This Looks More Like Rotation.

1) BULLS – Being bullish on a day when everything is red is what causes people confusion. But understanding why is what gives process value and why a systematic, non-emotional approach to investing tends to win the day. So what happened yesterday that kept our systems bullish?

- VIX: When VIX is down on a red day in the indexes, it points towards hedges being unwound into that weakness, not added. That’s position shifting, not rising fear.

- Crude Oil: Reversed intra-day gains suggesting that geopolitical/inflation risk is getting priced out, not escalating.

- Gold, Silver, Copper: The bubble is looking like it may have popped as prices got hit back down to more reasonable levels. Big moves like what we’ve seen in these metals over the past two days suggest that crowded inflation hedge trades are getting unwound.

- Bitcoin: Held the $70,000 mark, which suggests that risk appetite is still intact beneath the surface. This can also be seen in Small Caps. They were positive on the day with the Russell 2000 +0.65%.

- Indexes: The market held the lows and then rebounded quickly to close in the upper half of the trade range for the day.

- War: The Iran/US tone appears to be softening some, moving the narrative from “worst-case” to “let’s be reasonable”.

2) FLUSH – Action also pointing towards bullishness is "the flush.” According to Goldman Sachs prime book data, Long Only funds (funds who only buy, not sell short) net sold ~$9.6B worth of equities. That is the largest day of net selling in this category in their data set's history going back to 2022 and a 5 sigma event. Translation? That’s a lot of selling. That tends to point toward capitulation, which then often leads to a recovery/buying.

3) ROTATION – Sentiment continues to get more and more bearish as the American Association of Individual Investors (AAII) has shown more bears than bulls for five straight weeks. Magazine covers are screaming about economic trouble and geopolitical chaos. Options activity is leaning hard to the downside. Everybody seems positioned for a breakdown. So if stocks are really about to roll over, the rotation should confirm it. But it’s not. The most defensive areas of the market are getting hit. At the same time, the more aggressive, higher-beta stocks are starting to outperform again. Staples (XLP) were down -3.24% over the past two days, whereas Tech (XLK) was down just -0.79% and was up 0.34% yesterday. That’s not what weakness looks like. Look at High Beta (think riskier - SPHB) vs. Low Volatility (SPLV). If stocks were about to roll over, SPLV should be leading. That’s where investors go when they’re trying to protect capital. Instead, High Beta is pushing up toward new one-month highs relative to Low Volatility. So while the headlines are screaming “Caution!”, the rotation seems to be telling a different story.