To The Moon

The Market Followed Last Week’s Road Map Almost to the Letter

Here is my conclusion up front: the market may be setting up for a major selloff on a weekly time frame. But the key word this week is setting up. The selloff has not arrived yet. This is precisely when investors are most likely to let their guard down: after a sharp drop, when the rebound they were waiting for finally appears.

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Last week, I suggested that the decline could reach the lower edge of the previous trading range and then rebound. A week later, the market has followed that path closely. The rebound, however, does not mean all the risk has been priced in. The question now is where the market goes after the bounce.

Last week’s projected market path:

This week’s market performance:

I remain cautious. US stocks may be preparing for a decline that plays out over several weeks, though it need not begin immediately. Semiconductor valuations have fallen to relatively low levels, trading remains active, and buyers and sellers still disagree sharply. Those conditions could keep the index swinging across a wide range before any panic-driven selloff takes hold.

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The 2018 Playbook, Against a More Tense Political Backdrop

To understand the path the market might take, it helps to revisit November 2018. Donald Trump was in his first term, and the midterm election results had just been announced.

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The S&P 500 initially offered a window for a rebound. It then traded sideways for a while before breaking a key support level and printing a large down week. Today’s chart bears a striking resemblance to that sequence, while the political backdrop may be even more fraught. In 2018, Republicans at least retained the Senate under a divided government. This time, Democrats control both chambers, raising the prospect of a more intense struggle with Trump and the Republican Party.

There is another, less discussed political risk. Israel’s president has reportedly given Benjamin Netanyahu’s rival the first opportunity to form a government, while Netanyahu himself faces mounting political pressure. Trump and Netanyahu could both produce unexpected developments over the next two years, and markets may start pricing in that possibility ahead of time.

Taking Stock of the Signals: Panic Has Not Arrived

For a major selloff to unfold, fear generally has to build. Yet the market’s fear gauges are not flashing extreme readings. $Cboe Volatility Index(VIX)$ $ProShares Ultra VIX Short-Term Futures ETF(UVXY)$ $Volatility Index - main 2611(VIXmain)$

The put/call ratio compares trading volume in put options with volume in call options. A higher reading suggests greater demand for downside protection. Its 20-day average currently stands at 0.61 for S&P 500 constituents and 0.88 for the broader market. Neither reading is extreme. During the previous two major declines, the ratio’s peaks roughly coincided with the market’s lows.

The CFTC report released last Saturday tells a similar story. Noncommercial traders, including speculative investors such as hedge funds, still hold substantial net-long positions in S&P futures. The chart puts net-long positioning by non-dealers in US equity-index futures at $329.6 billion, well above its historical average of $85.54 billion and close to the charted high of $342.14 billion. Large investors have yet to show much sign of panic.

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Goldman Sachs, meanwhile, identifies two selling thresholds for commodity trading advisers, or CTAs, whose positions respond systematically to market trends and volatility: 7,549 for medium-term strategies and 7,676 for short-term strategies. Both levels have already been breached, leaving room for further CTA selling in the short to medium term. Goldman’s one-month scenarios, however, diverge widely. They allow for substantial buying as well as substantial selling; neither outcome is assured.

Trading volume offers another clue. On November 5, turnover in US-listed ETFs rose to nearly $60 billion, according to the article’s text. Heavy volume suggests that liquidity remains available and that buyers and sellers are both putting money to work. This was an active, contested market, rather than a low-volume slide with no one willing to take the other side.

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Semiconductor Valuations May Delay the Selloff

Semiconductors are an important counterweight to the bearish case. The SOX index’s two-year forward price-to-earnings ratio has fallen into a historically low range of roughly 8 to 10 times. Compared with peaks of about 20 to 28 times between 2021 and 2024, that is roughly one-third of its former level.

Cheap does not necessarily mean the sector has bottomed. It does, however, mean that a substantial part of the valuation decline has already happened. That may be one reason a panic-driven selloff has not begun. The potential sources of fear are clear: a tougher confrontation between Democrats and Republicans, and increased scrutiny of the semiconductor industry. But with semiconductor valuations already compressed, another bout of panic may be more likely to follow a period of sharp market swings than to erupt immediately.

Two Possible Paths From Here

In the first scenario, the market continues to swing within a broad range. As investors weigh the advantages and disadvantages of a divided government and absorb concerns about semiconductor oversight, the passage of time helps ease the pressure. Stocks form a base and begin rising again; the feared major selloff never materializes.

In the second scenario, the choppy trading is only a prelude. Fear intensifies, a key level gives way, and the market suffers a weekly-scale breakdown similar to the one seen in 2018.

After this period of consolidation, the odds of a renewed rise and a downside break appear nearly even. Over the next two weeks, an immediate crash is unlikely; the market may need more time to fluctuate, and a breakout to fresh highs also looks difficult. Any rally therefore calls for caution.

I Still Lean Toward a Breakdown

Although the two outcomes look almost equally plausible, I think the downside break is slightly more likely. Several indicators point in that direction. The VIX has come close to breaking above 30, a resistance area near its highs of the past two years. Its daily lows have also been rising, in a pattern reminiscent of early 2026.

After a selloff like last week’s, stocks rarely resume a sustained advance immediately. The VIX generally needs to return to more normal levels and market volatility needs to settle before a new rally can take hold. That leaves room for another round of selling into strength.

The VIX futures curve also remains unsettled. Near-term contracts are trading above later-dated ones, an inverted structure. Until the curve returns to its usual shape, with later contracts priced higher, it is too early to say the danger of a major decline has passed.

The equal-weighted S&P 500 has also formed what looks like a double top.

Positioning: Sell Rallies and Consider Puts at Much Lower Strikes

In practical terms, this is a time for exceptional caution.

One approach during the choppy period is to look for bearish opportunities when the index rallies, particularly as it approaches its 20-day moving average—the average closing price over the past 20 trading sessions. At that point, one could consider buying the VIX near its lows or using a long straddle on the index. A move back above the 20-day average would be the stop-loss signal. If the index turns lower, profits on the straddle and long-VIX position should be taken promptly.

A second approach is to sell deeply out-of-the-money puts with very low strike prices. “Deeply out of the money” means the strike is far below the current index level, making exercise unlikely; the aim in selling the option is to collect the premium. The view here is that the S&P 500 is unlikely to fall through its 20-month moving average, around 7,000. On that basis, selling weekly puts with strikes below 7,000 may be appropriate.

A break below 7,000 would bring the possibility of a return to a bear market into focus. The first response is needed if the 200-day moving average fails; if 7,000 itself gives way, the position must be stopped out promptly.