6500 Could Be the Last Dance

Volume 148 - The Week Ahead

Bonsoir du sud,

My two largest positions performed great last week… AAPL +13.3% and META +2.57%. My Summer of Rippy QQQ 540 calls for 8/15 from 12 are now trading 36. The Phase 2 basket still performs well, while still offering an attractive entry point (find in the link below).

And it’s not just the trades. The Gazette just crossed 1,050 paid subscribers and is closing in on 15,500 free readers, the fastest growth it’s ever had.

But here’s the twist: for the first time in months, the tape is starting to look like the conditions I’ve seen before big market breaks. Hedge funds cutting risk, systematic demand fading a little, liquidity thinning… all at all-time highs.

This is the kind of backdrop where tops are made. And with one key level now in sight, I’m thinking hard about what comes next.

That level is 6500.

And my gut says we don't stall there, we fly straight through it. Typical August volumes and liquidity, and a market still bidding from underweight participants who can't afford to miss more upside. If we tag 6500, the tape won't pause to take a breath. It'll overshoot IMO.

Here's what people keep getting wrong about tops: they're expecting some orderly rotation, some gentle rolling over. That's not how this works. Genuine tops are chaos. They're euphoric, messy, and loud. Positioning is maxed out, vol is normally starting to climb, correlations are spiking to 1, and retail are frantically buying index funds at the highs. Look around. Do you see any of that? Because I sure as hell don't.

What I see is a market that's still climbing this wall of worry, brick by brick, while the smart money sits there underweight, waiting for a pullback that keeps not coming. That's not topping behaviour, it’s fuel, as I have said all along.

Hedge fund net leverage is sitting bang on its 3yr median (it was down this week LOL, and is still lower YTD) According to Goldman Prime last week, they sold at the fastest pace in four months - almost entirely macro product shorts (index, ETFs). That's not all in like people would expect, that's them still hedging into highs like they're expecting the puke any day now.

CTA length is elevated but nowhere near maxed out. There’s still billions in dry powder waiting if momentum keeps working. Vol control funds are still mechanically adding exposure because realised vol just keeps bleeding lower - it's textbook systematic reallocation.

Retail flows have trickled back after that meme stock distraction, but it's steady buying, not manic FOMO. Correlation remains low, breadth is selective but not concerning. This isn't a blow-off top where everyone's throwing caution to the wind.

This is an underowned grind. The kind of market that keeps going precisely because no one believes it should (how many months has it been I have said this). And that's exactly why 6500 won't be a ceiling - it could be a floor that we rocket past on our way to something much higher.

Positioning still looks like a crash is coming, and that's precisely why it isn't. The market's defensive posture is the oxygen feeding this fire. It's why every pullback gets bought within hours, why dips don't stick, why those expensive left-tail hedges everyone's been buying just keep bleeding premium. You don't get a real top when half the street is still positioned for a disaster, you get melt-ups.

Earnings season has done the heavy lifting here. Twelve-month forward S&P earnings estimates are up 3.6% in the past month - the strongest seasonal start in years. These aren't just companies clearing some artificially low bar; they're actively reshaping the forward outlook.

AAPL's breakout past $230, META's relentless grind higher, hyperscaler capex that refuses to slow down despite all the hand-wringing about AI spending. The market's been sitting there all year, waiting for the other shoe to drop, for margins to crack, for something to justify the pessimism. Instead, it keeps getting better news. Operating leverage is finally showing up in an environment where rates have peaked and demand is holding up better than anyone expected.

Now layer in August's market structure. Depth is super thin. Some might call it "twitchy." In this environment, a modest upside surprise doesn't just nudge the tape - it rips through levels like they're not even there. Thin liquidity plus structural bid is a dangerous setup if you're positioned short. And then there's the mechanical flows waiting in the wings. CTA buy triggers are live and loaded (sell triggers are several percent below where we are). Vol control funds still have room to add. Every tick higher in price, every tick lower in vol forces systematics to chase, pure reflexivity at work, the kind that turns small moves into violent ones.

With CPI Tuesday, PPI Thursday, and Retail Sales Friday, the spark is there. We're through the bulk of earnings (NVDA still to come) - macro data runs this week. And in this liquidity environment, even an in-line number could send us screaming through 6500 if it's interpreted as not bad enough to derail the momentum.

That's the setup - defensive positioning, thin liquidity, mechanical flows still there, and a week of data that should provide another catalyst. This isn't about fundamentals anymore; it’s physics.

If 6500 prints, the first touch isn't where I’d fade it. It's where the chase accelerates. Thin August liquidity means round numbers become magnets - pulling in stops, triggering systematic buying programs, forcing dealers to hedge into the move. Late longs who've been waiting for a pullback suddenly realise they're about to miss the entire move and start paying up at any price. I guess this wouldn’t be some careful, orderly move through resistance. In this liquidity environment, 6500 can become a launching pad. The algos start firing, the systematic flows kick in, and suddenly you've got a feedback loop that doesn't care about valuation or sentiment or any of the rational reasons why markets should pause (it does seem we are in this feedback loop already). It's pure momentum physics. And once that machine starts running in August volumes, it doesn't stop at 6500 IMO. It keeps going until something breaks the loop.

I'll reassess if/when we breakout. Not because I think it's the top, but because once flows stall post-breakout, you can easily get a 150-200 handle pullback without any change to the bigger picture. But that's trimming tactical upside, not flipping bias. The core book stays long as the structural bid isn't going anywhere and positioning remaining neutral.

Risks? The obvious one is a hot CPI print this week. A 1-1.5% flush is absolutely possible if we get an ugly number (I will share my thoughts the night before). But in this setup, that kind of dip gets met immediately - put sellers stepping in, vol control re-allocating, trend followers buying the dip. The first real down day gets bought aggressively unless it comes with an actual positioning shift, not just a data disappointment.

Exogenous shocks are obviously always lurking, but the thing is, current positioning actually makes the tape less fragile to external events than it would be in true euphoria. When everyone's still hedged and underweight, markets absorb bad news better.

This remains a disbelief rally. It's not 2020 FOMO with retail piling into anything that moves. It's slower, more grinding, more painful for anyone still underweight. The marginal buyer is still underexposed, the pain trade is still higher, and the discipline now is simple: don't flinch. Keep size right, but don't talk yourself out of what's working. 6500 is in play this week, and the pain trade remains higher.

If you’ve been waiting for me to turn bearish, this isn’t it, yet.

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Last week you crushed the likes (151) but came up 6 restacks short for a free annual for one of you! This week, I’ll make it interesting: 75 restacks, 150 likes, and SPX hits 6500, and I'll give away a free annual subscription.

Questions, comments, and feedback are always welcome via comments on here or DM.

I’ll be more active this week and will drop some research tomorrow morning.

Have a great week,

Fed