Dux Advisors

May 15 Update: The market has irrationally given reality six weeks to catch up to rhetoric. It has not. We believe that price may be forced to violently catch down to reality instead. What's happening in the oil market right now is the exact inverse of the initial COVID lockdowns. In 2020, paper markets ignored physical reality until a final pricing event sent WTI crude oil negative for the only time in history. Today, paper markets are once again ignoring a severe physical reality. This time, the eventual reconciliation could send Brent crude oil to $200. Simultaneously, equities have been entirely detached, driven by a fragile combination of SPX 0DTE options microstructure and palpable AI irrational exuberance. The combination of a physical energy emergency and an algorithmic day-trading levitation that took the stock market to new all-time highs — despite a shocking 6% PPI inflation print and repeated acts of war during a supposed ceasefire — has created an extreme risk environment. We genuinely hope the worst-case scenario does not materialize, even as we are heavily positioned for it.

April 21 Update: Disconnect between market sentiment and "finger-on-the-trigger" reality of Iran conflict has become too extreme to continue underweighting for the sake of further upside participation. Stocks already went up in an elevator. Also, structural incongruities revealed during the Fed confirmation hearing are not priced in. Into this SPX 7000-7147 move, we reduced our overweight tech/semis long exposure, hedged the remaining core, and — in line with our current game theory and probability analysis forecast — established both downside convexity and energy upside positions again.

April 13 Update: The market has ignored sharp binary risks to embrace thin positive signals since March 30th. We adjusted our portfolio intraday to respect what the tape did this morning despite the intellectual imbalance. Agility rewarded us last week; we continue that mindset.

End of Week Update: The Strait of Hormuz remains closed, yet the market traded as if transit was peacefully restored. We view the probability distribution for this weekend inversely to the current market consensus, so we took profits to reduce long exposure today while holding hedges on our remaining core long tech positions. We also hold exposure to index downside convexity and energy upside into this weekend's imminent reckoning between rhetoric and reality.

April 8 End of Day Update: The Strait remains closed, meaning the paper market aggressively priced in a de-escalation today that physical reality has not met. After capturing the intraday momentum, we redeployed downside protection and also opened long energy positions into the dip as a hedge against the yet unresolved structural risks. We remain alert and will let the facts on the ground dictate our next move.

Just before the 4:00 PM close yesterday, we covered all of our shorts and protective hedges — then continued to add longs back as we read the tea leaves and our game theory forecast changed to an off-ramp. Our trigger was Iran, for the first time in five weeks, signaling they would re-open the Strait of Hormuz in exchange for a ceasefire ("positively reviewing" the Pakistani proposal). The market ignored a plethora of bad headlines while embracing specious positive headlines to rally for five trading days going into yesterday's close. That was also a signal we had to consider. The perma-longs were still gambling yesterday, unless they knew something; we were not gambling and aren't in the know — yet we are meaningfully outperforming S&P futures this morning. Maybe the market can hold a trend for a few weeks. That would be nice; we'll be watching.

We don't share the market's certainty that this is 'Madman Theory.' Our game theory currently yields 65–75% odds that the strike package will be executed. The mechanical components of this rally — negative gamma amplification, oversold mean reversion, and forced short covering — explain its velocity and magnitude. They do not validate it. The risk remains but the fear is gone.