Something Quietly Flipped

Volume 161 - The Week Ahead

Last week’s Volume 160 of The Week Ahead argued that what looked like fragility on the surface was actually one of the cleanest positioning resets we had seen in months. The market had every excuse to break: tech wobbling, liquidity thinning, CTAs selling and vol-control dumping nearly $120B of exposure. Yet the market held. As I made clear, the danger was not downside. The danger was being underweight into strength (*cough* pain trade *cough*). All the market needed was a breath of calm for the underlying bid to reassert itself.

That is exactly what happened. I have attached the last edition of The Week Ahead so you can read (no paywall).

A Different Story Beneath the Surface

ES1 finished the week up 3.6%, ripping through the 6700s and settling around 6860, validating almost every component of last week’s post. Positioning was too light, hedges were mistimed, and the moment realised vol cooled, the mechanical bid stepped back in. Thin holiday liquidity did not expose weakness, if anything it amplified strength. After all, it is unpatriotic to not buy US equities into Thanksgiving, no?

Anway, I think that the market behaved not like a market breaking down but like a market that had been coiled, cleaned up, and waiting for an excuse to move.

My book was well positioned for that dynamic. The 12/19 SPX 6825c, which I added into the lows, has now doubled from my average (initially a 50bps weight). The broader structure of my positioning continues to reward staying aligned with the prevailing regime rather than pretending it has changed. AAPL (9% weight plus 280 calls for 12/19) gained 4.85%. MSFT was up 2.8%, META +10.1%, with my short 12/19 650 puts continuing to provide efficient theta capture into strength - they were initially sold to take delivery, but happy to harvest premium. This definitely remains a market where patience is paying more than cleverness.

My Phase II AI basket snapped back exactly as expected from the positioning clean-up. Seven of the twenty names finished the week up double digits, with CRDO, CIEN, PSTG, DUOL, VRT, and LRCX leading - only two names closed up red for the week (MNDY -0.92% and NVDA -2.34%. The Laggards basket, which includes the names hit hardest during the recent dip, showed similar behaviour. MRVL, ON, ASML, TXN, SNPS, FIG, and UNH all posted outsized moves.

In short, Volume 160 was not only right directionally. It captured the underlying mechanics with precision. Vol-control had already completed its de-risking and was primed to re-allocate. Discretionary nets were, o(nce again) too light heading into December.

This setup does not come around often, and when it does, hesitation is the most expensive mistake you can make. The people who wait always end up chasing.

The part of the market that interested me most this week wasn’t the bounce, nor the breadth improvement (although it was stunning to see - RSP +3.1% for the week), or the fact we ripped straight back into the 6800s. It wasn’t even the squeezy feel the market had. What stood out was what started happening underneath the surface. You could feel the shift. The prior week CTAs were still selling, vol-control was still offloading, people were still hedging into weakness. This week that flipped. You can already see the systematic engines beginning to re-allocate. The clean-up on the CTA side has turned into the early stages of buying. And vol-control, after dumping nearly $120B of exposure into the realised-vol spike, has started mechanically adding again the moment volatility started to cool. The flows that pushed the market lower are now the same flows quietly turning into a source of support.

But the far more interesting development this week had nothing to do with flows at all. Something larger happened, something that didn’t trend, didn’t make a headline, and somehow didn’t register with many people. The US effectively laid out the early architecture of a national AI strategy. A genuine attempt to accelerate compute capacity, advanced manufacturing, semiconductor depth, energy infrastructure, nuclear and fusion investment, critical minerals, and the research ecosystem around AI. The language used was unusually direct, the kind of language you only see when a government decides it wants to pivot the entire productive base of the economy towards a specific technological goal.

You don’t see moves like this that often. And you definitely don’t see them land at the same time corporate America is finally beginning to show real AI adoption in earnings. For almost two years the conversation has been about the “potential productivity”. Now it’s showing up in the financials. The old-economy names that nobody associated with AI are starting to deploy tools that actually change how they operate. And it’s happening just as the US is effectively signalling it wants to accelerate the entire AI boom.

This combination matters a lot more than most people realise. Markets have spent so long obsessing over whether AI is priced in the megacaps that they’ve completely missed the fact the next leg of this cycle won’t just be about the sellers/enablers and so on of AI, but the users. The companies that benefit from cheaper compute, better tooling, and faster infrastructure. The ones sitting in the slipstream of this industrial shift.

That’s why the behaviour of my Phase II names didn’t surprise me and why the broadening didn’t surprise me. And it’s why I’m not second-guessing the trend here. The week prior was a wobble that shook out weak hands and forced hedging into the hole. This week confirmed the shift. And beneath it all, there’s a bigger, slower, much more powerful story starting to form IMO.

If you want to take a look yourself → Genesis Mission Link

Flows are turning positive again, vol-control is re-allocating. Discretionary nets are still too low. And now there’s a new tailwind building underneath the surface that the market hasn’t come close to pricing.

What makes this coming week interesting is how much the character of the market has changed without anyone really acknowledging it. Last week was heavy, choppy, and dominated by hedging/de-grossing/forced cleanup flow. This week felt like the opposite. The market stopped trading like it was fighting supply and started trading like it finally had oxygen again.

I think people massively underestimate what happens when a market that’s been mechanically sold for weeks finally gets a moment to breathe. Realised vol cools, and.... the bid comes back. And suddenly everyone who spent the last ten days “getting cautious” is staring at a tape that refuses to give them an entry. It’s the kind of behavioural whiplash that the final weeks of the year tend to provide. Flows this week told that story clearly. Even hedge funds, the same ones who were aggressively trimming and hedging into the wobble, have flipped back to buying. Retail hasn’t capitulated on the upside either, despite what people claim. And as I just said - discretionary nets remain far too low for where the market is trading. Every conversation I’ve had in the last few days has the same energy: “I like the setup, but I want a pullback.” The problem is that the pullback already happened, and the market absorbed it cleanly - you got 5%???

We’re now through the 6800 zone and starting to push into the part of the market where people who hedged or sold last week start to get uncomfortable. A few days of calm here would be enough to force another wave of re-risking. There’s very little resistance until the the 52w high, and even that is more psychological than anything else. The bigger danger isn’t a reversal. It’s still the same thing I said last week, well, since April/May - being underweight into strength because you convinced yourself the wobble meant more than it did.

Under the hood, the broadening is becoming harder to ignore. It’s not just the megacaps carrying this anymore. And when you get a a mix of systematic support, better breadth, reduced vol panic, and a tape that shrugged off real pressure… the default state becomes drift higher until proven otherwise. These are the conditions that produce the annoying, grinding, reluctant melt-ups people always underestimate at this time of year.

The psychology going into December is exactly what you’d expect. Portfolio managers want to be more long, but they don’t want to be the last ones adding. They want confirmation, but confirmation means paying up. They want dips, but dips aren’t getting deeper. It’s the classic December tension: everyone wants exposure, but nobody wants to look like they chased. That dynamic usually resolves itself the same way - higher.

And with flows turning, positioning still light, and the new Genesis Mission tailwind forming, the risk is not that we go down. The risk is that we go up faster than people expect. I’m staying with what’s working. The trend hasn’t changed. If anything, the last two weeks have made it stronger.

Given all of that, the year-end 7000 target that I have mentioned for many months that once felt aspirational now looks entirely possible. I’m not calling it a certainty as nothing is guaranteed in December, but the flows, path and momentum are there for it to happen. And the market has already shown you that it can shake off real pressure, reset cleanly, and re-accelerate as soon as the noise dies down. If we get even a handful of calm sessions, the combination of systematic re-allocation, discretionary chasing, and thin liquidity can easily drag us into the high 6900s. At that point, 7000 stops being a stretch target and naturally becomes a psychological magnet.

So that’s where I am this week - systematics turning supportive again, discretionary nets still miles lighter than they should be considering where markets are. And now an AI tailwind forming at exactly the moment the market has regained its footing. These periods don’t show up often, and when they do, the mistake is usually the same - waiting for the perfect entry while the market quietly marches away from you. The path of least resistance remains up.

VeryVeryCrunchy wins the free year - please DM me your email.

This week - 200 restacks, 200 likes and I’ll give another free annual subscription out.

I hope those who celebrate enjoyed their Thanksgiving. Looking forward to what should be a busy final month to 2025.

Fed