Perfection Prevails
Perfection prevails
Our 1997 analogy remains the chart that keeps us from turning outright bearish. There are plenty of tempting short signals out there, but markets driven by momentum and speculation rarely stop simply because they look expensive.
For now, perfection continues to prevail. The crowd keeps chasing upside, leverage keeps building, and downside protection remains unwanted. History suggests that can continue longer than expected. History also suggests it eventually matters.
Source: LSEG Workspace
Upside panic in a pic
SPX low delta calls have exploded as the crowd is desperate to show upside exposure.
Source: GS
Endangered species
Nobody wants protection. SPX puts are now trading at relatively cheap levels despite one of the most speculative rallies in years. More here.
Source: GS
The hedge?
NVDA increasingly looks like the funder of the latest semiconductor squeeze. The stock has struggled even as large parts of the semiconductor complex continue to rip higher.
One possible explanation is that NVDA has become the hedge. Investors remain structurally bullish AI, but rather than reducing semiconductor exposure outright, they are trimming the most crowded and liquid position in the space to fund new longs elsewhere.
If true, the irony is that the market's favorite AI stock may now be acting as the source of liquidity for the rest of the AI trade. More here.
The correlations crash
The crash in implied correlations has been epic. This is no longer an index market but an AI stock-picking market. That is bullish initially, but it also creates fragility as more capital gets crowded into fewer names. When leadership finally stumbles, the broader market tends to notice.
Crashing implied correlation is the market's way of saying investors would rather chase the next AI winner than pay for protection.
Source: LSEG Workspace
The software squeeze
On April 14 (here), we laid out our contrarian software thesis and wrote: "IGV has been absolutely crushed, but is now sitting on major support just as positioning looks washed out and momentum starts to turn. After four failed attempts, the setup for another bounce is building again."
Fast forward to today and IGV has rallied roughly 45% from the April lows. The ETF is now approaching a major resistance area. The setup remains constructive, but after a move like this, we are not looking to get greedy. Latest tactical update on software here.
Source: LSEG Workspace
Sexy software
Who would have thought? Since the recent IGV low, SOX has rallied 45% while IGV is up 43%. For all the obsession with semis, software has delivered almost identical returns. That's basically a rounding error.
Source: LSEG Workspace
European positioning
Europe saw positioning and flows improve in May, but there may still be room to run. Hedge funds were buyers, CTA exposure rebounded sharply, and overall positioning remains only around the 36th percentile. Flows are also showing signs of bottoming, suggesting potential upside over the coming months if the normalization continues. Full note here.
Source: JPM PI
The BTC Bear
BTC has traded one way only since hitting the 200DMA in mid-May. Momentum remains extremely poor as the breakdown extends again today. The 65k area is shaping up as a must-hold support.
Source: LSEG Workspace
Follow the flows
The BTC top coincided with the moment the AI narrative went parabolic. One possible explanation is that speculative capital has simply found a higher-beta home in AI. In our view, SK Hynix remains one of the key AI mania names to watch.
Is an AI bear market the only thing that can bring those flows back to crypto?
If so, BTC bulls may find themselves in the unusual position of rooting for weakness in the very risk assets that have driven markets higher. More here.
