Positioning Looks Like A Crash Is Coming

Between the Lines - Vol. 6

For weeks, the call has been simple. Stay long, the pain trade is higher as the underweight crowd will have to chase. The market has done that. SPX was 7165 when I wrote last week, 7,200 was the path of max pain when everyone was still doing the “bounce has gone too far” routine in the 6600s, and spot as I write this is around 7,246. The bear case has been embarrassed, the dip-waiters have not been given their dip, and the same people who hated 6,900 are now trying to work out whether they need to chase here at 7,300. That has been the trade. It has worked, and it has been profitable.

But I have spent the last few days going through the positioning, flow and sentiment data and I do not love what I am looking at. Not in the lazy “the market went up so it has to come down” way that I have been arguing against for some time as that argument is still wrong, and the people running it are still going to get hurt. The conditions that drove the rally are quietly changing, and the next dollar of risk in this book is no longer a long. It is a hedge.

The CTA bid is mostly done. GS has CTAs long around $44B of US equities and over $100B globally, that was your giant bid recently, and it has done a lot of work. Systematics bought almost $80B of US equities over the past month, the second-largest one-month re-levering on a ten year lookback. That tailwind is largely behind us, and the short-term and medium-term SPX pivots now sit around 6,930 and 6,820, which means a real break of either turns a friendly positioning backdrop into mechanical supply uncomfortably fast.

The Nasdaq just had its best month since 2002, and semis their best since 2000. None of that is a sell signal on its own, but stacked together it is the kind of backdrop where the market loses its margin for error.

Retail has moved along with it. Participation in SOXL is sitting at the 99th %ile on a five year lookback, QQQ just had its biggest monthly inflow ever, semiconductor ETF AUM has crossed $100bn, and the dip-buying behaviour from a month ago has quietly been replaced by chase mania.

So you stack it up. CTA bid, sentiment stretched, retail trading in vast volumes, and everyone is suddenly more interested in upside than they were 800 handles ago, which is not the same market I was writing about a month ago.

I have been the most bullish voice in your inbox. I had my hedges on, I didn't puke half the book out in panic, and I was right. But the conditions are no longer what they were, and I think a lot of people are about to learn the hardest lesson in markets, which is that being right on direction is not the same as making money.

For context, here are some marks from the book that have been doing the talking.… The 6500/7000 risk reversal I put on for 18 credit is at 312. The September 5,900 put I wrote for 188 trades at 52. TEAM is up 24% in a week at a 5% weight (still offside though). FSLY is up 11% as a fresh long that I paid 26.5 for last week. Phase 3 was up around 2% on the week with DDOG +8.5%, VEEV +6.5% and WDAY +6% leading the basket.