Asset prices don’t make their biggest moves because of fundamentals. They move because of positioning.
That’s the game.
It’s not about earnings. It’s about ownership. Who owns what, how much do they own, and, more importantly, what happens when Everybody’s Wrong.
Sometimes investors don’t own enough. Sometimes they own way too much. And when those extremes get stretched, the unwind in the opposite direction can be violent.
That’s where the opportunity lives.
If you can identify where positioning is crowded, you can also identify where the risk is. Not the risk everyone is talking about, but the risk of being on the wrong side when the move goes the other way.
And we’re starting to see a setup where the ingredients are coming together.
Not because earnings are accelerating. Not because the headlines are bullish.
But because the positioning is.
They’re Betting on Falling Stock Prices
On Sunday, we pointed out something important. We just saw the first week of net outflows from equity ETFs since last April.
That was the exact same backdrop that kicked off one of the most historic rallies in U.S. stock market history.
So is this going to look like last time?
Here’s another clue.
Our friend MacroCharts highlighted something important. You remember MacroCharts from the Lab Training we did together in the fall. He does great work and always brings a unique perspective.
Along with the outflows from equity ETFs, we’re now seeing something even more aggressive.
Volume in short ETFs just surged to new all-time highs:
Think about what that means. Investors aren’t just selling their stocks. They’re actively betting against them at a pace we’ve never seen before.
That’s a big difference.
When positioning gets this one-sided, the risk shifts. It’s no longer about how much lower stocks can go. It’s about how wrong these participants are if prices start moving higher instead.
The market’s job is to frustrate the most people possible.
And when everybody lines up on one side of the trade like this, it usually doesn’t end well for them.
If stocks start to rally, this group becomes fuel. Not just for a bounce, but for a squeeze.
And that’s where things can really start to accelerate.
But for that to happen, there was another problem that needed to be cleared first.
The VIX Positioning Reset
Coming into the year, asset managers were all leaning the same way. They were betting on lower volatility at a record pace.
In other words, everyone expected the Cboe Volatility Index (VIX) to keep falling.
But when positioning gets that extreme, it tends to create the opposite outcome.
Instead of volatility collapsing, it started to rise. And that created a problem.
Stocks and the VIX generally move in opposite directions. If volatility is rising, it puts pressure on equities. And if everyone is already positioned for lower volatility, there’s no one left to push it down further.
That’s the trap.
Before stocks could have any real chance of moving higher through that key 7,000 level, that positioning had to unwind.
And now it has:
Those bets on falling volatility have been forced out. The crowded trade is gone. The excess positioning has been cleared.
That removes the headwind.
Now the VIX can fall on its own. And if volatility is falling, stocks have room to move higher.
So now we have two things in place.
Investors are aggressively betting against stocks.
And the volatility overhang that was holding equities back has finally been reset.
What happens when you put all of that together?
All the Ingredients Are There
I don’t know what the market is going to do next. And neither does anyone else.
But we don’t need to know.
Our job is to weigh the evidence and identify when the conditions are in place for a move. Not predict it, prepare for it.
And right now the setup is hard to ignore.
Sentiment is pessimistic, and money is flowing out of stocks.
At the same time, investors are aggressively betting against them at a historic pace.
And the volatility positioning that was acting like a ceiling on equities has finally been cleared out.
That’s the combination.
When you get this kind of alignment, it doesn’t guarantee higher prices. Nothing does.
But it does tell you where the risk is.
And the risk is not to the downside.
The risk is that stocks go higher. A lot higher. And they do it in a way that catches the largest number of participants completely offside.
Because if this thing starts to go, the people betting against it are not just wrong.
They’re fuel.
And the market loves nothing more than lighting that match.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs