The Kobeissi Letter

There was only one "major" headline last night: The Swiss National Bank cut interest rates to their lowest since September 2022. However, this was a widely anticipated move which makes the drop in futures unusual. Something deeper is happening under the hood of this market.

The trend of markets "flash crashing" is spreading beyond just equities. We have seen multiple flash crashes in crypto over the last 2 months. On February 25th, crypto markets erased -$300 BILLION in 24 hours without a single major bearish headline. This is a similar theme.

Furthermore, on February 2nd, we saw Ethereum fall -37% in 60 hours as trade war headlines ramped up. However, most of the trade war headlines were priced-in prior to February 2nd. Yet still, liquidity was drained from Ethereum at a historic pace. So, why is this happening?

Much of this comes down to SENTIMENT and EMOTION. In recent months, we have seen consumer confidence plummet and recession fears skyrocket. This seems to have come with a decline in investor confidence as well. Investors are worried to take on more risk in this market.

AAII data shows that bearish levels in this market are now at 58.1%. This marks 4 straight weeks with bearish sentiment above 55%. Heading into 2025, bearish sentiment was below 30% for months. The sudden shift in investor sentiment has been catastrophic for stocks.

And, let's put this into perspective. The historical average shows bearish levels at ~31%. This means we investors are nearly DOUBLE as bearish as average. Meanwhile, the S&P 500 is down just 7% from its all time high. Sentiment is as if we are in a major bear market.

Our members have capitalized on the polarization of sentiment. Heading into the Fed yesterday, we posted this alert calling for the S&P 500 to rise above 5700. Members cashed out +75 points in 4 hours as we expected the rally to be sold. Join us: http://thekobeissiletter.com/s...

Positioning is the next big driver here. Over the last 4 weeks, hedge funds have dumped technology stocks as their fastest pace since January 2021. Just weeks prior, hedge funds were buying tech stocks at the fastest pace since the 2022 bear market. Positioning is polarized.

In fact, hedge funds just rotated out of US stocks at the fastest pace in history. Commodities like gold and silver have seen non-stop upside amid the uncertainty. However, the exact opposite trend has been seen in retail. Retail thinks the market dip will be brief.

Retail investors are pouring money into equities. Retail net inflows into Nasdaq 100 stocks as a % of market cap hit 0.1%, a 1-year high. JPM’s retail investor sentiment score hit a record 4 points. This is ~1 point higher than the peak of the meme stock mania in 2021.

The same exact trend is being seen in crypto. Short positioning in Ethereum surged +40% in early-February and +500% since November 2024. Never in history has Wall Street been so short of Ethereum, and it's not even close. However, retail investors continue to buy the dip.

The result is a market that is increasingly full of "air pockets." When sentiment shifts, large institutional investors have a major impact on price. The abundance of retail capital makes these shifts more turbulent. No one wants to be the "last one in" or "last one out."

As we have said previously, market conditions like these are HIGHLY profitable. We are seeing $500B+ swings in the S&P 500 on a near-daily basis. Want to see how we are trading it? Subscribe to our premium analysis and alerts at the link below: http://thekobeissiletter.com/s...

Lastly, keep an eye on shifts in liquidity in the market. After a complete collapse since January 1st, CTAs are beginning to increase liquidity again. Eliminate the NOISE and invest OBJECTIVELY here. Follow us @KobeissiLetter for real time analysis as this develops.