You are not wrong to believe in a trade and still be uncomfortable with the risk of holding it. The company might remain attractive while its shares become vulnerable to a factor shock or broader market dip.

A portfolio constructed with a five-year view might face a difficult quarter, and selling is one response, and often the best. If the earnings case were to deteriorate, the valuation no longer offers much upside, or the position is simply too large, cut it. But suppose the companies are delivering - cash generation might be improving, the numbers support your view, and you still like the prospective returns. Meanwhile, positioning looks crowded, and you’re less comfortable with markets as a whole, given how frothy they look. This doesn’t necessarily mean that every company in your book deserves a smaller allocation.

You may have a better view on those companies than you do on the S&P next month. Yet selling across the book gives up some of the company exposure to act on the market view. It’s something that deserves more thought than it usually gets. In my opinion, being nervous about the index isn’t by itself a particularly great reason to abandon the investments that you expect to do well.

Take a simplified $1m book of single names, against which you short $1m of a suitable index. The index falls 15%, while the companies you hold fall 8%. The shares lose $80k and the short makes $150k, the combined position makes $70k before costs. Selling half would have left you with a $40k loss on the remaining shares, and selling everything would have obviously left you in cash. You made money because the companies did better than the index and they didn’t even go up.

You still want to own those companies relative to the wider market. Selling them removes that opportunity. Keeping them alongside the short allows the stock selection to contribute, although it can just as easily hurt you if the names underperform. The equal amounts are only for example. In practice, sizing would reflect the book’s estimated sensitivity to index. You also need to think about what you actually own. Shorting the S&P against a concentrated collection of speculative software names leaves plenty that could go wrong. A low net exposure can still conceal an enormous amount of risk, as anyone who has watched their longs fall while their shorts rally will know…

Before you choose a hedge, look at what would hurt the holdings together. Ten different names can still amount to one trade (the current market is the perfect example of this). You may well think that you have ten perfectly respectable bull cases but rather less diversification than you had originally thought. The hedge needs to address the exposure causing concern and buying whatever put looks cheap doesn’t tell you whether you have done that.

People talk about drawdowns as though everyone can sit through them, provided they have sufficient conviction. Well… sometimes they can’t. A fund gets redemptions and sometimes risk might force the PM to reduce positions. In a PA, it might be leverage or money that needs to come out. Your five-year view can be perfectly intact while your ability to hold the investment disappears, which is an expensive position to find yourself in. You are selling because you have to, potentially at prices where the potential return has improved.

A hedge can be worth carrying because it reduces the chance of reaching that point. You may still expect the portfolio to make money. Even if I think a sell-off is unlikely, I need to know whether I could hold the book through it. Which also changes how much protection makes sense. If you can carry an ordinary pullback comfortably, there may be little reason to pay to eliminate it. The concern might be the larger loss that would force a change in the book. So start with that problem. There is no particular virtue in spending money to make every week look less volatile.

Cash can provide that breathing room too. The reason to hedge instead is that the exposure you retain is valuable enough to justify the cost. An index short gives up market gains as well as offsetting declines. A put on a single name lets you retain the upside, less its premium, while limiting losses below the chosen strike during its life. Do you want to keep the upside enough to pay that premium?

I think that price is something that tends to disappear from the conversation once everyone agrees the outlook is worrying. A perfectly sensible concern can produce a poor trade. If protection is expensive, hedging may consume too much of the return you expect from the shares. If the shares have already fallen substantially then selling them may mean surrendering a more attractive investment than the one you owned before the decline. Both prices have changed and you have to look at them together, rather than assuming more anxiety means you should buy more protection.

Equally, the fact a hedge loses money doesn’t establish that buying it was a mistake. If your book rallies and the protection expires, you’ve paid for an outcome you were happy not to experience. What matters is whether the cost was sensible beforehand and whether you can afford to keep paying it. For me, this is where discipline comes in. If you’re worried about the next quarter, decide what you’re prepared to spend getting through it and what would make you take the hedge off.

Another key point is to think about what you intend to do if the hedge works, preferably before everyone starts shouting about buying hedges. If the purpose was to help fund purchases after a dip, there should be some kind of view on which prices would make those purchases attractive. If it was to meet withdrawals without selling your longs, the proceeds need to be available when those withdrawals arrive. If I’m relying on profits from puts to fund purchases, I need to decide when to take some money off the table. Taking profit reduces the protection left, so that decision belongs alongside what you are doing with the rest of your port.

Try looking at it from cash. Allowing for costs, would you buy these shares and put this hedge on today, at these prices?

If you would, there’s a case for keeping the trade. If you wouldn’t, I’d be asking why owning it already changes your mind.

For me, the reason to hedge is that I still want those companies in my book. I’m willing to give up some return to reduce the risk I’m carrying, provided the cost of that protection makes sense.

Have a great weekend,

Fed

Read more

Another very worrying week with S&P making a new all time high.

As I said last week, the pain trade is up. As I also wrote last week, I think people are spending far too much time worrying about the next hike, and I think the focus this quarter will shift back to micro. I still think this earnings season gets us to 8,000 which isn’t too far now, compared to when I first mentioned it. But beyond that I am less certain on the trajectory as there are several scenarios that could play out there, although my bias remains up. I am sticking with both QQQ trades.

What has become more interesting to me is where to add next. I like bonds, which is particularly annoying because it seems plenty of other people do too… although, they’ve liked them for quite some time.

And then there’s AI. I keep thinking of putting my Phase 2 basket back on but something keeps putting me off. Even with single names the price action isn’t convincing enough. Take CRDO for example. Hold it at 4%; at one point it was 10%, repeatedly considering taking it back up to 8% but repeatedly finding a reason in the price action not to. ASML has been sold for a gain, leaving some dry powder available for earnings season.

Read more

I think this market is going to do the unthinkable through the midterms and into year-end, and I’m going to put some size behind that view. Paid readers got the first trade on Friday, but there’s more to come in this post.

Read more

It’s been an eventful couple of weeks. The QQQ 720c deserves a mention, although META, SNPS and DAL have all performed well, as have many other names I hold. I added to the QQQ calls at 4.4, taking total premium spent to 40bps of NAV, and have since sold half at 15. The remaining half last traded at 17.24.

In my post on the 14th September, I mentioned buying these calls as NQ approached 29k. And after the Fed hiked, I called it a clearing event and said I expect Mag7 to lead. The view was there before the move.

As most of you know, META has been a large holding for some time (10% weight originally back in late 2022 in the 90s, 9% now). In the September 14 post, I wrote about Muse and the threat to businesses that retain customers, because switching is a hassle. META is +31% on the month and +15% since that post.

Then there are some other recent names - SNPS bought at 376.5 and DAL at 77.40. Against Friday’s closes of 425.76 and 84.94, these names are up 13% and 10% from entry. Phase 3 is currently up 40% as well.

Anyway, things are going as I expected, yet there is a small detail in this week’s positioning that requires some attention before anyone decides the next trade from here is obvious. The main numbers make it easy to argue that funds still have plenty of buying to do, but if you look at what they already own, the picture looks less promising.

After the rally following the Fed meeting, I think it would be silly not to own downside.

Read more

Read more

I think Friday made it clear that positioning was too bearish going into CPI. It came in hotter than expected, and equities rallied while vol and skew got crushed. Simply put, too many people were too heavily hedged for a bad outcome, and a disappointing number was not enough to justify another leg down. You could see this positioning tale in Goldman’s prime data which showed investors adding shorts in macro products ahead of the release while buying individual TMT names.

When I talk about positioning, I am interested in what people have already done with their view. Someone who is worried about inflation who has already reduced exposure is in a different position from someone equally worried who remains fully invested, which matters when the number arrives. A bearish surprise does not necessarily trigger another wave of selling if enough people have already acted; many of those will be putting exposure back on when the market fails to fall.

I think a lot of the damage from higher rates is already priced in. One or two hikes by themselves wouldn’t make me bearish, particularly with more than three priced over the next year. Does the Fed actually hike in September? I am not sure, but the more attractive trade is rates being left where they are. I won’t pretend to have a way of knowing what’s going through every Fed member’s head, but I do have a view on how much tightening equities can tolerate. I think it could turn out to be less unpleasant than investors have been prepping for.

I think the big question here is what happens if some of the pressure starts to reverse. Obviously, energy is still the biggest concern in the inflation picture. If the fighting were to ease with Iran, you would see oil come off and inflation expectations move lower with it. From here, it may well be the catalyst that finally cracks the range index has been in for some time. I think that people spend so much time working out what the next disaster might be that their books are badly set if anything gets better.

Amid all the noise around rates, Iran and AI, people are spending too much time focusing on the market getting cheaper. By cheaper, I mean the index falling. This is a problem with hyper-focusing on price 24/7, they are yet to check their rear view mirror and notice that the multiple has already come down to 19x forward earnings. I guess it’s an easy thing to do when you’re waiting for a particular level on index to validate/invalidate your thesis. But part of the valuation adjustment you wanted has already happened, you were just too busy focusing on price. To be clear, I am not saying that 19x is some bargain, I am just saying that waiting for another big sell off might not be the right thing to do here. If equities were still getting more expensive going into potential hikes, I’d be a bit more worried.

Subscribe now

Let’s get the big discussion out the way as I have received endless messages about it over the weekend and I can just answer here… Any follow up questions, feel free to message. So Dario Amodei… He basically says that he wants a slower pace of frontier development because he thinks capabilities are getting ahead of the work needed to keep them safe (this is bullish PANW + CRWD as shown with todays price action, both of these are in the Phase 3 basket). His note did make me think of Nick Bostrom’s book Superintelligence, worth a read if you haven’t. Taking longer to develop the next model doesn’t mean customers stop using what already works. I’d be more concerned if it delayed the capabilities they’re actually waiting to pay for.

What I could takeaway after reading feedback from Goldman’s Communacopia conference was strength. The biggest constraints were on meeting demand. Memory and storage commentary pointing to further tightness for another year to 18 months. What’s been awkward about this whole Amodei post is that after a positioning clear-up in AI, people had quite literally just started to put this trade back on. Me included, I just had doubled CRDO and I put on ASML last week at 10%. I think most of this morning’s dip was panic from this cohort, as it’s not really shaken me. And BTW, please don’t take my explanation of Friday’s session to mean that every bad headline will be bought because nobody owns anything, because that isn’t what positioning is saying at all, nor what I am saying. I can think the market was too heavily hedged for CPI without assuming that the names bought during conference season are now immune to an AI scare.

The AI capex data is getting more interesting again. I am pretty sure I have said a few times recently that capex continuing to increase without enough coming back would be a concern. So something worth looking at as a trade would be higher capex companies that have seen their stock fall even as their relative earnings have held up since those will already be on a lower multiple.

I could also see people welcoming companies slowing spending if the company keeps getting more revenue out of the capacity that it has already built, without constantly increasing capex. This could genuinely be a very bullish scenario as it’s different from capex and would give them time to sit back and figure out how much more capex is needed going forward.

Another popular topic over the weekend was Oracle… If anything this has been one of the most popular names discussed over the past twelve months. It remains one of my largest positions (and offside) so I thought I’d put a few thoughts down on paper following earnings as when I say spending needs to produce something, the same applies here too.

The latest quarter gave us a big acceleration in revenue from 11% growth a year ago to 30%. Cloud infrastructure grew 120% in constant currency and management expects that infrastructure growth rate to accelerate further through 2027. Meanwhile the FY27 capex guide stayed at 90-95B with capex still expected to peak in either FY27 or 28. I would say that’s a positive… Faster infra growth without another increase in capex is better than the main thing to be going up being capex.

What should stand out is the more than 30B of additional AI cloud contracts signed during the quarter. Oracle has said the way those contracts are structured means there is no incremental impact on its plans to raide capital. Though this leads me to what I always think about the company, I always am asking myself how much needs to be spent before the customer starts paying. Oracle reported 23B of operating cash flow against 28.5B in capex. For those asking, yes I am still bullish but I am left a lot of the time asking too many questions with this name and I don’t like holding names that make me do that.

We progress… onto another large holding. Meta… At least a bit more positive. Small anecdote but I will get to the point… Try thinking about a service that you keep renewing even though you’re fairly sure there’s a better deal elsewhere. You may spend an afternoon comparing everything and sorting out the move, but you have other things to do, so it ends up being left for another day. Now imagine being able to ask an agent to handle most of that. The company providing the service doesn’t have to disappear for its economics to change but it might have to compete harder for a customer it used to keep without having to do much. How much of the customer relationship is actually loyalty and how much is hassle?

This is the part of the current Meta discussion that interests me the most right now. RIP Muse btw, Zuck snatched their Instagram handle and gave them MuseBand. Muse is designed to do things for people like shopping, booking travel and tickets and so forth, rather than just giving you another answer in a chat window. It’s managed to get to 2nd in the US app store, which sure is encouraging, but it’s all about whether people will keep using it once they’ve finished trying it out.

If people trust an agent to do stuff for them, then the agent starts to have a say in where the money goes. Of course, people will need to build a lot of trust with it first. You may be happy letting agent find you a flight but not as happy letting it book the flight with your bank details. Meta has said that Muse will ask for approval before sensitive actions like paying, so you’re not just handing it the keys and hoping for the best. For the consumer, I would say that if it saves you an hour on admin while leaving you the final say in checkout, that would be a decent start no?

I just hope Muse isn’t the next Threads, which was a complete flop where people downloaded it because everyone was talking about it and then stopped after a few days. If this habit sticks and the economics work eventually, then I think there is considerably more to it than being another AI app on your phone…

Anyway, away from single names for a moment… On to positioning. Fundamental L/S Gross at 205% (14^th %ile on a 1yr lookback, 63rd %ile on a 3yr) and net at 56.3% (61st %ile on a 1yr lookback and 73rd %ile on a 3yr). The gross number looks light compared to the past year, but the net is not particularly low. I am more interested in where people are choosing to put risk back on.

Which leads me back to my comment about people putting the AI trade back on… Goldman Prime had TMT as the most $ net bought global sector, with the net buying being the largest in seven months, driven almost entirely by long buys. Positioning is nowhere near as stretched as it was, and I’d put a lot of this risk being put back on due to people being back at their desks after a long boozy stretch in Europe this summer.

Subscribe now

The pain trade remains up, and my fingers remain ready to pull the trigger. I have a few names that have gone onto the immediate watchlist. Nothing put on just yet, but they are the next ones I want to spend some time watching. I am not necessarily short of exposure, which is one of the reasons I sold MCD to make some room for fresh ideas.

AKAM SNPS KWEB DAL GTLB OKTA

The less-friendly bit is the systematic flow: CTAs sold ~15B in global equities last week but still have roughly 120B of net length, which is in the top quartile on a 1-year lookback. Estimates have another 20B of selling this week on a flat tape which is worth considering when trading tactically. A lot of that flow may have already happened to be fair with the overnight dip. The tell will be whether equities can hold up and absorb the supply.

The main thing that matters this week is the Fed and the reaction afterwards. I genuinely think that a hike could end up with a rally dependent on the presser. I mean Warsh wanted live meetings; he got it - the hike is basically priced in but not fully.

Another active week for me on tap… One final thing before I sign off. For anyone getting chopped up in this range, be careful about comparing your actual trading to what you could have made with the benefit of hindsight. Imaginary PnL can do a lot of damage and the temptation is to become more active until something starts working but in reality the best thing you can do is wait until you feel it’s right to re-engage. Take a step back and work out what exactly has stopped working; trade smaller and if trading options, extend the expiry a little.

250 likes and 150 restacks, and I’ll hand three of you a free annual sub.

Have a great week,

Fed

When I launched Phase 3 in March, I put 20% of my book into software while the market was busy explaining why AI would destroy it. In last week’s update, the basket was up 47%. I added to it last week on the pullback as I still think there is more to come.

I could spend today talking about how well that trade has worked, but there isn’t much point. The more interesting development here is that I am now prepared to buy a name in the part of the AI trade that I spent most of the summer avoiding.

I had very little appetite for adding to semis and memory. Positioning had not cleared up enough to my liking, and the bar for earnings was less forgiving than it was for software, as I said at the time. Since then, the unwind has left one of the companies supplying the AI buildout on a much lower multiple while earnings estimates have continued to rise - so it deserves another look, particularly when the reasons I had for staying away were price and positioning in the first place.

You could count the larger trades I placed over the summer on one hand. I am happy sitting on positions when I still like what I own. I still think SPX trades with an 8 in front of it by year-end, but getting that right will only take you so far considering the dispersion we have experienced basically all of this year. From Memorial Day to Labor Day, SPX gained 4%, equal-weight S&P gained 7%, and momentum factors got taken to the cleaners. Goldman’s TMT pair was cut in half from its June high and recorded its worst two months on record. So plenty of people could have been right on the index but had a miserable summer in the names they owned. Meanwhile, you had a huge vol compression with VIX closing last week just above its YTD lows, and VXSMH has reset to ~36 from the mid-60s in July. Protection deserves a fresh look at these levels. With a good chunk of unrealised gains, I want to be able to add to something without leaving all of the gains exposed to a reversal. A SPX put will not necessarily do that, particularly if it keeps grinding higher while my names give back some of their gains.

Finally got short EUR/JPY alongside Scott Bessent last week, I can’t say I imagined to be up a few % so quickly, but here we are.

Earnings are why I remain bullish. We’ve seen the forward P/E decline to 19.5x from 22x at the beginning of the year. So, despite market progress, you’ve simultaneously seen multiples compress, and analysts continue to raise estimates.

I discussed this back in August when talking about the hyperscalers. A higher capex bill is much easier to live with when demand and revenue are rising with it. It gets considerably more difficult when the company spends more and leaves you guessing about what comes back.

The forecasts could be wrong, of course. Rising estimates do not settle the arguments over margins or the eventual return on all this investment these companies are making. But they do make it difficult for me to build a bearish view at present simply because September has arrived, and oh boy, have we all heard about September seasonality. Yes, I am aware of the seasonality chart; I see it every year. Please don’t mention it in the comments, I am tired of it.

Touching base on positioning after last week. I obviously described it as getting clean across the board. But I wanted to touch base on a few things… Fundamental l/s funds in Goldman’s data has net exposure at the 15th %ile over the past year, which is clean. However, if you look at a five-year lookback on gross, it’s sitting at the 82nd %ile. A low net number therefore does not necessarily mean that there is very little leverage left to unwind, but when you put things on a five-year lookback, that five-year comparison also includes 2022. So I do stick by my comments that positioning is clean; just take note that some measures aren’t.

The Nasdaq futures data is more awkward for the underowned argument. Between the start of August and the 1st of September, non-dealers bought ~$50B, hedge funds accounted for ~$37B, with ~39B of short covering. There was some fresh buying, but a great deal of the demand has come from cover bid. By the beginning of this month, Goldman had net Nasdaq positioning at the 92nd %ile over two years.

All of this indicates to me that index-level positioning is at a healthy level, and for any further upside, you need the earnings to arrive and investors to choose to add exposure instead of de-netting.

Some of the recent winners may already have priced in a good chunk of the improvement.

The main macro problem here is the long end. Yet equities have been able to tolerate higher yields as growth and earnings have been strong enough to compensate. An energy-led inflation shock would be a less comfortable combination since it would put pressure on costs and leave less room for central banks to ease, but that remains a hypothetical at this juncture. I am more interested in whether this happens rather than trying to extract another market forecast from every sentence of a Fed speaker.

So overall, I remain bullish, but the case for adding size has to be made at the level of the position. Three trades today: the first is a new AI-focused long, the second a hedge, and the third is the EUR/JPY short, which has already moved too far for me to finish sizing for now.

I barely traded over summer, that is about to change.

Read more

I have taken a few weeks off from writing. August is up there with Christmas time when it comes to the noise to signal ratio, while there has been plenty of action in names I own - index has pretty much done nothing since the first week of August. That should now change with Jackson Hole having happened, which is my green flag that summer is coming to an end. I have never seen much point in creating a market view just because another post is due on here. I am not here to give people their dopamine fix, sometimes there is nothing useful to add and the correct trade is simply to do nothing but sit on your hands. Yes, in a world full of grift, there will always be someone willing to fill the silence with another urgent chart or trade. Pretending there is always something to do may well be great for engagement, but I am not so sure it is for portfolio management.

I don’t plan on writing a post about Jackson Hole, having watched it, I still think most of it was noise, as I did before the event. He was hawkish, trying to make out that September will be a “live” meeting (rates will stay where they are) with a smack in the face for gold and ten year +4bps, with short term rates moving even more aggressively. The speech will be forgotten come the next NFP print, so not a lot more to comment on.

What has changed, and is worth discussing, is my Phase 3 basket. Back in March I launched this basket. I’ve written about it plenty of times but for those that don’t know… it’s a 15 name software basket which at the time was probably the most hated area of the market - AI would destroy software seats, make code abundant and leave the application layer looking like a bunch of expensive subscription dinosaurs. When I last wrote about the basket, it was up 36% with 14/15 names higher. As of yesterday’s close, it is now up 47% since inception. It’s been a great trade, and was published and fully sized when consensus was calling for the death of software but the performance is not the reason I am writing. I am writing about it again because the evidence is getting stronger and the language around software has been changing quickly. When I put the basket on the opportunity was price, today prices are higher but so is the probability that the thesis is right. I have not increased the position from its original 20% allocation yet, but I am seriously considering it and that’s what I will write a lot on in this post.

Read more

Another interesting week with SPX closing at 7758, leaving it with 242 handles from 8000 and over 400 above the low, where I thought the momentum unwind still had more work to do.

I know I mentioned this in my last post, but for those who missed it, I basically gave too much weight to 7200 during the dip, should’ve monetised more of the hedges on the way down, and the market chose the route I had assigned less probability to. I can spend another page explaining how I remained long throughout, but I suspect most people reading this understand the difference between owning hedges and running a short book. We live, and we learn…

I think the most interesting thing since my last post is that this has not been a clean return to the normal AI trade. NDX gained just over 5% last week, SPX made another ATH, and the VIX ended the week with a 14 handle, but some of the largest moves came from software and Mag7 names squeezing higher while a collection of shiny AI names traded lower. You can see the same thing in momentum. L/S momentum factors are blowing up because software has ripped while semis have been hit. Maybe we are seeing a reversal in momentum - the low momentum switching to high momentum and vice versa…

Anyway, the new positioning data is more useful than discussing the index itself. In my last post, I said I wanted to know whether the buying was from cover bid and call demand, and whether it was moving into proper long buying. I now have enough new data to start answering that question.

It also gives me a good excuse to revisit my most recent basket - Phase 3 AI. This is a basket with 15 names that I shared back in March, which is now up 36% with 14 of 15 names higher.

Lord Fed's Gazette

What If Everyone Is Wrong About Software?

If AI is going to replace software, why hasn’t it done it already…

Read more

7 months ago · 249 likes · 29 comments · Lord Fed

I have not written about it much on here since inception, which is surprising given its return and contribution to my NAV. The first move came as the market stopped treating software as an obvious AI casualty. Two positions have doubled, and another is up over 90%, but interestingly, the thing I bought the basket for has barely started showing up in numbers, which leaves me thinking we might be just at the beginning of this trade.

Read more

With the S&P trading at 7,800, it has managed to make me look right and wrong at the same time.

Some time ago, I said that SPX could trade to 8,000 this summer. I also said that the destination was considerably easier to forecast than the path, and that a 5-10% air pocket could arrive before or after it. Just before the market sold off to the low 7300s, I chose the bearish path and made 7,200 my base case before 8,000.

The market has rallied just shy of 500 points since Wednesday’s low and is now 200 handles from the 8K handle. I am not going to hide from the fact that I gave too much weight to the downside during the dip. But equally, I am not going to pretend that the original 8,000 forecast no longer counts merely because I bought protection against the journey. Unfortunately, the market chose the road I assigned less probability to. I got bullish on the 30th March this year, after a small technical indicator flashed bright and have remained bullish ever since… At some point I was bound to misread one bend in the road.

The more important point is that I did not turn uncertainty over how we got to 8k into a huge short position. I remained long throughout the sell-off and the entire rally. I cut AMZN after earnings for a gain, which I explain later in the post, but have kept my Phase3 basket at a 20% weight, ORCL at 10%, META at 9% and MSFT at 7%. The puts have been a small PnL drag as the market reversed, but my book has continued participating; if anything, it’s outperformed.

In my last post I wrote:

“If SPX goes straight to 8,000 as previously forecasted, the hedge costs me 1%, and the rest of the book should make money. Fine.”

The part I got wrong was how much work the first puke had already done. I focused on the fact that longer-term leverage and momentum exposure remained elevated and concluded that the initial sell-off still had considerably more work to do. The positioning reset had already become enormous. One prime book recorded the second largest de-grossing in its available decade of data. Fundamental managers had taken gross towards one-year lows, and some momentum factors were down 40-50% from the highs.

Read more

I am back after a short break from writing, spending some quality time with my family in Mallorca.

A fortnight ago I wrote about how SPX had remained calm because every ugly move underneath it came with an offset somewhere else. A day after that post, with SPX trading at 7550, I bought puts, as I came to the realisation that those “offsets” wouldn’t work forever. SPX closed at 7,412 on Friday, so those puts have at least started doing something. I refuse to get carried away, as we are still just under 2% below where I bought the hedge and the move has not been the air pocket that I described. I am not going to declare victory every time the market has one bad Thursday. If I wanted to do that, I would have launched a bear Substack and predicted nine of the last two corrections.

I think what happened on Thursday and Friday was more useful than another ordinary red day. I’d say that the market briefly showed us both the trigger for a considerably larger move and the off-switch that stopped it becoming one.

Alphabet reported good operating numbers, and demand was apparently strong enough for the company to raise 2026 capex guidance again to $195-205B. FCF nevertheless fell to -5.9B for the quarter, and the stock fell 7%. Alongside this move, you had brent pushing $100, 10yr >4.7%, while the Nasdaq fell 2%.

Then Friday arrived; reports of possible US/Iran talks knocked Brent back down, yields eased, and SPX finished flat. Nasdaq closed down 1% so the market has yet to rediscover its love for AI… it was more that macro pressures eased.

Anyway, these two days are probably the most important thing to have happened all week.

I think it was around a month ago that I wrote on X that index had developed an almost built-in AI hedge. If hyperscalers increased capex, the companies receiving the money rallied because the spending became their revenue. If the hyperscalers were to say they were spending less, their own stock rallied because lower spending improved FCF and left more room for buybacks. One side could get hurt, but the other normally caught enough of the money to stop the index falling very far.

That arrangement has made SPX remarkably difficult to send down. It is also one of the reasons all the violence I described two weeks ago kept disappearing at index level.

Alphabet was the first time the index cared, spending went up, the payer was punished and the wider group of recipients failed to rally enough to replace it. Some parts of memory may have held up, but the old response of blindly buying everything that might receive a dollar of hyperscaler capex was nowhere near as clean. The largest index weights fell, and the supposed hedge on the other side was too narrow to hold the whole thing upright. (I should probably note that Alphabet was not the first warning across AI. It was the first one large enough to matter at index level. During the previous fortnight, ASML, TSM, TXN, MXL, INTC and BE Semi had all managed to trade lower despite beats or guidance raises.)

Friday bought the market some time, but did not fix anything. Broader tech positioning is cleaner, but the conviction and crowding are still concentrated in semis and hardware, while the knife catching has not disappeared. Even the support on Friday looked more defensive than bullish - AAPL outperformed nearly 5%, and names like T had their best week relative to the market in decades…

My read here is that Thursday was a warning rather than a flush itself. The puts have more work to do.

Read more

Yesterday’s post was titled A Violent Market Pretending to Be Calm for a reason. SPX has managed to sit near the highs with VIX in the teens while the average stock moves like a madman, and entire factors suffer corrections that would normally come with a much uglier index. It has got away with it because the pain has happened in different places on different days. Semis rally while software gets smashed, Mag7 recovers while momentum unwinds elsewhere, and the opposing moves cancel each other out by the closing bell. That works until it doesn’t.

The bit that worries me now is what happens if all these supposedly different trades start moving together. Implied correlation is sitting around historic lows, so the options market is still pricing the offsets to continue. If correlation rises, index vol catches up to what has already been happening underneath it, and everyone discovers at roughly the same time that their book was less diversified than they thought. Add summer liquidity, high gross, levered ETFs and systematic sellers to that, and a fairly ordinary first move can turn into something much nastier before the fundamental explanation has even been agreed upon.

I don’t mean another 1-2% wobble that gets bought before lunch. I think there is a proper 5-10% air pocket lurking somewhere in this summer, and I have now started paying for protection against it. Not a token VIX call or a put so far out of the money that it only works if the world ends. I want something that begins working early enough to be useful and leaves me with cash if the index gets anywhere near 7,000.

Here is exactly what I have done and how I intend to manage it.

Read more

After a week of very limited phone reception and 2 Mbps internet in a remote beach house in Wales, I am back! I average around 10 hours a day of screen time on my phone, so the break was quite nice and probably good for the soul.

Two weeks ago, with SPX sitting at 7,350, I put a 7,700 July target before the paywall and said an August print above it was not off the table. SPX closed Friday at 7,575, so we are now 125 handles away from the original target and close enough that pretending 7,700 is still the interesting part of the call feels a little pointless.

It would obviously be easy to spend 500 words celebrating recent calls and another 2,000 explaining why the final 125 handles should trade. But I don’t think you need me for that. The more interesting question is surely what happens after 7,700, because while the index has quietly marched towards it, the market underneath has been screaming.

Many momentum factors have fallen more than 20 percentage points. The mainstream momentum ETF fell 11% peak to trough, and SOX went from trading around 80% above its 200-day moving average to a much more normal distance - 36% at the bottom of the recent dip and around 46% now. Mag7 suffered a roughly 15% correction (the below post was where I said to buy the Mag7 dip and explained my reasoning).

Anyway, continuing with my list of bizarre things that have happened despite SPX trading where it is… the shiny space, drones, quantum, non-profitable tech all got smashed. Software is split into two completely different markets all while SPX sits within touching distance of another all-time high.

While most wait for some kind of correction in index, I think the most important question here is whether the violence underneath the market has already removed enough excess to extend the rally or whether it is eventually going to escape into the index itself.

VIX with a 16 handle suggests a fairly orderly index. Single stock vol, positioning and now parts of the credit market say something very different. So today’s post is about which signal I trust, what happens after 7,700 and why I think the next meaningful move will be considerably larger (and probably less straightforward) than index is currently pricing.

My focus this summer now moves onto that 8,000 touch.

Before you all assume that is me expecting another 425 handles in a straight line, I don’t. In fact, I’d be surprised if we make it through the rest of summer without a proper 5-10% air pocket somewhere along the way. I have considerably more conviction that we see both 8,000 and a violent drawdown than I do in which one comes first. I am bullish on the destination but increasingly suspicious of the path.

Read more

Brazil went out to Norway, which tells you everything about what this summer does to crowded consensus longs. Dare I say, as an Englishman, that England is another overcrowded long? For the Belgium USA game… it will all depend on which Belgium turns up. If it's the one from the first 80 minutes against Senegal, the USA wins 3-0. If it's the final 10 minutes version, the US are in for a tough game. Spain Portugal game… I just don't think the young Spain team have the experience despite being incredibly talented. Not a strong stance, but I will take Portugal to qualify.

Speaking of which… last week I said buy Mag7, and it worked out fairly well, closing out with their first green week since late May where the cohort sold off just shy of 15% over four weeks. Mag7 closed up roughly 5% on the week vs SPX +1.7% and NDX +0.7%, which is not exactly a marginal relative move. That is the kind of week that makes everyone who “prudently reduced exposure” start checking their charts at dinner and pretending they always planned to buy them back lower. I am not moving the goalposts either, July SPX target stays the same at 7,700, and the August overshoot I floated last week is still on the table… positioning hasn’t given me a reason to shelve it.

Quick recap for anyone who missed Vol. 12 (The Mag7 ATM Is Running Out of Cash), because I'm not going to re-argue the whole thing. The call was never Mag7 is cheap. The call was that Mag7 had become the market's ATM, the most liquid, profitable, highest-quality companies on earth being sold to fund every shinier trade in the tape, and that all of that selling had created room. Anyway… this week is about what's changed and how I’d trade the next leg.

Read more

I’ve written a lot on here about the down-cycle: drawdowns, ruts, fear, revenge, the whole catalogue of ways a losing stretch can rip you apart. And it should get the attention, because losing hurts. But if I’m being honest about where I’ve done the most damage to my own book over a decade of managing real money, it wasn’t in the holes. A lot of the time it was at the highs. The worst trades of my career didn’t come when I was scared and down. They came when I was up, loose, and absolutely certain I’d figured it all out.

This is the post nobody writes, because it doesn’t feel like it needs writing. When you’re winning, the last thing you want is some bloke telling you to be careful. But that’s probably the moment you need to hear it, and exactly the moment you won’t. So let’s talk about the thing that actually ends most good years: not the losing, but the winning that came right before it.

A losing streak comes with built-in brakes. The pain itself is a brake, as is loss aversion. Fear slows your hand, makes you cut size, hesitate, and eventually makes you step away from the screen entirely. Your nervous system is screaming at you to stop, and your account balance is physically shrinking, which caps how much more damage you can do. A drawdown, left alone, tends to decelerate. The market and your own fear conspire to apply the handbrake.

A winning streak has none of that. There is no internal mechanism that fires when you've been right too many times in a row. Euphoria does not self-correct. Confidence does not throttle itself. The dopamine doesn't tap you on the shoulder at the right moment and say that's enough now. You just accelerate, and it feels fantastic the entire way, right up until the wall. You are speeding up while smiling.

That's why being up is more dangerous than being down and why I decided to write this post. Down, the market is fighting you, and so are your own emotions, and between them, they slow you down. On the up, everything is pushing you to go faster. Your P&L, your mood, your brain chemistry, you name it. And there's nothing in the system telling you to ease off. The handbrake during a winning streak has to be installed manually. It is the only one you have to build yourself, and almost nobody does.

If you keep a journal, and I’ve banged on enough about why you should, go back and look at the trade you put on immediately after your single best trade of the year.

I’d put money on it being one of your worst.

There’s a window that opens right after a big win, and it’s lethal. You’ve just been paid, handsomely, for being right. The afterglow is real, and it’s chemical. I went deep on dopamine in Mastering Your Mind, so I won’t repeat it, but the short version is that your brain has just been flooded with reward, and it wants to do that again immediately. So you go looking for the next trade. Not because the setup is there. Because the feeling is there, and you want more of it.

And in that window, your guard is down in three specific ways. Your sizing is loose because the last big bet worked, and your reference point for “normal” has just been dragged upward. Your standards are loose because you feel like you can’t miss. And your process is loose, because winning makes the checklist feel like a formality. Why run the full pre-trade routine when you’re clearly seeing the ball this well?

That’s the post-win trade. Bigger than it should be, on a worse idea than usual, with half the diligence. It is the single most reliable way I know to give back a chunk of a good run, and I’ve done it more times than I’d like to admit, as have many. The cruel part is that the better the win, the worse the follow-up tends to be, because the size of the win is exactly what determines how loose you’ve gone.

The rule I’ve landed on is simple and I try to treat it as sacred, which is that the trade after a big win gets less size, not more, and gets the full checklist, not a waiver. If anything, the moment you most feel entitled to press is the moment to do the complete opposite.

There’s a phrase that floats around when people are up, and I suggest you delete it from your vocabulary - playing with the house’s money.

You’ll hear it, you’ll think it. “I’m up 30% on the year, so I can afford to swing a bit.” It is one of the most expensive sentences in trading, and it’s a textbook case of what behavioural folks call mental accounting. The money in your account is your money. It doesn’t matter whether it arrived last week or last year. The moment it’s in your book, it’s your capital, and treating last month’s gains as casino chips is precisely how you hand them back.

The market doesn’t know nor care that you’re up. There’s no asterisk on a loss that says it doesn’t count, was made with profits. A 10% hit from a high is a 10% hit, and it’s coming out of your money. The instant you start mentally ring-fencing some portion of your equity as expendable house chips, you’ve given yourself permission to be reckless with it. And you will be.

I keep one number in my head and it’s the only one that matters: the account, as it is, today. Not the high. Not where it was. What I’m actually holding, right now, which I am responsible for protecting. There is no house. When it comes to markets, we are all the house, and the house’s whole edge is that it never gets emotional about a winning night.

I’d say confidently that the silent killer is the sizing creep. Nobody wakes up and consciously decides to double their risk. That’s not how it happens. It happens by creep.

Subscribe now

This is the thing I want you to really think about, because it’s the mechanism that does the most quiet damage during a good run. I wrote in the Size Matters post that size is more important than entry, and that too big is defined by your own behaviour rather than a percentage. But there’s a version of “too big” that’s even sneakier than the one I described there, and it only shows up when you’re winning.

During a streak, your size ratchets up imperceptibly. You add a little because the last one worked. Your new “normal” is slightly bigger than your old normal, and it felt fine, so the next normal is bigger again. Each individual step is tiny, and each one was vindicated by a win, so there’s no alarm. No single decision ever felt reckless. But string ten of those together, and your “core” size is now something you’d have called aggressive two months ago, and you never once made the conscious choice to get there. The streak made it for you.

Then the regime shifts, or vol expands, or one trade simply doesn’t work, and you discover you’re carrying three times the risk you think you are, with none of the emotional preparation that comes from deciding to be that big.

The fix is mechanical. Anchor to a fixed base size and recompute it from your rules, not from your inflated equity. Every so often during a good run, ask yourself flat out: “Is my current working size the one I’d have chosen on a cold morning with no recent wins behind me?” If the honest answer is no, you’ve got creep, and you trim back to your normal size, whether it stings or not.

I think another dangerous thing about winning streaks is that they have the ability to rewrite who you think you are. When you’re winning, you start to believe the winning is all skill, which is normal. It’s a very natural and very human error. You did your analysis, put the trades on, and they worked, so clearly it’s all you. What gets quietly written out of the equation is, one, the regime, and two, luck. Most strong runs tend to happen because the market handed you an environment that suited your style. The trend was clean, vol behaved, and your bread and butter set-up was printing because these conditions were ripe for it. Sure, you were good, but you were also fed.

The trap here is that the streak convinces you that the regime is permanent. It convinces you that the way the market is behaving right now is normal and just the way markets are. And that your recent results are the baseline you should expect going forward. Recency bias is dangerous, and when the regime finally turns (oh, and it always does) you keep running the playbook that worked in the old regime straight into the new one, sizing your positions up because it’s been working right up until it very much isn’t.

I have lived this one properly. I had a stretch a while back where a particular kind of environment suited me down to the ground, and for a good while, I couldn’t put a foot wrong. By the end of it, I’d half convinced myself I’d cracked the code, but what I had actually done was get very good at trading that specific regime, and I mistook the regime’s gift for my own genius. And of course, it finally flipped and caught me out, giving back a good chunk before I was willing to admit the world had changed, and I hadn’t. The lesson here for me was that I’d stopped being able to tell the difference between my edge and my luck, and a streak is precisely the thing that erases that line.

When I wrote the Size Matters post, I wanted to give you the behavioural cues to look for when your size is wrong. Here’s the equivalent checklist for when you’re getting high on your own supply.

1. You are checking your PnL because it’s fun

   • When you’re down you check out of fear

   • When you’re up you check for the dopamine hit

     • Both mean the number has way too much power over you

2. You’re telling people - be that your partner, colleague or anyone that’ll listen

3. You’ve stopped journaling

4. You’re bored with your normal setups and find yourself reaching for spicier trades just for the stimulation

5. Lifestyle creep

6. You’ve rounded your size up

If three or more are true, you’re at the most fragile point of the cycle, and the smart move is to de-risk into your own strength.

In my Drawdown Psychology post, I tried to cover how a drawdown can ruin your life outside the screen - losing sleep, irritability, and so forth. What nobody will tell you is that a winning streak can do its own kind of damage but because you feel good, you never see it as a problem.

You actually sleep worse during a great run, not better, because you’re wired and excited and your brain won’t switch off thinking about the next idea. You start spending gains you haven’t realised. Your ego inflates, and the people around you notice before you do. And the higher the high, the harder the comedown when it’s over because you’ve let your sense of self get tangled up in the equity curve.

So, as a follow-up to my Drawdown Psychology post, protect your life from trading in both directions. A great month shouldn’t turn you into a different person any more than a terrible one should. If a win is making you sleep badly and spend stupidly and quite frankly act like a prat, the win is also costing you. You just can’t feel it yet.

So what to do if you’re winning… A good start is to take some off, mechanically. As I said in Size Matters, some of the most successful guys I know will systematically trim into strength so that when the inevitable reversal comes, they’re already smaller. Reduce size after a run, not just after a loss. Cutting when you feel invincible is the hardest thing to do, yet the most valuable and one of the things that separates people who keep their gains from those who round-trip them.

Another thing to do is to keep journaling the winners. For those who journal, it’s common to stop writing trades down because winners feel self-explanatory when they’re not. If you only autopsy losers, you bank every bad habit that got rewarded by luck, and you’ll repeat it at size next time. So write down your gains, and be honest about which winners came from good process and which were just coin flips that landed your way.

In Size Matters, I made the point that the penalty for overestimating your edge is roughly twice as severe as the penalty for underestimating it. Here’s why that’s the whole ballgame for this post: a winning streak’s single most reliable effect is to make you overestimate your edge. You have seen your strategy win over and over again, so of course, you now think it’s better than it is. Which means a hot streak doesn’t just tempt you to bet more, it actively pushes you towards the exact error that the maths says is the expensive one.

The most rigorous sizing framework ever built and your own nervous system agree on the same advice, and it’s the same advice when you’re up as when you’re down - trade smaller than you think. You just don’t want to hear it when you’re winning.

That is it for me today… I’ll leave you with the line I’d tattoo on every trader who’s having the best month of their life - the drawdown you’re going to spend next quarter climbing out of is almost certainly being seeded right now, at the high, while you feel untouchable. Good runs don’t end because the market turns. They end because you changed.

Subscribe now

Happy trading,

Fed

Further reading on psychology…

SPX closed up on Friday at 7350 after the AI trade cooled a little. I’ll put my balls on the line before the paywall today, my July SPX target is 7,700. And if positioning stays the way it is, an August stupid-print above that is not off the table.

Read more

Last week I entered two fresh SX5E positions at 1.2% weight (prem paid - not notional) as well as a single name in the US at 7% weight.

Read more

Read more

As I sat and watched some boring World Cup games over the weekend, I found myself thinking less about football and more about how tired I was. Honestly, it was one of those weeks where the market did not move enough to justify the emotional energy it zapped from me, and from a lot of you, I am sure.

The kind of tired where you have spent most of the week staring at red candles, rates, AI headlines, hyperscaler funding debates, levered ETF noise, oil headlines, Warsh takes and, of course, SpaceX.

And here is the funny part. SPX opened the week around 7440, traded down to ~7240, and closed at 7431. The prior week’s close was 7383. So, depending on where you anchor yourself, the market was either basically flat from Monday morning or modestly up for the week. Nothing happened. And yet everyone I spoke to felt like they had just played 120 minutes a man down. Which is the bit I could not get away from. Index didn’t have a bad week; people did. The market closed higher on the week, and somehow everyone went into the weekend tired or hedged, half bullish/half-traumatised. It was a good example of the parts of bull markets people don’t like.

Every small dip starts to feel like the big one. Every bounce feels untrustworthy. Every high feels stretched, while every dip feels like a trap, which is the part of bull markets nobody likes admitting: they do not feel like bull markets while you are in them. They feel like a sequence of almost-tops. The bull case is always more annoying than the intelligent bear case that comes with numbers, charts and a little bit of moral superiority.

The bull case is much more annoying. It usually sounds something like “yes, I know, but it is still going higher.” Which nobody wants to hear because it sounds too simple, unserious and that you are ignoring the risks. But the whole job in markets is not to pretend risks do not exist, but to work out which are already priced in, which are being over-discounted and which the market is absorbing in real time.

As I said in last week’s Between the Lines post, SpaceX’s IPO was a big deal.

It was a test of positioning and liquidity. Following the IPO, I think the bull market is still very much alive, and 8K remains the summer target.

I think this week, specifically, the market can do something stupid.

A new all-time high this week is not a heroic call. We are sitting less than two percent from the highs, vol has backed off, the market has already absorbed a huge supply event, the broadening trade is starting to work under the surface, oil has become a macro release valve, and the main bearish arguments are now so well circulated that I am not sure who is left to be surprised by them. But let’s remember, markets do not exist to make you sound sensible at dinner. They exist to embarrass the largest number of people in the shortest amount of time.

So please let me be precise about what I am actually saying, because this is where most people get the number wrong. Where we are sentiment, positioning and level wise… 8K is not a consensus summer forecast. It is what happens if new highs trigger underweight panic and if/when hedges get monetised. It’s poetic with Mag7 acting like a funding short right now, as when that cohort rallies, it’ll really add oxygen to the fire. We also need Warsh to not deliberately tighten financial conditions at his first press conference. If liquidity is bad enough to make upside travel the way downside travelled last week, we could see a 200-handle green week this week.

The mistake people make with 8K is treating it like a valuation target. It is not. A valuation target is where you sit down calmly, plug in earnings, margins, multiples, the discount rate, the terminal AI productivity assumption and whatever other nonsense makes the spreadsheet look good. A market-structure target is what happens when the price gets above a level where people have to react. The first two percent is the index getting back to the highs. The next three percent is the people who thought they had time realising they do not. The final stretch is where the options market, levered ETFs, underweight managers, short-covering, systematic buyers, retail and the “I’ll buy the next dip” crowd all discover that the next dip was last week and they missed it (again). That is how these moves happen.

This is why I am less interested in the obvious bear case than I probably should be. I know it. Everyone knows it. If you don’t here is the list, bluntly put. AI is crowded, hyperscaler capex is absurd, software has a structural problem, equity supply is rising, token costs are falling, the IPO calendar creates funding needs, levered ETFs and options can turn a normal wobble into a stupid candle, Warsh could say the wrong thing, oil can rally, and rates can ruin the party. Fine. All of it is true, and none of it is new. If you’re bearish and somehow needed more material, I hope I have made your day!

Anyway, the market spent two weeks being forced to stare directly at every line of it, and the index still closed higher, which is the part the bears conveniently do not want to talk about, because it is more annoying than the bear case itself. The market has been handed so many reasons to break, and so far it has chosen to rotate, hedge, complain, de-gross, absorb supply and move on.

Positioning is the first reason.

Read more