The REAL reason markets are crashing:
Over the last 2 months, the S&P 500 and crypto have erased a combined -$5.5 TRILLION of market cap.
We have just witnessed one of the most SUDDEN shifts in sentiment since 2020.
What's happening? Let us explain.
(a thread)
Let's begin with a timeline:
Markets have known the trade war was coming since as early as mid-2024.
In December, tariff threats ramped up, and we saw many all time highs in the S&P 500 after that.
Even after the trade war began on February 1st, we saw MORE all time highs.
Since February 20th, the S&P 500 has erased a whopping -$4.5 TRILLION in market cap.
That's ~$350 billion in market cap PER DAY over the last 13 days straight.
The Nasdaq is now just 8% away from entering a bear market for the first time since 2022.
What changed so quickly?
The trade war is simply the scapegoat.
The real reason behind the market's decline is a sudden shift in risk appetite.
We have gone from Extreme Greed to Extreme Fear in a matter of days.
Positioning was so polarized, that we have swung in the complete opposite direction.
Where it gets even more interesting is that institutional capital exited BEFORE this decline in tech stocks.
Heading into 2025, hedge fund exposure to Magnificent 7 stocks fell to a 22-month low.
Take a look at the divergence between the Nasdaq and fund positioning.
On February 9th, institutional investors built the LARGEST Ethereum short position in history.
This came as retail investors piled into crypto on hopes of a US Strategic Reserve.
Crypto is down over $1 trillion even as almost ALL of the bullish Trump promises came to fruition.
Crypto is even more supportive of our thesis:
Take a look at all of the bullish crypto developments that have happened over the last 2 months.
Even the US Bitcoin Reserve became a "sell the news" event.
So, what changed?
Clearly, a sudden shift in risk appetite.
In December 2024, sentiment was so bullish that Apollo published their risks in 2025 with a 0% chance of a US recession.
Meanwhile, they saw a 90% chance of tariffs coming in 2025.
Markets have known about tariffs for months, the decline is NOT entirely due to tariffs.
Last week, US small cap funds saw $3.5 billion of outflows, the most since December 18th.
Mid-cap funds saw outflows of $2.1 billion.
Sectoral funds saw $4.5 billion of outflows which includes $1.9 billion from technology duns alone.
Once again, a SHIFT in positioning.
This means that getting ahead of shifts in sentiment will be the most profitable strategy of 2025.
And, as the Volatility Index, $VIX, surges over 70% in one month, the swings are going to broaden.
We expect to see 1,000+ point swings in the Dow become a regular occurrence.
Through technical and fundamental analysis, we have been trading these swings.
Stocks, commodities, bonds, AND crypto are highly tradable now.
Want to see how we are trading it?
Subscribe to our premium analysis and alerts at the link below:
Lastly, the moves in crypto and stocks are becoming increasingly one-sided.
Red days are DEEP red days and vice-versa, yet another sign of changing risk appetite.
Sentiment is the ULTIMATE driver of price.
Follow us @KobeissiLetter for real time analysis as this develops.
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