Why Last Week's Dip Was a Bear Trap (And What Comes Next)

Volume 163 - The Week Ahead (Final of 2025)

Good evening,

This is my final Week Ahead of the year.

After this, we move into the Year Ahead, which will be out shortly after Christmas.

This was one of those weeks that looked doom and gloom if you only glanced at the closing levels and completely different if you paid attention to how the market behaved while it was under pressure. The S&P finished down 63 basis points, Nasdaq closer to 2%, and on the surface, it looked like a late-year wobble driven by two ugly tech post-earnings moves in Broadcom and Oracle, and thinning liquidity. In reality, the way the market absorbed it tells you far more about where we are headed than the size of the move itself.

Though localised, I think Oracle gave the market a clean excuse to de-risk, particularly given positioning in AI names.. The narrative was obvious and the reaction in growth made enough noise to feel meaningful. But what stood out to me was not the selloff. It was how quickly the selling ran out of oxygen. Credit stayed calm, post-Fed the dollar weakened rather than firmed, volatility was offered rather than chased, closing well off the highs of the week, and index never behaved like it was under genuine stress.

This is exactly where people get caught leaning the wrong way. Late in the year, with positioning elevated and sentiment stretched, it is easy to convince yourself that any drawdown is the start of something larger, especially those, like myself, who suffer some minor PTSD after trading Christmas 2018. But markets that are actually rolling over do not shrug off pressure this cleanly… What we saw last week was not distribution - it was pressure being released in a very specific part of the market while the broader structure remained intact.

As I said earlier, this is the final Week Ahead of the year. Before we turn the page to 2026 and The Year Ahead, it is worth being very clear about what this market is doing, what it is not doing and why the next phase of this cycle is likely to punish anyone relying on surface-level signals rather than understanding the mechanics underneath.

Once you step away from the headlines and noise, and look at how last week actually traded, the picture becomes much clearer. Markets that are in the process of rolling over do not behave like last week. They do not allow bad news to remain localised and they do not see vol bleed lower into weakness. What we saw instead was a very specific release of pressure in a specific part of the market. Growth and AI-linked names took a hit, positioning was adjusted, the noise got louder, and then the selling simply struggled to follow through… When selling struggles to accelerate on a market running on thin liquidity, it is usually because the marginal seller has already acted, not because the market has found new buyers at attractive levels. The Oracle move is a good example of this dynamic. It gave participants an excuse to do what many of them had already been considering, which was trimming exposure in crowded AI names into year-end. The story was convenient, the timing made sense, and the reaction was forceful enough to flush out weak hands. But importantly, it did not spread. Broadcom reported very solid earnings and if anything the reaction post-earnings was positioning related.

In genuine distribution phases, weakness tends to radiate outward. You see correlations rise, vol pick up, and liquidity disappear at exactly the wrong moment. Last week, we saw the opposite. Correlation stayed low, and vol wasn’t chased. Liquidity thinned (as it always does in December), but it did not vanish. The market never behaved as though it was fighting for its footing.

This is also where a lot of people misread positioning. Yes, hedge fund nets are elevated. Yes, sentiment measures are stretched. But the posture behind that positioning is still defensive. A large amount of exposure is hedged. Plenty of managers reduced risk in the recent wobble and never fully rebuilt it. The market looks crowded on paper but trades like one that is still uncomfortable. That is not a trivial distinction - crowded and confident is dangerous, but crowded and uneasy is not.

When you put all of that together, last week starts to look much less like the beginning of a broader unwind and more of a bear trap. The market allowed participants to de-risk where they wanted to, absorbed it cleanly, and moved on. That does not mean upside is guaranteed or that price needs to move vertically from here. It does mean that the underlying structure has not changed, despite how unsettling the tape may have felt in real time. And this is where the mistake usually gets made. People anchor on the discomfort they felt during the move and project it forward, rather than paying attention to how quickly the market resolved it. If you are feeling discomfort after a week like that, you should probably be looking at your net leverage… To really understand why this market keeps resolving stress instead of compounding it, you have to move away from price and spend more time on behaviour/psychology. The most important signals this year have not come from how far markets move, but from how they respond when they are put under pressure. Last week was just another example of that dynamic playing out.

Start with volatility. Vol remains stubbornly suppressed, even as single stocks continue to swing around violently beneath the surface. It is the product of a market where dispersion is high, correlations are low, and risk is being expressed in very targeted ways rather than through broad de-risking. This is exactly why so many people feel like something is off while the S&P refuses to break down. What matters here is not that volatility is low, but how it behaves when it is tested. In fragile markets, volatility spikes early and stays bid. Hedging demand accelerates, dealers eventually get forced to buy vol >20 to hedge their gamma exposure and every small move starts to feel unstable. Last week we saw the opposite. Volatility lifted briefly, found supply, and then eased back lower even as growth names remained under pressure. That tells you the market was not scrambling for protection, it was using elevated vol as an opportunity to sell it.

That feeds directly into the systematic side of the market, which continues to be badly misunderstood. CTAs, vol control, and other systematic strategies do not care about narratives, earnings prints, or how convincing a selloff looks on Twitter. They respond to realised volatility, trend, and liquidity. When realised vol rises and trends break, they reduce exposure. When vol stabilises and trends reassert, they re-allocate. That is exactly what happened around the recent (large) wobble. These strategies were forced sellers into the move, and once the inputs flipped, they stopped selling and quietly started adding risk again. CTAs weren’t even large sellers as index struggled to get through the medium-term trigger…

This is why so many pullbacks this year have felt sharp but short-lived. The selling pressure is mechanical and front-loaded. Once it is done, there is often very little natural supply left. Discretionary managers then find themselves in an awkward position, underweight in a market that has already stabilised, forced to chase back risk at worse levels or sit on their hands and hope for another chance that often never comes.

Positioning sits right at the centre of this. On paper, hedge fund nets are high. That fact gets repeated endlessly at the moment, usually without context. What matters is not the level of exposure, but the conviction behind it. A large portion of current positioning is hedged, cautious, and reactive. Many managers have been running with protection on all year, adding hedges into weakness and monetising them into stability. That process creates supply during selloffs, but it also removes it very quickly once the market refuses to break. The result is a market that looks crowded but trades like one that is still defensive.

This distinction is critical. Markets top when positioning is confident and unhedged, when dips get bought without hesitation, and vol is treated as an annoyance. That is simply not what we are seeing. We are seeing a market where every drawdown is treated with suspicion, every rally is questioned, and every piece of bad news is immediately extrapolated into something larger. That scepticism has been expensive all year, and from what I hear and see, there is little evidence it has gone away.

Liquidity also plays a role here, particularly into year-end. December always brings thinner depth, wider intraday ranges, and sharper reactions to relatively small flows. This often gets misread as a change in regime, when in reality it is just the seasonal reduction in participation exaggerating normal price action. Thin liquidity does not automatically mean fragility. It simply means moves can look more dramatic than they really are.

When you put all of these pieces together, the behaviour of the market starts to make sense. Low correlation allows dispersion to do the work. Suppressed index vol keeps systematic strategies engaged rather than defensive. Reluctant positioning ensures that supply dries up quickly once mechanical selling is done. And a steady backdrop of liquidity, even if thinner than usual, prevents stress from cascading.

This is why so many attempts to fade this market on “reasonable” grounds have failed. The arguments often make sense in isolation, but they ignore how the market is actually wired right now. Until volatility, correlation, sentiment and positioning start to shift together, weakness is more likely to be absorbed than amplified. That does not mean upside is unlimited or that drawdowns cannot happen. It means that the default outcome remains frustration for anyone leaning too heavily on what feels obvious.

And this is the environment we are heading into the final stretch of the year with. Not one of complacency or euphoria, but one where structure>sentiment, and where understanding the mechanics matters far more than reacting to the noise they produce.

What all of this means in practice is that the final weeks of the year are unlikely to deliver the kind of resolution people instinctively look for. The market does not feel set up for a clean melt-up, but it also does not feel remotely set up for a breakdown. Instead, it should continue to trade in a way that frustrates anyone hoping for clarity, which is usually a sign that the underlying trend has not yet been exhausted. A choppy move up…

One of the biggest mistakes people make at this point in the calendar is expecting year-end rallies to look and feel bullish. In reality, they often feel awkward and unsatisfying while they are happening. Liquidity thins, dispersion rises, leadership narrows, and intraday moves become exaggerated. You get days where the index goes nowhere while large parts of the market feel untradable. That disconnect between how the tape feels and where it ultimately goes is exactly what creates so much second-guessing.

This year, that dynamic is even more pronounced because of how risk is being expressed. The GS prime stuff you’ve seen over the past few weeks has been consistent on this point. Single-stock vol remains elevated while index vol stays suppressed, and correlation remains low. That combination allows pressure to be released through rotation rather than liquidation. It is why Nasdaq can underperform without dragging the S&P down with it, and why ugly days in growth do not automatically spill over into other asset classes.

The cyclical rotation that has been quietly building beneath the surface also matters here. While tech and AI-linked names have been digesting, cyclicals and parts of financials have been steadily absorbing flow. GS and JPM have both highlighted that this has not been a euphoric rotation, but a gradual reallocation driven by improving growth expectations for 2026 that I’d say the market still does not fully price. That keeps a bid under index even as leadership looks messy and uneven.

The result is a market that grinds rather than trends. Small pullbacks feel worse than they are; rallies might feel slower than they should. And anyone relying on clean signals from headline moves or single data points is likely to find themselves constantly late. That’s the natural outcome when liquidity is thinning, positioning is uneasy, and volatility is suppressed.

This is also why the idea that the year-end rally is “over” feels premature. Nothing in the behaviour of rates, credit, or the dollar suggests that financial conditions are tightening meaningfully. Powell removed the red light, even if he did not wave the green one. I believe the dollar will continue to trade lower, which historically supports risk assets at the margin. And despite all the noise around AI, the broader earnings and growth backdrop remains intact. Put simply, the path of least resistance still looks higher, but it is unlikely to be comfortable. It is more likely to come via drift, rotation, and frustration than via anything that feels obvious or celebratory. That is exactly the kind of environment where people talk themselves out of staying involved, only to look back in a few weeks and wonder how the market ended up where it did.

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What tends to trip people up in this kind of market is not being outright bearish or outright bullish; it’s the constant urge to wait for things to feel cleaner than they ever really do. Every pullback feels like it should go a bit further. Every rally feels like it should prove itself a bit more. And so people hesitate, hedge, trim, add back, repeat. Over time, that behaviour becomes expensive, not because it’s reckless, but because it’s reactive.

You could see that play out again last week. The market finally gave people something tangible to point at. Oracle breaks, Broadcom doesn’t help, Nasdaq starts to slide, and suddenly the narrative snaps into place. It feels familiar and ssensible. And for a brief moment, it feels like caution is finally being rewarded. This is the part that frustrates people the most. The move makes sense and the reaction feels justified. And yet the outcome is the opposite of what intuition suggests. Instead of weakness building on itself, it just gets absorbed. Instead of noise/stress spreading, it stays contained. And suddenly, anyone who leaned into the move finds themselves either scrambling to reverse it or sitting in a position that no longer makes sense.

At the same time, the market has been just as unforgiving to people on the other side who assume that supportive structure means everything should go up in a straight line. We’ve seen that clearly in parts of tech and AI over the past couple of weeks and when positioning gets heavy in the wrong places, the market has no issue showing you.

That combination is what creates this constant sense of being out of sync. Bears feel early, then wrong. Bulls feel right, then uncomfortable. And the people trying to thread the needle in the middle often end up doing the most damage, reacting to moves that have already done their work. The irony is that nothing about this behaviour is new. It’s exactly what you would expect in a market where structure is supportive, but conviction is still missing.

This is also why surface-level signals have been so misleading. Elevated positioning on its own hasn’t been enough. Sentiment readings on their own haven’t been enough, although I don’t think they are even worth monitoring. Even fairly ugly price action on individual days hasn’t been enough. This market keeps forcing people to look past what just happened and ask why it happened, which is not a comfortable way to trade.

What follows is a tape that consistently punishes rigidity. If you anchor too hard to a view, the market has a way of making you pay for it. If you wait for everything to line up neatly, you usually end up acting after the fact. And if you assume that discomfort must mean danger, you miss the periods where frustration is actually the dominant feature of a still-intact trend.

That’s been one of the defining characteristics of this year, and last week did nothing to change it…

So, I guess you probably want to hear where I think this market is heading after I’ve spent the last few minutes of your life rambling on about psychology and structure.

I still think the S&P can trade a 7k handle before year-end.

Nothing about the past couple of weeks suggests a tightening in financial conditions. Rates have stabilised, credit (bar-ORCL) has remained well behaved. The dollar has softened rather than firmed post-Fed. Put all of that together, and you get a market that does not need incremental optimism to grind higher. It just needs the absence of stress. That is often how these year-end moves happen.

At the end of the day, 7,000 isn’t all that far away. It’s literally ~2.5%. The path is unlikely to be clean. It probably comes with more rotation, more dispersion, and more days where the index does very little while large parts of the market feel uncomfortable. This is also where expectations tend to get misaligned. People hear “year-end rally” and picture a straight line higher. When that fails to materialise, they assume the thesis is wrong. In reality, grind is often the mechanism. A series of small, frustrating advances interspersed with pullbacks that never quite go anywhere. By the time the index is sitting at a level that looked unlikely a few weeks earlier, the conversation has usually shifted to something else entirely.

I want to be clear that none of this means risk is one-way from here. Thin liquidity will continue to exaggerate moves. Headlines will continue to matter more intraday than they should. And there will be moments where the market feels like it is about to roll over, because that is what this time of year does best. But unless something changes in the underlying structure, those moments are more likely to be opportunities to take advantage of.

That is really the takeaway into year-end. The market looks like it is setting up to frustrate anyone expecting clarity, while continuing to edge higher in a way that feels unsatisfying until it’s already happened.

And that sets the stage for why 2026 is a very different conversation.

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One last word on Oracle, because it has become the focal point for a lot of misplaced anxiety over the past week.

There is no point pretending the credit story looks pretty. Oracle is spending aggressively, cash flow is being dragged forward, and the funding mix is becoming more complex as a result. That makes credit investors understandably uncomfortable. The widening in CDS reflects concerns around leverage, funding visibility, and the fact that some of the solutions being discussed to bridge the gap between capex and monetisation are unconventional by traditional IG standards. None of that is wrong.

Where I think the market has gone too far is in treating those concerns as a verdict on the equity story, or worse, as evidence that something is breaking across the AI complex more broadly. That leap does not hold up.

What Oracle is doing is attempting to scale AI infrastructure at speed, without the luxury of a balance sheet that was originally built for hyperscale compute. That was always going to involve front-loading investment and being creative on financing. Some of that creativity looks uncomfortable when viewed through a credit lens, because credit markets care deeply about timing, predictability, and near-term cash flow coverage. Equity markets care far more about whether demand exists and whether the platform is strategically relevant. Those perspectives rarely move in lockstep.

The important point is that demand is not the issue here. Backlog continues to grow, workloads are real, and Oracle remains deeply embedded in the AI buildout it is trying to serve. The problem is not that the opportunity has disappeared. It is that the cost of pursuing it aggressively is showing up before the benefits fully do. That is a very different situation from a business model breaking down.

This is also where history matters. Larry Ellison has never run Oracle to optimise for short-term comfort, particularly for creditors. He has a long track record of pushing hard into structural shifts, absorbing volatility along the way, and dealing with the balance sheet consequences later. That approach has repeatedly created moments where the stock looks uncomfortable, narratives turn hostile, and scepticism peaks. Betting against Oracle at those moments has generally been a poor trade.

None of this is to say the credit concerns are trivial or that spreads should magically snap back. They may not. But extrapolating balance sheet stress into an immediate equity failure, or using Oracle as a proxy for the health of the entire AI cycle, strikes me as lazy/”panican”. If anything, the violence of the reaction says more about how emotionally charged and crowded parts of the AI trade had become than it does about the durability of the underlying demand.

Oracle’s issues are Oracle’s issues. They are not systemic. And in a market that keeps refusing to let stress spread, I am very cautious about leaning too hard on a single company’s financing choices as a signal that something larger is wrong. I’ve seen this setup enough times to know that writing Oracle off early, and betting against Larry Ellison at the exact point where ambition is making people uncomfortable, is usually not where the edge is.

Anyway, that’s where I’m at into year-end. This market continues to do what it has done all year, which is punish people for relying on what feels obvious and reward anyone willing to stay aligned with the underlying mechanics. Nothing about that looks finished yet. I’ll be back soon with the longest post of the year - The Year Ahead.

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One last thing before we wrap this year up.

If 2025 has been a tough year for you in markets, you’re not alone. A lot of people have found this market exhausting. It’s punished hesitation, overthinking, and the constant urge to wait for things to feel clearer than they ever really do. That wears people down.

This time of year has a way of magnifying that frustration. You look back at missed opportunities, trades you second-guessed, weeks where you felt out of sync, and it’s easy to carry that baggage straight into the next year. That’s usually a huge mistake. Markets don’t know or care how your year went.

If you’ve had a bad year, there’s nothing wrong with calling it quits here. Flattening out, stepping back and resetting mentally before you start thinking about what comes next. The goal isn’t to make it all back in December. It’s to show up in January with a clear head.

This market, more than most, has rewarded people who stayed patient, flexible, and honest with themselves. That won’t suddenly stop being true just because the calendar flips. If anything, it’s likely to matter more.

That’s where I’ll leave it for the year.

Since this is the final Week Ahead of the year, I’ll give out three free annual subscriptions if this post hits 300 likes and 300 restacks before Christmas Day. Just a way of saying thanks for reading and sharing the work.

If you do sign off for the year here, enjoy the break and have a very Merry Christmas.

Fed