Stock Market Hits a Record But No One Likes It? Ilya Spivak Looks At Why Traders Hate the Rally

Key Concepts

• Bifurcated Market: A financial environment where different asset classes (e.g., stocks vs. bonds/commodities) show diverging trends.
• Backwardation: A market condition where the spot price of a commodity is higher than prices in the futures contracts (or, as noted, the narrowing of this spread).
• Negative Divergence (RSI): A technical indicator where an asset makes a new price high, but the Relative Strength Index fails to confirm it, signaling weakening momentum.
• Hyperscalers: Large-scale cloud computing providers (e.g., Amazon, Google, Microsoft, Meta) driving massive capital expenditure (CapEx) into AI infrastructure.
• Non-Residential Fixed Investment: Business spending on structures, equipment, and software, which currently acts as a primary driver of GDP growth.
• Risk-Defined Verticals: An options trading strategy (e.g., credit spreads) that limits potential losses by capping the risk of a position.

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1. Market Overview and Current Sentiment

The stock market has largely shrugged off the geopolitical tensions surrounding the Iran conflict, pushing to new highs. However, the host, Julius, highlights a significant lack of conviction, evidenced by declining trading volumes and negative RSI divergence. While the S&P 500 headline index is hitting highs, the equal-weighted S&P and Nasdaq indices show a much weaker, narrower market performance, suggesting the rally is driven by a small subset of tech stocks rather than broad-based participation.

2. The Energy-Inflation Nexus

• Crude Oil: Despite a slight pullback, oil remains near the top of its post-conflict range. The "slow boil" in the Strait of Hormuz has transitioned from an active war to a maritime enforcement action, keeping energy prices elevated.
• Inflationary Impact: Rising energy costs are filtering into the broader economy. Core inflation (excluding food and energy) is already trending higher, and the bond market is pricing in this reality.
• Bond Market Response: Break-even inflation rates for 5-year and 10-year bonds have surged, erasing previous disinflationary gains. Consequently, bond prices have fallen, and yields have risen, putting pressure on gold and the US dollar.

3. The AI Infrastructure Thesis vs. Economic Reality

• GDP Drivers: First-quarter GDP data revealed that non-residential investment (10.4% growth) significantly outperformed consumer spending (1.6% growth). This is largely attributed to the massive build-out of AI data centers.
• The Contradiction: While the "AI build-out" is fundamentally supported by record-breaking CapEx from hyperscalers, the market is hesitant. The cost of inputs (helium, polyethylene, naphtha) and the energy required to build these data centers are being disrupted by the same geopolitical tensions driving inflation.
• Macro Headwinds: Central banks globally (RBA, ECB, Bank of England, Bank of Canada) have shifted to a more hawkish stance, raising or maintaining interest rates to combat inflation. This increases the cost of capital, potentially making the massive AI infrastructure projects less viable.

4. Technical Analysis and Market Internals

• Manufacturing and Services: ISM PMI data shows that while headline numbers are stable, the internals are concerning. Manufacturing costs are "eye-watering," and service sector employment is in contraction.
• Volume Analysis: The current rally is occurring on the lowest volumes seen since the transition to the M 2026 ES contract, confirming that the "heroics" in the stock market lack institutional conviction.

5. Strategic Positioning

Julius outlines his current portfolio strategy, emphasizing risk management:

• Short Gold: Betting on the interest rate structure to continue pressuring the metal.
• Long US Dollar: Anticipating that rising yields will continue to support the currency.
• Long Bitcoin: Noting its detachment from the broader stock market narrative.
• Short Equities: Expressed via risk-defined put verticals on the Nasdaq and S&P 500 to protect against a potential market "unclenching."
• Short Long-End Bonds: Using TLT put verticals to capitalize on the expectation of higher yields.

6. Notable Quotes

• "The question is are we running out of juice and does this really still make sense for the level of vigor that we are seeing?"
• "This is not a move with breadth. This is not a move with broad-based conviction. This is really a very narrow story."
• "This does not appear to be driven by demand with legs to it. Instead, it starts looking increasingly like stock buying."

Synthesis

The market is currently caught in a tug-of-war between the tangible, high-growth narrative of AI infrastructure investment and the deteriorating macroeconomic environment characterized by persistent inflation, rising interest rates, and geopolitical energy shocks. The lack of volume and breadth in the equity rally suggests that investors are increasingly skeptical of the sustainability of this growth, leading to a cautious, risk-defined approach to trading.