history, and switching-cost gravity.

In enterprise software, the moat is not just what the product does. It is what the customer risks by leaving. And that is where the replacement narrative really falls apart.

The CFO of a global manufacturer is not ripping out an ERP because a startup has a cleaner interface and a better AI demo. They are thinking about data migration, regulatory exposure, integration with forty other systems, retraining thousands of employees, operational downtime, board accountability, and the non-trivial possibility that the entire project becomes an expensive disaster.

Those risks are real. They have always been real. AI does not make them disappear. If anything, it makes the incumbents stronger because the incumbents already own the workflow. That, to me, is the most important part of the thesis and the bit the market is missing.

The incumbents are not sitting still waiting to be disrupted. They are the ones with the installed base, the distribution, the domain expertise, the customer relationships, the workflow context, and in many cases the best data. If AI is going to be embedded into enterprise workflow, why would the value accrue to outsiders rather than the companies that already own that workflow?

That is why I think the winners of this phase are not the people trying to replace enterprise software from the outside. They are the incumbents absorbing AI from the inside.

That is how I think about what is happening now. AI gets pulled into the software stack as an intelligence layer. Not as a substitute for the platform, but as an enhancement to it. The platform still provides the reliability, controls, audit trail, and scalability. The AI layer improves productivity, speeds up decisions, automates repetitive workflows, and expands what the software can actually do.

Together, that creates something much more powerful than either on its own.

And crucially, the platform captures the value because the platform owns the customer relationship, the workflow, and the place where decisions actually get executed.

That is why I think this is not some niche side theme. This is the main way AI diffuses across the real economy.

Every top company runs on enterprise software. That software is now getting smarter. The companies that own those platforms are, in my view, the primary beneficiaries of everything the market has spent the last few years financing further down the stack.

The Valuation Case

Even if you ignore the thesis completely and just look at the numbers, the setup is attractive.

Software as a sector is trading at roughly 5x forward sales versus a 5-year average closer to 8x. That is around a 40% discount to recent history. On a growth-adjusted basis the discount is still material. P/E multiples are well below their medium-term average and free cash flow multiples have been crushed relative to prior peaks.

In other words, this is not a sector trading as if the market sees a coming acceleration in value. It is still trading as if disruption is imminent.

That is the disconnect. Because I do not think the underlying businesses have deteriorated in the way price is implying. In many cases, their strategic position has improved. Their AI products are more credible than they were a year ago. Their role in the stack is more important, not less. Their moats look deeper once you separate real workflow ownership from AI narrative tourism.

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Not close to some beautiful low where everything lines up perfectly.

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Not because nothing has been happening, but because this has been one of those stretches where the market has become noisier than the signal. Every few hours another headline hits, oil and rates jump, credit gets dragged into the conversation, software gets used as a pinata again, and yet the market still refuses to give anyone the clean break they’re desperate for.

This kind of environment can easily fool people. If you only look at the S&P, it feels like we are just chopping around in a frustrating range. If you look underneath the surface, there has been plenty going on. Hedge funds have been cutting, ETF shorts have surged, asset managers have largely frozen while systematic exposure has been coming down again. ETF shorts just posted one of the biggest weekly increases on record, yet single stocks were still modestly net bought. I don’t think I would deem the flow and positioning situation panic - more of a hedge first and ask the harder questions later kind of thing.

So the right framing here is not "everything is broken." It is that we are in an ongoing positioning clean-up, and until the war path becomes clearer, the Fed speaks, and the market gets more confidence around the next macro leg, equities probably continue to trade with higher vol and a lower tolerance for bad headlines.

The part I think most people are still getting wrong is what the real fear should be.

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I’ve been sitting on this post for three weeks.

That’s not normal for me. I think fast, I write fast, I publish and move on. But this one has been open in a tab since mid-February, half-finished, getting longer and then shorter and then deleted back to almost nothing.

Some of you have been in my DMs. Asking if I’ve flipped. Asking if the Year Ahead is getting quietly shelved. Asking if the name I’ve been most convicted about for the better part of six months has finally broken.

What I will say is this. The last three weeks have felt different from every other drawdown I've navigated since starting this letter. Not in the magnitude. In the quality of the doubt. There's a version of being wrong that feels like noise. And there's a version that makes you sit very still and ask whether you misread something fundamental.

I've been sitting very still…

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February sure was a long year.

The market has not been polite recently… It has been a slow bleed of positioning, a constant churn on internals and a market that keeps pricing fear in the places most people don’t stare at all day.

The most important shift of the last couple of weeks is not whether software is dead, or whether the AI displacement narrative has peaked. It’s that fear is no longer contained in one sector. Software might have been the theatre recently, but it isn’t the only battlefield now.

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Nothing has happened for two months.

If you only watch index, it feels like a holding pattern. The range has been unusually tight and you could argue that we’re drifting. You could argue we’re digesting. Some will argue the market is tired.

But underneath the surface, this has been anything but calm.

Growth has been hit. Beta has been hit. Software has been hit. Factor spreads have blown out and dispersion has been elevated. Single-stock realised vol has felt closer to a correction than a sideways tape.

And STILL the index hasn’t broken.

When the index compresses while internals churn, you’re not in equilibrium. You’re in storage mode. Energy builds quietly in regimes like this. And when it releases, it rarely does so gently.

The narrative doing the damage right now is AI displacement.

Job destruction, recursive automation, permanent impairment of white-collar demand. The sort of framing that sounds inevitable when you string enough hypotheticals together… But in my opinion, there’s a difference between technological capability and economic diffusion. There’s a difference between what a model can theoretically do and what companies actually deploy at scale. Adoption curves don’t go vertical because a Substack went viral. When a Fed board member feels compelled to publicly address a newsletter post, you're not watching a fundamental repricing. You're watching narrative saturation.

Markets don’t wait for nuance. They price fear fast. Software sold off hard. Anything remotely vulnerable to AI was de-rated instantly. Hedge funds cut more exposure and long-only weighed in to their defensive lean. Put hedging surged, skew steepened, and call demand evaporated. The market moved like something was structurally broken. Nothing was.

Some have described the current environment as a 'price-informing narrative' market, where price action sets the tone rather than the other way around (I agree). The tactical cure for negative sentiment in a one-way positioned market could simply be higher prices. That observation matters because it means the reversal doesn't need a fundamental catalyst. It needs the price to move.

It was simply positioning unwinding in response to narrative escalation. The gap between narrative intensity and macro reality has widened more than ever and that gap is important.

Right-tail events do not emerge from optimism. They emerge from situations where positioning has moved further than fundamentals.

What Positioning Actually Looks Like

Prime data shows software exposure has been cut dramatically from prior peaks. AI-disrupted cohorts are sitting near the bottom of historical exposure percentiles. This to me looks like peak fear.

Meanwhile, semiconductors and specific AI infrastructure names remain heavily owned. Consistently net bought YTD… Exposure there is not light.

The spread between semis and software positioning is stretched across every region. The rotation has been forceful, painful for many too.

But something subtle has shifted recently. De-grossing in North America has stopped. Gross exposure has been added globally over the past several sessions. Some things I monitor that had deteriorated are resetting toward neutral. For example, the tactical positioning monitor from JPM Prime just hit neutral, sitting at the 48th percentile since 2015. Software, after several standard deviation weeks of selling, is showing some early signs of stabilisation.

This doesn’t mean leadership has flipped. To me, it means the selling impulse has exhausted itself. And, markets rarely pivot when positioning is still building in one direction. They pivot when the marginal seller is tired.

We are much closer to that condition now than we were a month ago.

Add to this… 80% of 2026 corporate buyback programs have yet to be executed. The market’s largest sponsor is not going away. Repurchase authorisations are tracking at a near-record pace, and the mega-cap names that dominate these programs are still directing significant cash back into their own stock. It is a relentless structural bid sitting underneath the market every single day. (I know I have touched base on this recently, but I think its important for those who might have not seen the last post).

The Semi Cycle Is Mature in Time

I think we can all agree that the semiconductor run has been extraordinary. On duration metrics, the cycle looks statistically mature. But duration alone does not end cycles. What ends cycles is demand concentration and valuation extremes unsupported by diffusion. If AI demand broadens beyond training infrastructure, into inference, enterprise deployment, workflow integration, robotics, edge computing - the next leg is not multiple expansion in chips.

It is application-layer monetisation. That’s software.

Right now, the market has split tech into two clean buckets: physical AI infrastructure and digital AI disruption. One owned and the other has been totally discarded.

If infrastructure earnings hold and software shows incremental resilience rather than collapse, the forced rebalancing between those buckets could be sharp. And sharp rotations in stretched positioning environments create convex moves.

The partnership announcements coming out recently are worth paying attention to. Intuit and Anthropic. Docusign integrating into Anthropic's Cowork platform. Klaviyo and Google. A bit different to what the market sentiment is suggesting..

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I’m back after a week in Cannes, with a tan that won’t last and a phone screen full of alerts that made me question why I ever left. You take one week off and the Supreme Court tries to rewrite the tariff playbook (spoiler: it doesn’t matter), software loses another trillion in market cap, and gold decides it wants to be a five-handle commodity again. Magnifique.

I left the book as it was and only traded ES while I was away. Bought ES1 at 6797, six points off the lows, running 25% notional as a percentage of NAV with a stop at 6697 and a target of 7000. Sold into Friday's close at 6924.5 for a clean 127.5 handles. Not bad for a holiday trade…

Rebought yesterday at 6855 on the same sizing. Stop is 100 points below at 6755, target remains 7000. The thesis is simple: the range is holding, the lows are being defended, and I'd rather be tactically long into NVDA than sitting on my hands. If the stop gets hit, I'll reassess.

Anyway… let's get into it. There is a lot to unpack.

Software… We've Seen This Film Before. Or Have We?

I spent the first half of February writing about why software was not dead, why net exposure had collapsed to record lows, and why the biggest risk was being short into a squeeze. Two weeks later, we got a taste of that squeeze on the back of the Friday snapback... only for the sector to get absolutely obliterated again on Monday.

IBM down 13%, its worst day in 25 years. CRWD down 10% after Anthropic announced their Claude cybersecurity features. MSFT down another 3%. ServiceNow, Salesforce, Intuit, all getting dragged through the mud.

Here’s the thing, though, and I want to be very clear about this… the narrative has now expanded well beyond software. Trucking, logistics, commercial real estate, financial services, and even payments companies like DoorDash and Uber are getting caught in the crossfire. This is no longer a so-called SaaS repricing story. This is the market trying to price in the existential threat of AI to the entire services economy. And when the fear gets that broad and indiscriminate, history tells us we’re approaching the point of maximum pessimism rather than the beginning of a structural move lower.

The S&P North American Software index just posted its worst monthly decline since October 2008. The peak of the GFC. And the bifurcation in how funds are positioned tells the story better than any headline can.

The latest GS Prime data paints one of the more extreme positioning pictures I’ve seen in recent years, and it supports the thesis I laid out in Volume 168 almost perfectly.

TMT made up 70% of the total net selling for hedge funds last week. But within that number, the divergence is insane… funds are aggressively selling software and internet names while simultaneously buying semiconductors and memory. The result is hedge funds are now running their largest ever net long position in semis and their largest ever net short in software, at least since 2016 when the data begins. Record long semis. Record short software. If that isn't the definition of a crowded consensus trade, I don't know what is.

LOs finished the week $4B better for sale, bringing the February MTD total to negative $10B. That is the largest monthly sell skew for asset managers since March 2025 and one of the most significant selling episodes in four years. The other large sell months were these - August 2022 (Hiking Crusade bear market/re-rating $18B), March 2024 (profit taking? can’t even remember - $14B), and March 2025 (Tariff Tantrum - $22B). In other words, the asset management community is behaving as though we’re in a proper risk event, not a flat tape.

And here's the part that really caught my attention: globally, equities saw the largest net selling since liberation day... It seems people are taking down risk in what feels like preparation for index to finally reflect what single stocks have been saying for weeks. Which puts me at two thoughts. The first being that the whole move higher the whole time has been driven by people not having enough risk on, chasing, and buying what they don't own = more up. And the second being that maybe, just maybe, we are due a proper correction. More than 10%. The kind that actually resets things.

So where does that leave me on software?

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I’ve said it before on here, and I’ll keep saying it: size is more important than entry. What I mean by that is that I’d rather be average on entry with perfect sizing than have the perfect entry with reckless sizing. One keeps you in the game while the other eventually takes you out of it.

Most online market content focuses on what to buy, when to buy it, and where to put your stop. Almost nobody talks about how much. And yet sizing is the single variable that determines whether a good idea makes you money or puts you in a hole you spend the next quarter or more climbing out of. It’s also the one decision that is entirely psychological. It has nothing to do with the chart. It has everything to do with you.

This post isn’t a sizing formula you can plug numbers into, although I am sure some of you can make it into that. It’s about the mental side of sizing: how conviction translates into risk, why most traders size backwards, what it actually feels like to be heavy into something that’s going against you, and how I think about it after over a decade managing real capital.

How to Know When the Size Is Wrong

I’m going to give you four rules that have taken me years to learn. They’re not complicated. But they’ll save you from yourself if you’re honest about them.

1. If you can’t hold your stop, the size is wrong.

2. If you’re checking it every two minutes, the size is wrong.

3. If the position is dictating your mood, the size is wrong.

4. If you need it to work today, the size is wrong.

That’s it. You don’t need a spreadsheet or a risk model to tell you whether you’re sized correctly. Your own behaviour is the signal.

I’ve watched experienced guys turn into completely different traders because they got a bit too big in something they were just totally emotionally attached to. The thesis was fine. The entry was fine. But the size turned a rational person into a nervous wreck who couldn’t follow their own process.

The Real Definition of Too Big

Too big isn’t a percentage. It’s not 5% of your book or 10%. Those numbers are fine as guardrails, but they miss the point entirely. Too big is when the position starts changing your behaviour. If a position is large enough that you’re negotiating with your own rules, it’s already mis-sized.

You know it’s too big when you start moving stops because you can’t stomach the loss at that level. This is not risk management, it’s self-preservation dressed up as flexibility. You should also know that you’re too big if you start adding to a loser not because you planned to, but because you need to bring the average down so the P&L looks less painful... If this is you, it’s not conviction - it’s ego refusing to accept reality.

You know you’re too big when a trade becomes a must win. When it stops being one of many positions in a portfolio and starts being THE position. The one that’s going to make the month, quarter or year. Because must-win trades don’t get managed, they get prayed over.

And the worst part is, none of this has anything to do with whether the trade idea is good. The idea can literally be perfect. But once you’re managing P&L instead of risk, the quality of the idea is irrelevant. You’ve shifted from “what is the market doing?” to “what is my P&L doing?” and those are two completely different questions. The first one makes you money over time. The second one willl destroy you.

I’ve had trades where the thesis was perfect, the timing was close enough, but the size was too heavy for me to sit through the noise. So I cut at the worst possible moment, watched it work without me, and learned the lesson the hard way. The idea wasn’t wrong, the size was. Entry price does matter, but entry size matters more. If the size is right, you can survive being early. And, if the size is wrong, being right won’t save you.

I’ve also watched guys lay out a beautiful plan to be scale-down buyers. “I’ll buy at $80, add at $70, last-add $66.” But they’re the type who’ll be throwing up at $70. If that’s you, you shouldn’t be buying at $80 at all, or if you do, it should be a third of the size. You have to trade within your emotional capacity. If you don’t know where that line is, the market will find it for you. And the tuition is expensive. Trust me on that one.

Position-Induced Stupidity

People love to talk about “psychology” like it’s a separate topic from trading. Something you address in isolation, maybe by reading a book or doing some breathing exercises. It isn’t separate. Most of the psychological problems traders face are self-inflicted via size. The moment you go heavy, you hand the steering wheel to your blood pressure.

Here’s what I mean. You put on a trade, the thesis is clean and the setup is there. But you went bigger than usual because you really like this one. For the first few hours, it’s fine. The position ticks around, doing nothing. Then it moves against you by a per cent. Suddenly, your phone is in your hand and you’re continuously refreshing the chart. You’re reading every headline that comes across the wires, searching for a reason to explain the move. And now, you’re scanning Twitter for someone, anyone, who agrees with you. The thesis didn’t change at all. But your nervous system did. And that’s the point nobody makes clearly enough: size creates the emotions that later get blamed on the market. When you’re appropriately sized, a 1% move against you is noise - you barely notice it. When you’re oversized, that same 1% move feels like information. It feels like the market is talking to you, which it isn’t. You’re just uncomfortable, and your brain is scrambling for any kind of narrative to explain the discomfort.

This is where people make the most expensive mistake: they confuse discomfort with signal. They think the anxiety they’re feeling is the market telling them they’re wrong. It’s not. It’s the size telling them they’re too big. There’s a huge difference between “this trade isn’t working” and “I can’t handle this trade at this size.” The first one might require action. The second one required less size from the start.

I’ve made this mistake myself more times than I’d like to admit, sometimes I still do. And every single time, the lesson was the same. The idea was fine and the size wasn’t. Fix the size and fix the psychology. It’s that simple and that difficult.

The Two Kinds of Conviction

You size for the destination and forget about the path. The market doesn’t owe you a smooth ride. As even the best ideas have ugly paths. Size has to be built for the path and not the destination.

This is something that took me an incredibly long time to understand properly. There are two kinds of conviction, and they require completely different sizing approaches.

The first is research conviction. This is your fundamental view on where something is going. You’ve done the leg work. The macro supports it. The positioning is clean. The rates differentials make sense and you believe in the direction. This kind of conviction can be very high, and it should be, because it’s based on analysis and experience.

The second is time-path conviction. This is your confidence in how the trade gets there. Will it be a straight line? Will it chop around for three weeks before working? Or, will it go against you by 10% first, shake out every weak hand, and then rip in your direction? Time-path conviction is almost always lower than research conviction, because the path is inherently uncertain even when the destination isn’t.

The biggest sizing mistake I see, and one I’ve made plenty of times myself, is sizing a slow thesis like a fast trade. You have a view that you think will play out over three to six months. But you size it as if it needs to work this week. Then, when it does nothing for two weeks, or worse, moves against you, you start to freak out. Not because the thesis is wrong but because the size cannot survive the path.

You can be completely right on direction and completely wrong on timing, and at the wrong size, being right on direction is completely worthless. The market can stay irrational longer than you can stay solvent at 3x your normal size.

If you have high research conviction but low time-path conviction, size accordingly. Go smaller than your gut tells you to. You can always add if the trade starts confirming. You can’t un-size after the market has already taken your money and your confidence.

You’re Not as Diversified as You Think

You think you’re sizing positions. You’re actually sizing factors. In calm regimes you get away with it. And during times of stress, everything becomes one trade.

This is something that only becomes obvious after you’ve lived through it. You look at your book and think you’re diversified. You’ve got ten positions across different names. But when you dig into what’s actually driving each position, five of them are essentially the same bet. Maybe they’re all long-duration. Maybe they’re all short vol. Maybe they’re all levered to the same macro outcome. In calm markets, those correlations sit at 0.3 or 0.4 and you feel clever. In a stress event, they all snap to 0.9-1, and suddenly your “diversified” portfolio is one giant position.

I think about this in terms of heat. How much total risk am I running, not at the individual position level, but at the factor level? I’m not just asking myself “how big is my position in X?” I’m asking “if the thing that X depends on has a hiccup, how much of my book gets hit?”

This is where gross exposure and vol regime intersect to create hidden leverage. In a low vol environment, you can run higher gross because the daily swings are much more manageable. But the moment vol expands, that same gross exposure suddenly feels three times bigger. Your positions haven’t changed, but the risk has. If you don’t adjust your book when the regime shifts, you’re running leverage you didn’t sign up for.

Correlation is hidden size. Two positions that look separate on paper but move together in stress are really one position you put on twice. If I’m long three “different” names but they’re all just long duration, then a rates shock isn’t three small problems. It’s one big one. I size them like one trade.

I’ve learned to build a mental correlation matrix before I put on anything fresh. If the new trade needs the same thing to happen as two positions I’m already running, I’m not adding a third position. I’m tripling an existing one. I don’t care that they’re different tickers. They’ll behave identically when it matters most.

Correlation spikes when you need diversification most. If you’re not thinking about this when you put on positions, you’ll learn about it the hard way during a drawdown.

The Three Sizing Buckets

Here’s the mistake I see over and over: people press first and probe last, and I’d say that is backwards. You probe to earn the right to get bigger. You don’t get bigger to force the market to pay you.

I think about sizing in three buckets. It’s not a formula. It’s a framework that keeps me honest about where I am in a trade’s lifecycle.

Bucket A: Test. This is a small, information-gathering position. You have a thesis, but you’re not certain on timing. You want skin in the game so you’re paying attention, but not so much that a move against you matters. These trades exist so that when the trade starts confirming, you’re already in and you can add with conviction rather than chasing from zero. Lots of the time these trades won’t become anything, but the information they give you is worth far more than the small P&L hit.

Bucket B: Core. The thesis has been validated and price action is confirming. You now have both research conviction and some degree of time-path conviction. This is where you move to your normal working size. Not your maximum, but a size where you can sit through noise without it affecting your behaviour. Core is comfortable and lets you be patient. If you can’t be patient at your core size, it’s not actually your core size. It’s too big.

Bucket C: Press. This is reserved for the rare moments when the stars align. Critically, you’re already being paid as the trade is working. You’re pressing from a position of strength, not from a position of hope. Pressing from strength means your average cost is already good, your stop is effectively at breakeven or better, and the market is telling you that your view is right. This is where you can go to your max size.

The discipline is in respecting the sequence. Test, then core, then press. Never press without having earned it. The traders who blow up are almost always the ones who jumped straight to press because they were so sure they were right.

Position size is important not only in avoiding trading too large, but also in trading larger when warranted. When everything lines up, when the thesis is compelling, the potential relative to risk is large, and your confidence is high, you should be positioning bigger than normal. You can transform a mediocre strategy into a winning one purely by varying position size: smaller or not at all for low-conviction setups, larger for high-conviction setups. The sizing is the edge... not your entry.

But there’s a distinction that matters enormously here, and it’s the one thing that I’d want you to take away from this section. There’s a difference between sizing up because your P&L is up, and sizing up because the trade is confirming. The first is ego and the second is process. I only press when my risk is shrinking. If you’re pressing because you’ve had a good run and you feel invincible, that’s not conviction. That’s hubris with a tailwind!

Scaling Rules That Protect You From Yourself

Adding to losers feels like bravery. Yet most of the time it’s just ego. The market is offering you a deal: pay up for being wrong and the professional always declines.

Scaling is where most traders fall apart, because it’s the moment where emotion is most likely to override process. You’re already in a trade. It’s either working or it isn’t. And the decision to add or trim is rarely made rationally unless you have rules written down in advance.

Here are the rules I follow mentally…

Add only when the trade is confirming. If the market is moving in your direction, the thesis is playing out, and you’re getting paid, that’s when you can add. You’re pressing winners from strength. That’s how I scale into positions.

Never average down unless it was pre-planned. There’s a difference between a planned scale-in at predetermined levels with a clear invalidation point and panic-averaging because your P&L looks ugly. If you didn’t write or mark down the level you’d add before you entered the trade, you’re not following a plan. You’re making it up to justify a loss.

No adding during emotional states. If you’ve just had a losing trade, if you’re angry, if you’re chasing, do not add to anything. The market will be there tomorrow.

Now, I want to be honest about something. “Press winners, trim losers” is how I trade. But it’s not gospel. Some of the best traders I’ve known or studied do the opposite, and they do it successfully. They systematically reduce into strength, take money off the table when the trade is in their favour, and look to rebuild the position on pullbacks. Some are so good at trading around positions that they make money even when the net move goes against them. Others have a simple rule: always take some off when it’s working. Always. They say it saves them because when the inevitable reversal comes, they’re already smaller.

Why does this matter for you? Because if you read my buckets framework and interpret it as “always add to winners, never take profits,” you’ll be wrong. The buckets are about when it’s appropriate to get bigger. They’re not a commandment to always get bigger. Some trades are better served by taking profits into strength and looking to re-enter on a pullback. Especially in choppy markets where trends don’t run clean, trimming into strength and buying back cheaper can generate returns that pressing straight through never would.

Stops Are Not Risk Management if the Size Is Wrong

If you’re not certain you can hit the stop; the stop doesn’t exist. It’s just a story you tell yourself so you can enter.

This is one of the most important things I can say in this entire post. Everyone talks about stops. But here’s the problem: a stop is only real if you can actually execute it at that size without hesitation. If you’re running a position where the stop represents a loss so large that you know, deep down, you won’t take it, then you don’t have a stop. You have a suggestion and that won’t protect your capital.

I’ve seen this play out so many times. A trader puts on a cable trade and says “my stop is 1.3320” and they genuinely believe that when they set the trade up. But when price gets to 1.3330, they’re already moving it. “Let me give it a bit more room.” Why? Because at that size, the loss at 1.3320 is too painful to accept. So the stop moves to 1.3280. Then 1.3250. Then eventually they’re so far offside that the stop has become meaningless, and they’re just holding and hoping.

The correct framework is simple. First, decide at what price you would believe your trade is wrong. That becomes your stop. Then work out how much you’re willing to lose on the idea. Then divide that acceptable loss by the per-unit loss to the stop point. That gives you your position size. Most traders do it backwards. They start with size, then find their pain threshold, and that determines where the stop goes. The result is stops that are set based on emotion rather than on where the trade is actually invalidated.

The solution: size so your stop is executable. Work backwards from the loss you can genuinely absorb without it affecting your behaviour, your sleep, or your process. Then calculate the position size that makes your stop level consistent with that loss. If the answer means you have to be smaller than you want, be smaller. The alternative is a stop you won’t honour, and that’s the fastest way to a drawdown spiral.

Sizing in Different Regimes

The market has seasons. Your size has to have seasons too. If your sizing is static, your drawdowns won’t be.

This is something that separates lots of professionals from everyone else. The same trader, with the same idea, in a different regime, should have a completely different size on. Sizing is not a fixed input. It’s a variable that needs to adapt to the environment you’re operating in.

In a low vol regime, you can afford to size up. The daily moves are smaller, your stops are tighter in percentage terms, and the probability of a gap through your stop is lower. This is when most traders feel comfortable, and rightly so. But the trap is that low vol regimes breed complacency. You get used to running more size because it “works,” and then when vol expands, you’re caught oversized in a new regime that punishes you for it.

In a high vol regime, size needs to come down. The daily ranges are wider. Moves are faster and more violent. Liquidity is thinner, meaning your stop might not fill where you want it. Everything that was comfortable at low vol becomes dangerous. If you don’t reduce size when vol expands, you’re effectively running leverage you didn’t choose. When vol explodes, I cut gross aggressively. Survival should always take priority.

In trending markets, you can lean in more because the trade has a tailwind. In choppy, range-bound markets, size should come down because you’re just going to get whipsawed. The win rate in chop is lower, so each trade needs to cost less.

Around events, whether it’s CPI, earnings, central bank decisions, or geopolitical risk, gaps dominate. Your stop might be at a sensible level, but if the market gaps through it on a print or a headline, you’re going to take a much larger loss than you planned. Sizing into events needs to reflect this. If you can’t afford the gap risk at your current size, you need to be smaller. It’s that simple.

The discipline is recognising which regime you’re in right now, not which regime you were in last week. Most traders size for the regime they just experienced. They run low vol sizes into a vol expansion and high vol sizes after the storm has passed. By the time they’ve adjusted, they’re already behind.

The Sleep Test

I don’t care how perfect the setup is. If the position is hijacking your life, it’s not a trade you should be in.

This is the simplest and most honest heuristic I know for sizing. And it has nothing to do with maths.

If you can’t sleep, the size is wrong. If you’re waking up at 3am to check futures, the size is wrong. If you’re lying in bed rehearsing excuses for why the trade isn’t working, the size is wrong. If your partner asks you “what’s wrong?” and you reply “nothing” but you’re thinking about your book, the size is wrong.

Your body knows before your brain does. Anxiety, disrupted sleep, irritability, distraction. These aren’t signs that the trade is bad. They’re signs that the size is simply too big for you. Not too big in some abstract risk management sense. Too big for your nervous system.

I’ve learned to trust this signal above almost everything else. When I’m sized right, I can go about my day. I check my positions when I need to, not because I’m compelled to. The trade is running in the background, not dominating the foreground. That’s how it should feel and you can get on with whatever tasks/research you need to do.

If a trade is costing you sleep, trim it until it isn’t. The lost P&L from sizing down is nothing compared to the compounding damage of trading the next day, exhausted, emotional, and compromised.

The Drawdown Trap: Why Size Gets Worse When You’re Losing

Drawdowns don’t end from hero trades. They end from boring discipline. If you’re in a hole, the answer is rarely “more risk.”

I covered drawdown psychology in a previous post, but I want to address it specifically through the lens of sizing because this is where the two topics collide in the most destructive way.

When you’re in a drawdown, the temptation to fix it with size is almost irresistible. You’re down 10%. You think: “If I just size up on this next idea and it works, I’m back to down 5%. Two of those and I’m flat.” The maths checks out, and the logic is sound on paper. But the psychology is utterly lethal.

Because here’s what actually happens. You size up in a drawdown. The trade goes against you. Now you’re not down 10%, you’re down 14%. Then the emotional pressure doubles. You size up again because now you need an even bigger win to dig out. The trade chops around, you can’t think clearly, and you cut it for a loss. Now you’re down 18%. At this point, desperation takes over. You take a trade you’d never normally take, at a size you’d never normally use, because “I just need one good trade to get my mojo back.” That one trade either saves you (very rarely) or puts you in a hole so deep that you spend the next quarter or two recovering. Usually, the latter.

This is the death spiral. Bigger size leads to worse decisions, which lead to bigger drawdowns which lead to even bigger size. Every step feels logical in the moment. Every step makes the problem worse. And the lottery-ticket mindset, the idea that one big winner will solve everything, is one of the most dangerous things in trading.

The traders I respect most handle drawdowns the same way. Any time drawdowns approach a certain threshold in a given month, they flatten everything and start fresh at half their normal size or less. They don’t increase size again until they’re making money. This might sound extreme to many of you. That is because most people can’t do it, many of you would have seen me do it last April and boy was it the best decision that I made. But the principle is universal: when you’re losing, the answer is less risk, not more. You trade smaller until you prove to yourself that you’re back in sync with the market. Only then do you scale back up.

Now, I want to flag a tension here, because I think about this a lot. If drawdowns in a given strategy tend to mean-revert, then the period right after a bad stretch is often when the best opportunities appear. And that’s exactly when you’ve made yourself smallest. I’ve lived it. You cut size after a rough patch, then the next three trades are perfect, and you’re running at half size for all of them. But the cut is still correct even when it costs you. Because the alternative, maintaining full size through a drawdown, is what turns 10% drawdowns into 20% drawdowns. You’ll occasionally leave money on the table by being small at the wrong moment. But you’ll never blow up. And in this game, not blowing up is the prerequisite for everything else.

If you’re in a drawdown right now, read this carefully: the move is less risk, not more. Cut your size in half. Take fewer trades and focus entirely on process. The P&L will follow the process, not the other way around.

The Only Maths Point That Matters

I said at the start that this post isn’t about formulas. So one maths point, then back to psychology.

The Kelly Criterion is probably the most famous sizing formula in finance. It tells you the optimal bet size to maximise long-run compounding. In a casino, where odds are precisely known, it works perfectly. In markets, the odds are never precisely known. And that’s where the formula gets interesting, because the lesson it teaches is the opposite of what most people expect.

The penalty for overestimating your edge is twice as severe as the penalty for underestimating it by the same amount. Bet double Kelly and you eliminate 100% of your gain. Bet more than double, and your expected return goes negative, regardless of how strong your edge is on any individual trade.

The people who understand this formula most deeply don’t bet full Kelly. They bet half. When the edge is genuinely uncertain, some go as low as one-tenth. The most rigorous mathematical framework for position sizing ever created says the same thing your nervous system says: be smaller than you think.

A One-Page Sizing Playbook

If you take nothing else from this post: write your sizing rules when you’re calm. Then follow them when you’re not.

Here’s the framework I use. It’s not perfect. But it keeps me honest, and it might keep you honest too.

The Three Buckets

Test: Small size. Information gathering. You’re paying for clarity, not returns. Small enough to survive anything.

Core: Your normal working size. Thesis confirmed, structure in place. Normal working risk. You can sit through noise at this level without it affecting your behaviour.

Press: Maximum conviction size. Only when all the stars align. You’re already being paid. Risk is shrinking, and the trade is paying.

Portfolio Heat Rules

Know your factor exposure, not just your position exposure. If three positions depend on the same outcome, treat them as one for sizing purposes.

Adjust gross exposure for the vol regime. What’s comfortable in low vol is reckless in high vol.

Correlation Cap

No more than three positions driven by the same factor at any one time. If you find yourself with four or five names that all need the same thing to happen, you don’t have five positions. You have one, and it’s five times bigger than you think.

”No Add” Rules

• Don’t add to losers unless it was pre-planned at specific levels with clear invalidation.

• Don’t add to anything when you’re in a drawdown. Drawdowns get fixed with less risk, not more.

• Don’t add into events where gap risk makes your stop theoretical.

• Don’t add when you’re emotional. If you’re angry, desperate, or in chasing losses walk away.

Pre-Trade Sizing Checklist

• Can I hold my stop at this size without moving it? If no, size down.

• Can I go about my day without obsessing over this position? If no, size down.

• If this trade hits my stop, does it materially affect my month? If yes, size down.

• Am I pressing from strength or pressing from hope? If hope, don’t press.

• Is this size appropriate for the current vol regime?

If you made it this far, do one thing before your next trade. Write down your sizing rules. Not during a drawdown. Nor after a bad day. Now, while you're calm and thinking clearly. Then follow them when you're not. That's the edge, and eventually it becomes automatic.

Size isn’t everything. But it’s the thing that makes everything else work.

If this post hits 300 restacks by Saturday, 21st February, 5pm ET, I'll gift 10 free annual subscriptions to readers picked at random from the restacks list.

Happy trading,

Fed

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On the surface, the S&P ripped on Friday and finished basically flat. That's enough for most people to conclude nothing meaningful happened. But beneath the index, single names moved aggressively, and books moved with them.

Gross leverage came down in the biggest step-down since Liberation Day, but this was not a broad de-risking. The selling was overwhelmingly short-led, concentrated in single stocks, and highly targeted. Hedge funds didn't run from risk; they rotated forcefully and leaned into the pain trades. Nowhere was that clearer than in software. I wrote about this in my mid-week thoughts post - ICYMI, see below…

Lord Fed's Gazette

The Index Is a Mirage

If you only watched the S&P this week, you might say: “a bit soft…

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3 months ago · 72 likes · 7 comments · Lord Fed

Single-stock shorting hit record notional levels, tech was the most net-sold sector, and software accounted for the vast majority of that pressure, with net exposure collapsing to fresh lows.

I went into last week positioned for a positioning shock, not a gentle pullback:

• I shorted ES1 at 6945.5 and realised it into the washout at 6776.5, roughly 25 handles off the low.

• I ran a core-satellite S&P hedge, monetising the March 6900 put leg for a solid gain while deliberately keeping the 6900/6800 spread on as structural protection.

• I put on a post vol spike gold long at 4660 and took profits near 4950 as the snapback materialised.

  • Sadly, shortly after I reversed the trade and got stopped out… all for it to go and hit my target shortly after.

    • I do have a fresh gold trade that I put on Friday..

None of this was about calling a top. It was about respecting positioning, protecting unrealised gains, and making sure a sloppy sell-off didn’t ruin my Q1. And while, I have given back unrealised gains - I am still green on the year and happy with that considering the dispersion…

What we saw last week was not a cycle turn. It was a targeted positioning unwind, amplified by leverage, capped by a violent Friday squeeze, and masked by a flat index close. Nothing ever happens, right?

The key question for this week isn't whether stocks can go higher. It's whether positioning has reset enough to allow the next leg, or whether we're still working through an unfinished unwind beneath the surface. After all, CTA triggers fired last week. They're in sell mode.

Below the paywall I’ll walk through… why software became the fulcrum of the move, what the short-led selling actually tells us about risk appetite and how I’m thinking about positioning and risk as we head into the next phase.

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SPX is down roughly 80bps on the week. If you watched Nasdaq, the story already looks different… NDX is off about 2.6%.

If you watched how the market actually behaved underneath those indices, it felt closer to a drawdown than a routine pullback.

That paradox is the story of February so far: modest index damage, far more stress in the plumbing.

We are amidst a positioning shock.

And as I wrote to subscribers not so long ago, the pain trade is down, the pain trade is semis down/software up and the pain trade is also momentum down.

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For most of 2025, markets were on easy mode. You could be sloppy with risk, late to moves, and still win because the plumbing was doing the work for you. Carry was clean, volatility stayed asleep from April, and the crowd was structurally wrong-footed. That regime broke last month.

The free ride disappeared, but the rally didn’t. Instead, we moved from a melt-up to a toll road: you can still go higher, but you now have to choose the right vehicles to get there.

If you only watch index price action, you’ll miss what actually changed. The real story is happening underneath the surface - in single names, FX, in flows/positioning, and in who is quietly getting squeezed.

We are in a market that looks calm while quietly punishing the wrong exposures. If you’re positioned like 2025, you are on borrowed time as the easy money has been made.

This morning I opened a new gold position - below the paywall I'll explain why, and what else is on my radar this week.

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From the outside, it might look like the bull case is intact. From the inside it feels like the market is forcing a choice: give back gains to stay involved, or hedge discipline to keep them. And when participation carries a cost, it’s rarely complacency. It’s usually something worse.

We got the discomfort that I was looking for. We just didn’t get a reset. That’s why this spot is dangerous. The market tested belief, not positioning, and belief doesn’t pay anyone’s bills. If the bull market wants to continue, it needs to shake someone out first. The question is who. Because at the end of the day, you don’t need a blow-off top to end a melt-up; you just need to remove the marginal buyer. Last week felt like the first real attempt to do that.

What made last week interesting wasn’t the dip; it was how quickly the tape was forced to decide whether it still wanted to sponsor continuation. We got downside in the futures-only session, negative headlines, positioning pressure, and yet by the end of the week, the S&P closed flat, and the Nasdaq finished green. That wasn’t bullish in the way people assume; it was simply the market refusing to transfer ownership lower.

Bull markets do not die when bears attack, they die when bulls stop paying for the next leg. And the concern right now is that the price of admission is going up.

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I think we crossed that line for 2026. The right tail isn’t hypothetical anymore, it’s simply expected. Higher isn’t the issue. The issue is the path, and whether it decides to slap you around first.

Today, we got our first taste of that hostility in the most inconvenient way possible: a futures-only short session sold because of geopolitical headlines.

Last Monday, with spot trading at ~6970 and my book up ~10% on the year, I bought puts. I didn’t buy them because I thought the bull market was over but because Q1 has a habit of punishing people who start the year strong, and as I have said before I have no interest in round-tripping early PnL into the thick of earnings season. There’s a fundamental difference between hedging from fear and hedging from discipline. One happens when you’re panicking, the other happens when you’re ahead and thinking clearly.

Today’s move is exactly what that distinction is for. The structural regime hasn’t changed, but the path absolutely has. This isn’t what I’d call a wall of worry climb anymore, it’s acceptance, and acceptance introduces friction. In this phase, you get paid for being positioned correctly through the chop.

The easy part of this rally is over. We’re past the disbelief and now we are somewhere between acceptance and something more uncomfortable. Participation appears to now have a cost. Mega-caps haven’t contributed for months and they’re about to report. They’re either the catalyst for continuation or the point where discretionary finally blinks. The market will answer that soon enough. But the more immediate question is: what exactly was I hedging for?

The market will always expose who’s running a playbook and who’s running vibes. Nobody gets paid for believing here. You get paid for executing through the turbulence. The difference between riding a 3-5% shakeout and de-grossing into the hole is preparation, not your view on the market. I’ve watched more PnL get wiped by people de-grossing into a 3-5% shakeout than by anyone being wrong about direction.

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The thing is when you hedge from behind it’s from a place of fear. Hedging from ahead is discipline. I’m +8.2% YTD into earnings, and I have no interest in donating that back because people on the internet prefer their bulls unhedged. I guess what I am saying is that the real danger in Q1 is being complacent when you’re up and earnings are about to test that complacency.

The distribution of outcomes for index hasn’t flipped, but the path is no longer as charitable as it once was. Tops don’t tend to announce themselves; they arrive when everyone thinks they don’t need protection.

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Instead of weakness into the new year or a moment of balance, we’ve seen the same parts of the market that were de-grossed, hedged, or rotated out of into year-end become early leaders. The S&P has added ~150 handles since the last Week Ahead titled “Why Last Week’s Dip Was a Bear Trap”, but the manner of the move has been more interesting than the magnitude. No euphoric chase, no capitulation from sceptics and no attempt by the market to make anyone feel comfortable. If anything, discomfort has increased. And that discomfort is expensive.

The mistake coming into January wasn’t being cautious, it was assuming the new year would give you a clean entry. Spoiler alert - it hasn’t. Early performance has forced portfolio decisions into the worst possible timing window: right before earnings, when paying up feels stupid and waiting feels prudent. That’s exactly how inflection points leave people behind.

I’m already +8.4% YTD, most of that from core positions that refused to give people a second chance at better levels. The names that got rotated out into year-end have been the early leaders, as I said. While the “wait for a pullback” crowd have been left behind for now… I’ve barely started to get active.

The only real adjustment I made last week was taking CRDO up to a 5% weight mid-week around ~130 after confirming the Amazon cabling rumour was nothing more than a colour change (purple to orange/blue) rather than a shift in supplier. The stock reclaimed the selloff and closed the week at 150.

But here’s the issue as we approach earnings season - owning the right stocks is only half the battle during earnings season. That’s where most portfolios leave alpha on the table as they’re positioned for direction but not for the event itself. Earnings season should be about monetisation rather than constantly coin flipping.

This brings me to a new strategy that I’m testing this earnings season, which for now I am calling Delta Surfing. (Feel free in the comments to share a name for it). Periods like the end of last year and the beginning of this one reward expression rather than direction. So if you’re not monetising the event, you’re kind of missing the point of the event. The strategy is a way of capturing earnings volatility without the binary risk of directional calls, it eliminates getting punished for being right at the wrong time and means you will not need to make any heroic calls. It’s still early days, and I’m treating it as an experiment for now, but the initial signals have been encouraging.

Paid subscribers will be getting every Delta Surfing trade as I enter it, plus, as normal, the ongoing management of core positions that are already working.

Below, I’ll go through how Delta Surfing works and why the coming weeks will separate the performance for those who adapted early from those still waiting for the perfect moment.

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