As we’ve been saying the past few of weeks, speculation in the general stock market is getting extreme. We have never seen anything like it (the headline of our October 5, 2025 Wellington Letter was, “Speculation Is Reaching An Extreme”).
But that in itself is not a precise timing indicator. For determining that, we have other clues, including “pattern recognition.”
The week after that issue was published, a most experienced hedge fund manager, Paul Tudor Jones, said that this current period is “very much like 1999.” He has been in the markets as long as we have.
That is what we have been saying. Yes, there are many dotcom bubble similarities with other approaching market tops. We were fortunate to have caught the exact top of that giant bubble to the day on March 10, 2000.
That was the most insane, speculative market ahead that top, but it was a great time to make big profits. But when we gave our sell signal on the day of the top, most investors just didn’t want to leave the party.
That is the most critical part of investing: knowing when to sell and to ignore your emotions. “Greed” is one of the most destructive emotions.
A good sign of extreme speculation can be seen in the “zero-day options” (0DTE), which have a life of only one day, trade about $1.2 TRILLION per DAY! In comparison, the entire stock market trades somewhat over $800 billion per day according to one analyst.
According to Bloomberg, these 0DTE options continue to reach record highs. On the chart below (via Bloomberg), the yellow line represents the daily notional volume of 0DTE’s on the S&P 500 and the black link is the 10-day average.
That tells you what the algo-traders and HFT are doing, since the zero-day options are not just traded by individuals. They are now a main stage of the high-speed computer of HFT. Therefore, short term trading is futile. Those traders are better off trading for longer term.
One sector that may be ripe for HFT to shake up is gold and silver. However, we would expect that to come in the new year.
A few of the newest signs that speculation is now approaching the “insanity stage” come from ETFs. A couple of weeks ago, the ETF that was popular in the 2021 meme stock craze, MEME, just relaunched after closing down in December 2023. Although the new version of this ETF doesn’t include the original meme stocks like AMC, GameStop, and Upstart, it does include stocks that are currently highly volatile.
The “animal spirits” are alive and well.
A new chart from BofA research shows that there are now over 700 leverages equity ETFs, a new record! See the chat below:
This doesn’t include the potential first ever 5x leveraged ETFs, which were just filed with the SEC last week, focusing on some of the most highly traded stocks in the market.
Of course, most retail investors will immediately think “I can make 5 times the return of these stocks in one day!” They don’t consider that just a 20% decline against them will wipe out their entire investment.
For all the potential reward there is always big potential risk, especially with leverage due to the fact that margin calls can cause huge, swift liquidations.
That’s what often causes CRASHES, similar to what we saw in the cryptocurrencies two weekend ago. It was the largest liquidation in crypto history!
And in such speculative environment like the one we’re in now, leverage is the recipe for disaster for the majority of uninformed and inexperienced investors. Even investors with no leverage suffer when the markets crash.
Therefore, as we have said repeatedly for months, do not use leverage for any positions at this time. That goes for individual stocks and ETFs.
WALL STREET “WARNING”: Over the past 10 days or so we’ve been hearing some of the biggest and smartest hedge fund guys on TV commenting on the drastic overvaluation of the stock market. The comments mirror those we wrote in our October 5 issue of Bert Dohmen’s Wellington Letter.
This is the traditional warning ahead of a market plunge. But it is often followed by one sharp rally to show that these analysts are wrong. Of course, most people likely did not pay attention to the warnings, which were made on days stocks reached new highs. That is the intent.
For us that suggests that after one more rally, it will be time to look for the exits. As always, we will work hard to determine the top and find the important clues for our members.
Through year-end, portfolio “window dressing” should be one of the propellants for that rally.
By early 2026, the enthusiastic bulls will be close to exhausting their buying power with the assistance of Wall Street cheerleaders.
We also say, “don’t leave the party too early because you might miss the most fun.” We have written how the final rally in most bubbles not only had the best performers being stocks without earnings, but stocks of companies that had no sales.
Guess what: we just saw a stock without sales that is up 1445% since it went public in early 2024. We won’t mention it to discourage the gamblers. Always check the financials. It is so easy with AI.
You must always have a tool to help catch a top, such as this publication. During that last super-speculative phase in these cycles, the big, smart money starts taking profits for several months before the top. It is called “distribution.”
We can notice that in our indicators. Analysts in media never mention such indicators. That is an edge we provide.
Thus, it appears that time is short and sometime in the first quarter of 2026 we should see a top.
We discuss the potential of a big bull trap being set for early next year in our latest October 19 issue of the award-winning Wellington Letter (23 pages) titled “Preparing For A Bull Trap In 2026.”
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Wishing you successful investing,
Bert Dohmen, Founder
Dohmen Capital Research
Editor, The Wellington Letter