Title: Broadening Out as Late Cycle — More Thoughts on Why Tops are Impossible Show: Paulo Macro (Substack) — paid Guest: Paulo Macro ("Cloudbear") Date: 2026-FEB-20 URL: https://paulomacro.substack.com/p/broadening-out-as-late-cycle Length: written post (no timestamps) Note: Back-filled post (processed 2026-JUL-07). A short elaboration of the prior week's "Intensely Concerned for Risk" note, in the context of the ongoing VaR shock that started with precious metals three weeks ago. Core argument (re-quoted from that note): "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 into the 1973-74 bear). New threads here: the USD breaking out of a 15-year up-channel with bearish sentiment (Economist-cover contra) in a "Triple Yasu" stronger-dollar/stronger-stocks regime; the flow question of who receives the $50-100bn of tax refunds / OBBA benefits — if lower-income cohorts spend/gamble it (ponzi/crypto one more breath, Broadening supported) vs Boomers/Gen-X saving it into passive/S&P (Mag7 gets one more push, Broadening falters). He wonders about a late-2021/March-2000 "final hurrah" in Mar-Apr 2026, then "Sell in May" + Year-2 election seasonality. Macro-only — no securities named as views (SPY cited only as a passive-flow rebalancing mechanism). Body reproduced for personal study; Substack chrome removed, wording otherwise verbatim.
In last week's big note "Intensely Concerned for Risk — With a Catch," I laid out a scenario that has been bothering me as it relates to positioning and my bearishness (while remaining intensely concerned for risk at the current juncture). This is a quick note to elaborate more on this in the context of the ongoing VAR shock that started with precious metals three weeks ago.
In that note, I wrote the following but it was toward the end, so some may have missed this:
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?
Back to the present moment. It also occurred to me recently that we saw something very similar in the late 2021 bull run, and it actually happened twice:
Stepping back, we are really talking about "the wiggles" and probably best for most to keep a bigger view that it's hard to see us getting through the summer without an accident in risk. But I can't discard a few notions:
The USD breaking out of the 15-year up-channel is very visible, and sentiment is quite bearish as shown by the Economist cover contra:
We live in a "stronger dollar = stronger stocks" world of the Triple Yasu where the US current account deficit change is the same chart as the Nasdaq (US favored? Stocks up, bonds up, USD up). But how could US stocks go up despite record extended positioning, sentiment extremes, etc?
It always comes back to flows. Retail is the "smart money" and the new big player on the field. Their money keeps coming, and while the $50-100bln of tax refunds is extremely visible, in a passive flow world, does that really mean "priced in" if the money keeps coming?
I pinged my pal Vincent Deluard at Stone-X for thoughts this weekend — specifically, I wanted to better understand tax refunds and the OBBA as it relates to income cohorts and demographics. Vincent has been amazing with his analysis of tax receipts and his growth calls — if you are institutional and don't have a relationship with him and StoneX, you should reach out to him.
We have all seen versions of this chart showing the OBBA Big Beautiful Bill and its effects on the population by income strata (great for the top deciles, bad for the plebes, especially when regressive consumption tariffs are factored in):
I also have discussed at length how Boomers hold over half the US asset base, and more recently saw this chart regarding their growing share of consumption:
The narrative around the refunds is that there's no taxes on tips and it's great for the plebes, but I suspect a big portion of the relief is also coming from higher SALT caps and other goodies benefiting higher strata and the Boomer cohort. This is where it gets tricky. If the plebes get a few thousand in cash, they are probably A) going to spend it and/or B) gamble with some of it, which means you would think ponzi/crypto garbage gets one more breath of life. However if the Boomers/X get the money, and if they are generally better off on assets and incomes, then they have a lower propensity to spend (poors have higher propensity to consume) and that money probably gets shoved into more passive/S&Ps, which means Mag7, which means Broadening Out falters and the teracaps get one more push. Boomers are certainly not going to screw around with crypto or ponzis.
Vincent thinks most of the refunds may go to lower income groups (waiters, overtime workers, retirees etc) where the windfall effect and higher propensity to consume is high, so it's possible not much leaks into degenerate behavior like after we saw with Covid checks. I was also thinking this is especially true if you consider recent rises in subprime/consumer credit delinquencies (autos, Buy Now Pay Never, student loans) which suggest debt paydown may be a big target of refunds. Still, a one-time boost to consumption in theory should support smallcap/value rotation and Broadening according to Vincent…
But then again, if this has been the story everyone sees coming, maybe it's precisely this that has been priced in over the last several weeks in the Russell…
I called Kevin Muir on Saturday and I told him that every year people start off thinking this will be the year of Broadening Out/Smallcaps/Non-US/Value — and the year starts off that way (2022, 2023, 2024, ok 2025 non-US actually worked really well)… but actually the answer may be simpler. I believe it was Mike Green who recently flagged that actually when annual rebalancing plays through in January, you would expect to see smallcap Broadening Out because each year SPY gets bigger, and each year taking a little out of that or Mag7 in a rebalance has an increasingly relevant impact on smallcaps as the Mag7 numbers become enormous.
I can't help but wonder — what if poors spend their checks, consumption rips, wages remain sticky etc…but Boomers/X save their checks and their passive inflow short circuits the Broadening Out — and that's our late 2021 or March 2000 final hurrah in March-April 2026 (just before "Sell in May" reminds everyone that those checks are a one-off bump and Year 2 Election Seasonality rears its head).
I know a lot of people who are having a great start to the year who would feel a lot of frustration giving their 2026 YTD back in a scenario like that…
Again, we are talking about "the wiggles" and Kevin Muir is right to reinforce don't lose sight of the bigger picture. Nothing there has really changed.
But if things start to get squishy between now and end of February next week, put/call goes really bananas, TICK prints some crazy -1700 number, etc… maybe I want to buy some April Blood Sacrifice Mag7 calls…?
Of course, since I am even thinking this — we probably crash now.
Stay frosty out there…
As always, kind regards,
Paulo aka Cloudbear