If you look at the raw data right now, you should be terrified.
I was reviewing positioning models this week and the data is lighting up like a Christmas tree. But not the festive kind.. the kind that usually precedes a market explosion.
The Dry Powder is Gone (AAII Cash %): Conversely, cash holdings are in the bottom 5th percentile. There is no one left on the sidelines to step in and buy a dip. Everyone who wants to be long is already long.
Priced for Perfection (P/NTM EPS): Valuations on a forward-earnings basis are in the 97th percentile. We are paying top dollar for future growth that hasn’t happened yet.
Zero Fear (IG Credit Spreads & Vol Correlations): Investment Grade credit spreads are in the 1st percentile. That means bond traders see effectively zero risk of corporate default. Meanwhile, implied volatility correlations are also bottomed out (1st percentile). The market is pricing in a “Goldilocks” scenario where nothing ever breaks again.
The “Smart” Move vs. The Right Move
If I traded based on “logic” or macroeconomic fear, I would have sold everything weeks ago. Looking at that list above, the “smart” intellectual move is to go to cash, build a bunker, and wait for the inevitable mean reversion.
But here is the problem with trading based on macro positioning data: Markets can stay irrational longer than you can stay solvent.
Top-ticking a market based on fundamental overvaluation is a widow-maker’s game. You could have looked at similar “overbought” metrics in 1998 and missed the face-ripping rally of 1999.
Enter The Macro Regime Engine
This is why I don’t trade on feelings, and I don’t trade on “what should happen.” I trade on what is happening.
Take a look at my Macro Regime Engine:
Despite the fundamental positioning screaming “danger,” price action is the final arbiter of truth. My system is currently full risk-on. We are in a Goldilocks regime (Growth Bull).
The chart doesn’t care that retail has no cash. The chart doesn’t care that P/E ratios are high. The chart cares about momentum and trend. And right now, the trend is up.
The Strategy: Dancing Near the Exit
So, how do I sleep at night being Long in a market that is statistically overdue for a flush?
I trust the system to get me out.
The beauty of the Regime Engine isn’t just that it gets me into trends; it’s that it identifies when the character of the market changes. Look at the “Risk Off/Chop” signals on the chart (the purple arrows). Those are my safety valves.
If the “Red List” of positioning indicators above finally matters.. if the credit spreads blow out or the correlations spike to 1.. price will react first. My system will detect the shift in volatility and momentum, the paint will dry on a “Risk Off” signal, and I will exit.
Conclusion
Positioning data tells you the fuel load is high. It tells you that if a spark hits, the explosion will be massive. But it doesn’t tell you when the spark will hit.
We are sitting on a powder keg. I acknowledge that. But as long as the market keeps handing me gains, I’m not going to leave the party early just because I’m afraid of the noise.
I will stay Long because the system says Long. When the music stops, the system will tell me to sit down. Until then, we dance.
⚔️ Stay Sharp
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— Durden out.
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