Title:   Intensely Concerned for Risk — With a Catch (A Review of US Equities)
Show:    Paulo Macro (Substack) — paid
Guest:   Paulo Macro ("Cloudbear")
Date:    2026-FEB-07
URL:     https://paulomacro.substack.com/p/intensely-concerned-for-risk-with
Length:  written post (no timestamps)
Note:    Back-filled post (processed 2026-JUL-07). Paulo's base case: a proper bear market has finally begun after a lengthy topping process. He revisits his "Era of Rolling Blowouts"/rolling-VaR-shock framework — a key bubble sector fails while the index flounders and crackups unfold under the covers (the dotcom analog: Nasdaq crashed while S&P/Dow rolled over slowly and defensive sectors led "through a keyhole"). The software space is in a historic crash (IGV), reflexively boomeranging into private credit/BDCs (BIZD) because ~15-25% of private-credit/BDC exposure is software — a contagion loop hitting CLO loans and hyperscaler credit (AMZN sold off, ORCL CDS higher). Retail is now the dominant marginal price-setter (options above 2021's GME/SPAC peak), setting up the "no Fear yet" problem. The Crowded L/S factor pair had its worst day since Jan 27 2021 — the "March 2000 moment." The catch: "Broadening Out" is a very late-stage bull narrative that historically precedes one last large-cap jam higher (1999-2000, the early-70s Nifty-Fifty echo before the 1973-74 bear). Body reproduced for personal study; Substack chrome removed, wording otherwise verbatim.

It is tempting for most investors to write off this week's market action as yet more chop and index compression before another eventual move higher. While I am trying to keep an open mind (and there is one analog where things actually do move up, as I discuss at the end), as a base case I am intensely concerned that a proper bear market has finally begun after a lengthy topping process.

Way back in October 2024, I outlined a phenomenon I described as the Era of Rolling Blowouts (see Feedback and Loose Thoughts From a Week of Travels). In it, I took a walk down memory lane in 2018 — a moment in my career that saw each month experience a weird blowup in an unrelated sequence to what followed, and eventually ended with the Risk Off episode of 4Q 2018. It was this idea that inspired the "rolling VaR shock" notion that I flagged last weekend following the precious metals collapse and the idea that this would touch off other position unwinds in seemingly unrelated assets or strategies (something we saw very clearly on Wednesday in the Quant Quake).

The thing about bear markets is they don't usually start with a bang in the aggregate. Rather, a key sector in a bubble's formation fails while the overall market flounders around, all while crackups unfold under the covers. When people think of the dotcom mania in 2000, we need to remember that the parabolic Nasdaq was dominated by tech/dotcom/telecom speculations being traded aggressively by leveraged retail.

However the S&P and Dow had a very different, prolonged topping experience, and tended to roll over in an extended process that exhibited clear distribution and repositioning as stock moved into leveraged, speculative "weak" hands.

The bursting of the bubble and ensuing bear market didn't mean there was nothing to do but short stock all day. For a while, there were notable rallies in several other sectors whose relative weights in the S&P had fallen so low that the "Elephants through a Keyhole" phenomenon meant that even marginal flows from tech into these sectors resulted in positive absolute as well as relative performance. For instance, the S&P Utilities and Healthcare indices only peaked in December 2000, while S&P Energy peaked in May 2001, and Consumer Staples held on for a peak in May 2002 — more two years after the dotcom bubble burst, and eight months after the 9/11 crash!

Of course, you can also see that these sectors suffered for all of 1999 as the party raged in tech, but the message is clear — there are things to own, though even sector return expectations need to be recalibrated lower across the board.

Despite its concentration in Mag7 tech names today, the S&P continues to be dominated by Dispersion Bros whose trading have held back the overall index from collapsing by harvesting high volatility and low correlation among individual constituents (individual large names crack lower but are made up by other names which increasingly looks like a "Broadening Out").

Since I have already discussed the extremity of overall market positioning two weeks ago I won't rehash all the usual investor positioning slides, but rather display my concerns "under the covers." For starters, I am starting to see broken charts and collapsing narratives everywhere, which dovetails with the idea of a rolling VAR shock.

At the risk of beating a dead horse, the software space looks truly terrible, and what is more concerning is that Friday's rally saw software names barely bounce in the context of a huge decline. We flagged software on chat a few weeks ago, and then wrote up a return of the Rollover Syndrome at the bottom of this note here. Little did I realize we were at the start of a historic crash in the space.

IGV when originally flagged:

And today:

"Everything is a Flush," and looking at the above chart, the sector has Flush potential for a snap back…but in the context of Friday's action, it is concerning that we did not get a bigger bounce no?

Updating some of the individual SaaS/software charts — they are all broken.

Could the moves prove overdone? More than likely. But the nature of the bounce on Friday still concerns me. Looking through those charts above, some of these names did not even bounce — and they really should have, particularly when you consider that call volume activity yesterday in the IGV Software ETF was literally off the charts:

I also flagged the alternative asset managers two weeks back. Here's where they stand:

Their move is a "catch down" related to their publicly listed private credit complexes (Business Development Companies or "BDCs") which have been leaking lower for several quarters. When we look at publicly listed private credit and levered loans (BIZD as an ETF of various BDCs), we can see capitulative flush behavior on significant volume (their 12% dividend and 15-20% discounts to underlying NAVs notwithstanding). We discussed the mechanics of private credit redemption unwinds in Credit Enters Snapcount Part 2 in case you need a review.

The overlap with SaaS/software and private credit should be obvious by now. For years SaaS companies were ground zero for private equity buyouts given their attraction as asset-light, high margin, high return, stable, low-churn businesses with operational scaling that could be also heavily financially leveraged at high multiples. According to BofA, ~25% of BDCs are exposed to technology:

Barclays and JPM have also recently published notes showing that software/SaaS is something like 15-20% of private credit (though these figures may understate true exposure because many SaaS names are classified by end‑market like healthcare and financials rather than "software"). So the problem is that software and private credit/BDCs are reflexive through overlap. Software loans in CLOs also have been getting killed as a subgroup, so what you are seeing in equities is also happening in credit. This may not seem like much, but CLO loans hold senior secured floaters, so these are huge moves (read my primer here):

A contagion boomerang is in full effect between software and private credit, per Bloomberg earlier this week (emphasis mine):

Fears of AI disruptions are hitting software companies worldwide. Prices of their debt are falling in secondary markets, while some deals on the primary block are being put on ice. Investors are concerned that rapid developments in artificial intelligence will soon displace enterprise software companies.

Stock markets were the first to raise the alarm last month, and now the credit of software firms is buckling. A wave of debt-backed private equity investment in software companies in recent years has come under scrutiny. From 2015 to 2025, more than 1,900 software companies were taken over by private equity buyers in transactions valued at more than $440 billion, according to data compiled by Bloomberg.

Credit investors who bankrolled these investments are rethinking valuations — and how much they stand to recover in a default. The asset-light nature of these businesses means the amounts could be minimal, and that's amplifying price swings.

Bonds issued by software firms including ION Platform and CDK Global were among the biggest losers last week. Notes sold by McAfee and Newfold Digital as well as loans by Perforce Software and Cloudera fell into distress. Companies affected operate software for a wide variety of industries, ranging from financial to automotive, and have clients across the world. Short bets against the debt of these software names have also been piling up. Credit strategists at UBS said in a note to clients on Monday that this is a product of 'disruption risk premium' playing out in credit markets as investors seek to sift out AI winners from losers. Firms including Arcmont and Hayfin have hired consultants to check their portfolios for businesses vulnerable to AI. Apollo cut its private credit funds' software exposure almost by half in 2025, from about 20% at the start of the year.

Investor worries about the software sector have also spread to new deals. In recent days, European software firm Team.Blue halted a transaction to amend and extend its debt stack. Meanwhile, Dedalus, which provides software for the healthcare industry, is also postponing an attempt to lower the margin on its leveraged loans. Even AI-native companies — and their creditors — are feeling the pinch of an expected increase in competition. A group of lenders led by Deutsche Bank is at risk of getting stuck with about $1.2 billion of loans linked to the acquisition of PROS Holdings's B2B unit by Conga.

This is happening at a time when private equity fundraising has slowed dramatically due to a lack of realizations for funds that are getting long in the tooth just as institutional investors are choking on over-allocations to privates (this Forbes article highlighted by my friend Kevin Muir is a must read). Some charts from Prequin show the tightening noose around this key sector:

There is a literal ocean of long-term investor money looking for an exit and indirectly trapped in possibly the most popular sector whose industry now face significant disruption.

The problem is that software's weakness is also boomeranging back on the Hyperscalers whose dominance of the S&P has not been lost on anyone. For all the euphoria and FOMO on Friday — hyperscaler bonds barely rallied (AMZN sold off along with the stock):

Problem child ORCL's CDS continued to tick higher (inverted scale) despite Friday's bounce in the stock (I have discussed ORCL as a significant and misunderstood contagion risk in credit here):

Coming back to how crackups tend to start with a topical industry first and then roll out more broadly, the worst thing I want to see is a Buy-the-Dip reflex in the absence of fear, which brings us to a discussion about retail traders.

A year ago retail was the smart money using the lessons from Covid — a nightmare from which the equity market woke up in a few weeks. Always buy the dip. We are now at a point where everyone agrees that retail is in control, such that we have experienced observers like Citadel's Scott Rubner openly saying they are the dominant force in the market. Earlier this week Scott became admittedly cautious that retail inflows might begin to slow down due to February seasonality and timing of payments, but looking back at January flows, we cannot dispute that retail has piled in at the all-time highs with everything they have.

Options volumes from retail are even bigger than the heady days of the GME squeeze and SPAC mania in January 2021:

And it's been pretty much a non-stop year of Risk On for retail:

Indeed, the activity has become more and more short term, with % of options trading among even the biggest names skewing toward daily options expiry for daytrading:

Friday showed that retail cannot even wait for a -5% drawdown in the S&P to jump in. Here's AMZN's retail trader activity after getting annihilated on the capex guide (charts are from Vanda):

Microsoft stock is getting destroyed, but that has not stopped the retail army:

Even Peloton is back in retail's psyche:

Vanda added some commentary:

One simple way to see this is via the intraday chart of retail buying vs actual price movements in the S&P 500. The two have been moving in virtual lockstep this week (chart below), suggesting that retail is determining marginal prices for the entire US equity market:

Even in index futures we see retail's footprint, as the small trader (non-reportable) net long in futures and options is present on the Nasdaq 100 at levels even exceeding 2020:

So Rubner isn't wrong — retail is the dominant driver… but this should scare us. It is never different this time, and history has shown with a 100% hit rate that retail will win for a time…and then leave it all on paper.

Digging a little deeper into the nature of Friday's rip higher in equities, here's UBS with some of their baskets ranked by Friday's returns:

What do you notice among the top 15 or so? All crappy garbage. Unfortunately we see nuclear in there, skewed by OKLO/SMR nuclear tech names which dragged my uranium miners up in sympathy…it is this relationship that needs the "Trump wedge" of government announcements which I have repeatedly flagged.

Here's Goldman with similar baskets — again, all garbage and short covering:

Going back to the Quant Quake where we saw some extreme moves in Momentum, Growth, and Value pairs. Remember how I flagged that oddly the Crowded Long/Short Pair factor was doing ok? For all that people were breaking out the Dow 50k hats and Momentum/Growth/Value pairs were settling down yesterday, ironically it was the Most Crowded Long/Short factor pair that got absolutely murdered on Friday. How ironic — the one major pair that survived Wednesday's quant bloodbath unscathed had the worst day since January 27th, 2021 on Friday:

Now you would say, "that's weird…the second worst Crowded L/S day since Covid… that 'worst day' on January 27th 2021 seems kind of random?"

As some of my friends will recall, 27th January 2021 was a very special day. See if this jogs your memory why:

That Crowded Long/Short factor blowout marked the beginning of the end of the retail/SPAC/Cathie Wood trash mania. Sure, the S&P took another year to top (and I will get to the analog of how this could work at the end), but that was the beginning of the end for garbage trading. That was the March 2000 Moment — even if the S&P 500 didn't top until September 2000. It was time to get out, think about where the crackups would roll next, and where the rebalancing flow had a chance of delivering relative and absolute performance (even if modest).

Several brokers made observations about record shortselling and de-grossing this week as the quants and 'pod shops' ran into trouble. Here's JPM (via Marketear):

JPM: "On a 1wk basis, the de-grossing is now -3z…in line with some of the most extreme we've seen in the past."

GS Prime: "This week saw the biggest shorting on record."

JPM: "Social media sentiment took another dip towards 1yr lows (similar levels hit in late Feb and early Mar 2025)":

Marketear also reminds us according to ICI that US equity mutual fund cash balances are extremely low (something we noted previously in BofA's Fund Manager Survey):

Barclays: "Our aggregate equity positioning indicator has strongly rebounded to the 94th percentile, leaving little room for error."

JPM reminds us what we saw in Goldman's data in recent weeks — hedge fund gross and net leverage is extreme when you look at the percentile numbers, and this ran headlong into the Rolling Blowouts VaR Effect and has not really adjusted yet:

More concerning is that despite the uptick in volume, we did not see the sort of trading turnover that would suggest people moved their books around much.

JPM: "HF Turnover hit a +1.4z level this past week…a bit elevated, but not extremely so, given VIX also increased (large disconnects can be indicative of HF-specific unwinds and if the divergence is very big, it can indicate we're closer to the end of the event). The recent move looks somewhat similar to what we saw in Jan 2021."

But most concerning is that despite having one hell of a bad day on Wednesday, Momentum positioning has not really moved much yet.

JPM: "Momentum positioning remains near highs globally among Quant and Equity L/S funds, even after last week's decline."

Morgan Stanley: "Hedge fund net exposure to the momentum factor is still 17% or at the 66th percentile."

For context, here is the Long Momentum Factor overlaid with the S&P going back ten years. That rip from Liberation Day to October sure looks a lot like 2000-2021:

The real problem as I see it is that despite the pain various strategies took this week, turnover remained relatively muted, meaning institutions have reflexively learned to respect retail. You don't want to liquidate because retail will inevitably jump in to save the day and take the market higher, leading to further fund underperformance, redemptions, and career risk.

In other words: we've seen the complacency and euphoria with an initial minor liquidation, but we have not seen The Fear. And for a market more concentrated than 2000 or 1973, this is the heart of the issue and why I don't favor "2021 means we keep going higher."

I mentioned earlier how Dispersion is leading to "Broadening Out." This chart from Market Stats shows the problem that Broadening Out Bros are missing in their focus on improving breadth while key names like SaaS make fresh lows. Think of this as a narrowed version of Hindenburg/Titanic breadth signals which all to often give off false or early signals — the dates are auspicious of a sick tape:

The Broadening Out theme has even gone fully global recently as Korean retail degenerates were not satisfied with US Quantum stocks, and got busy at home with local semiconductor plays (a space which itself is off the charts long among US hedge funds):

To reiterate, on the surface, the index continues to show extreme levels of complacency and bullishness among institutions (as well as retail discussed above):

I have not followed David Rosenberg's work in a while, but this week he flagged some work by Walter Murphy on how the relationship between equal-weighted consumer discretionary vs staples has frequently led the broader market as investors show signs of becoming more defensive (ie. consumer discretionary underperforming staples). Staples in particular have been a huge, persistent underweight for investors, most recently noted in BofA's Fund Manager Survey:

We can see how the consumer staples complex has absolutely exploded this year — another pain trade:

I wanted to take a look at Rosenberg's discretionary vs staples comment…here is what I came up with:

The vertical lines mark pivot highs of significance as far back as the data of Invesco's equal-weighted ETFs allows. The green bars denote the start of notable declines in discretionary vs staples but where the S&P 500 rallied, while the red lines denote the leadup to market corrections. We can indeed see that the S&P tends to follow equalweighted discretionary/staples more frequently on the downside than diverging higher. That's not to say the market can't shake this off, but it is clear something in consumer stocks is going on, and historically that has not been pro-risk.

Turning now to what could result in one final run in the S&P and where I might be wrong that a convergence lower is favored here. Remember the analog of 2021 where the S&P kept running after the speculation started to fade, or 2000 when the S&P and Dow chopped around while the Nasdaq crashed? Interestingly, we are seeing a familiar sign of this analog in Mag7 vs Energy as flagged by Nullcharts:

"The Mag Seven topped out vs the energy sector in December of 2025, at the same level it did back in October of 2020, when XLE bottomed and ran 250% over the next two years... The Mags continued their ascent for another 12 months, but they lagged energy, which itself was breaking higher. Markets rarely rinse and repeat that easily. But price is confirming..."

Flows have also suggested that the money is pouring into both tech and energy — basically money being thrown at everything (yet tech has stopped working):

Despite massive flows last year in gold, all it took for a crash was apparently one week of outflows — and therein lies the vulnerability of any asset in my mind…hence my concern for Risk Off until we feel the fear, get cash balances up, and deleverage hedge funds:

Ditto crypto:

Still, there a case to make for 2021 (or 2000) where the index crawls higher (or goes nowhere), and at its heart lies the Broadening Out narrative (or what Hartnett called "Detroit over Davos" — i.e. smallcaps over large, Main Street over Wall Street, etc). This narrative is currently very strong, and a popular consensus just waiting for the right set of disproving catalysts to prove its falseness.

To this point, a good friend flagged to me an interesting development during the dotcom bubble (charts are mine).

Here is a chart of the Nasdaq 100, the Russell 2000, and the ratio between the two:

There are two important points to note above. The first one is obvious: You wanted to wait for the bear market to run its course because despite the dramatic Russell outperformance from the bubble top, you still lost money in smallcaps (and probably will see something similar in the next bear market given the composition of the Russell today in "smallcraps"). Wait for the bear to play out, then buy once the speculation has been wrung out.

But there is a second, more frustrating lesson — that Broadening Out is a very late-stage bull narrative which appears throughout history before one last jam higher by largecaps into the ultimate top. I'm going to zoom in on 1999-2000 to show you what I mean:

Notice how the Nasdaq 100 underperformed the Russell in January 2000 (yellow circle), then stabilized, and went on one last run just to twist everyone's mind inside out — including Druckenmiller who famously bought hours from the high in late March.

This is not unusual. A similar phenomenon occurred during the Nifty Fifty echo-bubble of the early 1970s before the terrible 1973-74 bear market (the analog that led me to create the Rollover Syndrome). To review, this was the S&P 500 over the whole period. The Go-Go Growth mania of the 1960s gave way to a nasty bear market in 1968-70, followed by an epic bull market from May 1970 to January 1973 known as the Nifty Fifty:

Data is harder to come by, but using IBM as a proxy for the Nifty Fifty and comparing it to the NYSE Composite in lieu of the Russell 2000, we can zoom in on the 1971-74 experience into the 1Q 1973 top and the initial bear market:

Notice the 1971-72 run in Nifty… but there was a definite "Broadening Out" moment in 4Q72 as the smaller names did some catching up (see the rip in the orange line). Then there was a final rotation back into the Nifty Fifty just as the smallcaps rolled over.

Again, the first lesson also applies. If you look at the entire bear market into the end of 1974, even though smallcaps outperformed, you had to wait for the bear to run its course (largecaps continued their long slide vs small caps well into 2H75 after the bear market had ended)… relative performance was great, but in absolute terms you still lost money because small caps were not cheap:

This is why the call here is so difficult. On the one hand, we have all the signs we need that retail and institutional investors remain fully committed to risk despite a broader market making little-to-no progress for months, yet we have not seen a proper rupture to shake the tree and reestablish the Wall of Worry the way we did with Liberation Day, the 2022 bear, Covid, or 2018 Volmaggeddon and its Rolling Blowouts, etc.

On the other hand, Broadening Out can fail just as it did in 2021 or 2000, but with the large caps taking one last run at new highs.

As Forrest Gump said at his mom's grave — maybe it's both?

Perhaps we will see a shaking of the tree here in the coming days and weeks, but then more rally into the spring just to get everyone to wear Druck's 2000 shoes for a couple of weeks, before its lights out for everybody? As Adam Smith once said:

We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking "What time is it? What time is it?" but none of the clocks have any hands. — Adam Smith, Supermoney

Of course, when I look at this BofA chart, I start to wonder "what if the Mag7 have already had their final multi-week run vs. smallcaps":

And then I look, and this is what I see:

What if the run into October was it? What if the initial Quant Quakes of July and especially October were the July-Aug 2007 Global Alpha moment just ahead of the ultimate high October 2007 all-time high?

And how are these divergences a healthy development?

All time high:

Nasdaq 100 — October 29th, 2025

Russell 2000 — January 22nd, 2026

S&P 500 — January 28th, 2026

Dow Industrials — February 6th, 2026

I have more questions than answers, but regardless of what a bounce may look like in the coming weeks/months, I remain intense (and apparently lonely) in my concern for equity risk.

As always, kindly yours,

Paulo aka Cloudbear