The Puts Have More Work To Do
Between the Lines - Vol. 15
Good afternoon,
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.
