This article is reprinted with permission from Phyrex_Ni, and the copyright belongs to the original author.
Although there were no major events this week, the pressure has been greater than in the past month. After experiencing the Sino-U.S. trade disputes and the U.S. government shutdown, it was initially thought that the market would see some relief. However, the market's fear index has reached its highest point of the year, primarily due to the Federal Reserve's reluctance to continue cutting interest rates in December. Most investors have skipped the judgment of whether we are in a bull or bear market and directly believe that the market has entered a bear phase.
Indeed, the market has become more challenging in the past half month, with various negative news emerging frequently. Not only has the price of BTC continued to decline, but even the performance of U.S. stocks has been lackluster since November. The root cause should still be the very poor market liquidity, especially after the shutdown, where the liquidity that fell has shown no signs of recovery. Previously, when there were topics and focal points, even if liquidity was slightly worse, the buy volume could still support price stability due to lower sell-offs. However, in the absence of direct positive news, the increase in sell-offs caused by negative factors, combined with the continued decline in liquidity, naturally leads to an inability to support prices.
I have repeatedly stated that the rise of BTC is not due to strong purchasing power but rather because the amount of sell-offs is very low. This is actually the same for leading tech stocks. The reason for this situation, I have always believed, is the lack of liquidity. However, when I looked at deeper data, I finally understood where the problem lies. Two key data points from the past week have presented the current market's capital structure very clearly.
First, data from BofA shows that since 2025, retail investors have maintained net buying in almost all weeks where the S&P 500 has fallen more than 1%, marking the first extreme behavior since 2008. However, this situation showed the first significant signs of weakening in early November. Unlike retail investors, hedge funds have been in a selling state throughout 2025, only gradually showing a buying trend in November with U.S. registered funds (Mutual Funds + ETFs).
Among them, ETF inflows reached $4.3 billion in a single week, the largest scale since December 2022. ETF inflows are usually not emotional buying but rather "allocation funds." Once they return, it means that investors are beginning to be willing to take on risks again, which also represents a significant return of trend-based funds from the institutional side.
This is quite different from what many friends imagine, where institutions are hunting down retail investors. Instead, it can be said that throughout 2025, retail investors have been providing liquidity to institutions and hedge funds. Interestingly, the rise of U.S. stocks driven by tech stocks in 2025 has allowed investors to reap substantial profits, while hedge funds have been selling all year, yet prices have continued to rise. By November, although hedge funds were still selling, institutions had begun to take over from retail investors as the main buying force.
Another piece of data from GS shows that retail portfolios have underperformed relative to institutions by a cumulative margin of negative 10% to negative 12% as of 2025, marking the most extreme period since 2022. Although these two sets of data may seem contradictory when viewed together, they actually illustrate the same principle: the core difference between retail and institutional investors has never been about "what they bought," but rather "when they bought." Retail investors tend to chase prices as they rise, while institutional layouts usually occur in the intervals of negative news, valuation compression, and rising short-term interest rates.
In the first half of 2025, there was indeed a significant inflow of retail investors into giants like NVDA, META, and AAPL, but most of this accumulation occurred near all-time highs, while institutional increases were more inclined towards the 10-20% deep correction range. From the perspective of trading density and capital flow structure, since November, the costs of retail and institutional investors have first shown significant overlap in NVDA's current 20% correction range. Although there hasn't been an extreme low, this "cost overlap" is still rare in history and is a common precursor to trend reversals.
In addition to the capital flows from BofA and GS, this week, the ICI (Investment Company Institute) ETF Net Issuance data further confirmed that institutions are systematically entering the market. ICI shows that in the past five weeks, the net issuance of ETFs has continuously exceeded $30 billion, with four weeks surpassing $40 billion. Such large-scale issuance from the primary market of ETFs can only be driven by institutions, as retail trading in the secondary market does not lead to an increase in shares. Therefore, this continuous large-scale issuance can almost be directly interpreted as institutions significantly bottom-fishing.
What’s even more noteworthy is that both tech stocks and bond ETFs have seen strong net inflows, which is completely consistent with the significant support seen in leading tech stocks during the November correction period.
The ETF Weekly Flow data from FactSet has further exposed institutional behavior. In the past week, U.S.-listed ETFs saw a total net inflow of $43 billion, breaking the $1.14 trillion mark for the year for the first time, setting a historical record. More critically, the inflow structure is as follows:
SPY +$12 billion in a single week (a rare institutional-level large buy)
QQQ +$2.8 billion
VOO +$2.4 billion
IVV +$2 billion
SMH (semiconductors) +$1.3 billion, indicating institutions are clearly "buying the AI dip"
TQQQ (aggressive leveraged long) +$1.2 billion, which can only be driven by CTA and institutional quantitative positions
IBIT (BTC ETF) saw an outflow of nearly $600 million, with funds rebalancing from BTC back to tech stocks and short-term bonds
The market is declining, but funds are flowing in on a large scale, which is a typical capital structure at the bottom.
More critically, although retail investors are also buying leading tech stocks, their portfolios still contain more small-cap stocks or stocks that are expected to rotate sectors but have not yet risen. This has been the part that has been most severely repriced in the past month as interest rate cut expectations have decreased and short-term rates have surged. In terms of the cryptocurrency field, although retail investors hold some BTC, they also hold a large amount of altcoins and memes. When adverse factors arise in the market, the decline of altcoins and memes will drag down the profits generated by BTC.
In contrast, institutional portfolios are highly concentrated in profitable and stable cash flow assets, thus exhibiting stronger resilience during volatility. Therefore, these two charts tell the same story: during the most panicked decline in November, the determination of retail investors and the patience of institutions have first overlapped in the same valuation range. This "cost resonance" is extremely rare in history, having only occurred a few times in the past decade, including during the pandemic panic in 2020, the end of the 2016 rate hike cycle, and the tail end of the 2012 European debt crisis, all of which are typical characteristics of trend reversal periods, usually occurring near structural turning points in the market.
The determination of retail investors is almost visible in the data every day, but whether institutions are buying needs to be assessed through allocation funds. Data from BofA, GS, ICI, FactSet, and CME all indicate that during this round of decline, registered funds (Mutual Funds + ETFs) have shown significant inflows for the first time, with strong support appearing in tech ETFs and large tech stock trading density areas. The net long positions of asset managers at CME have begun to rise, all of which are typical signals of institutions re-entering the market.
This also means that the structural conditions necessary for a trend reversal are rapidly being met, and the consensus in the bottom area is accelerating towards convergence. To put it more plainly: both retail and institutional investors have begun bottom-fishing, with retail buying at the start of the decline, while institutions are gradually finding low points and building positions in batches. Of course, the determination of retail investors does not mean they can withstand volatility, as the high Beta structure of retail portfolios (small caps + memes) is most susceptible to forced selling when short-term rates surge.
Of course, this does not mean that the market is completely without risk. I have also seen another set of very concerning data, which is the bankruptcy statistics for U.S. companies published by S&P Global for 2025. As of the end of October this year, the two industries with the most bankruptcies are industrials with 98 cases and consumer discretionary with 80 cases, totaling 178 cases, accounting for nearly 46% of all 387 bankrupt companies that meet the statistical criteria, making them the two sectors with the highest proportion, far exceeding the 45 cases in healthcare, which ranks third.
This illustrates a very realistic issue: high interest rates are not truly harming tech giants or large multinational companies. After all, the tech industry has only seen 24 bankruptcies throughout the year, even fewer than the 45 in healthcare, and only 4 in energy and utilities. The reason is not that interest rates are lenient towards tech, but rather that tech giants have stable cash flows and light debt structures, making them insensitive to financing costs. These companies have balance sheets strong enough to withstand the entire high-interest rate cycle. Therefore, even in a high-interest rate cycle, tech stocks represented by AI can still rise against the trend.
In contrast, traditional industries have high debt ratios and volatile cash flows, and consumer discretionary is directly affected by household income. In October, the serious delinquency rate on U.S. credit cards exceeding 90 days rose to 9.87%, the highest since 2012, with average rates exceeding 24.5%. The funding chain for consumer discretionary companies has been directly severed, making it a typical phenomenon that these two industries are the first to collapse.
More critically, the industrial and consumer discretionary sectors have historically been the first to encounter problems when interest rates peak and economic pressures begin to accumulate. This was the case at the end of the 2016 rate hike cycle and on the eve of the pandemic in 2020, and it is now almost repeating the same structure. Therefore, if the wave of bankruptcies continues to expand, even if the Federal Reserve does not want to cut rates, it will be forced to face the downward pressure of the real economy. This is a typical reaction after both demand and financing sides are compressed.
This corresponds completely with the market's performance over the past month. The most significant declines have been in small-cap stocks, consumer discretionary, and highly leveraged companies, while tech giants and cash flow stable assets have shown stronger resilience. Funds are clearly concentrating towards "stable profits + low risk," including large tech stocks, S&P ETFs, and short-term interest rate ETFs. From the bankruptcy structure to the capital flow direction, they are essentially telling the same story: economic pressure is being transmitted from bottom-tier companies upwards, and the longer interest rates remain too high, the more apparent this transmission becomes.
This is also why investors are concerned that if the Federal Reserve does not cut rates in December, it will lower risk appetite. This is because there is already a trend indicating that the economy may decline, and many interest-sensitive companies have begun to go bankrupt. The longer high interest rates are maintained, the greater the probability of an economic recession in the U.S., which has occurred multiple times in history. Of course, the further the wave of bankruptcies transmits upwards, the less the Federal Reserve will dare to continue to hold high rates.
Since November, the spread of high-risk high-yield bonds has expanded by 55 basis points, with the yield on CCC-rated bonds nearing 14.8%. A spread expansion of over 50 basis points within a month typically indicates that financial pressure is rapidly accumulating, which is almost identical to the credit environment when the Federal Reserve was forced to pivot in June 2022 and March 2023. This may actually accelerate the future path of interest rate cuts, which is a medium-term positive for liquidity-sensitive assets.
Therefore, the market and the Federal Reserve are like gamblers, seeing who can hold out longer. It's not about direction now, but rather who has stronger endurance. If the market collapses first and enters a recession, then even if the Federal Reserve desperately cuts interest rates, it can only delay the recession, which is what I often refer to as the "final drop." However, if the Federal Reserve is more concerned about the economy and chooses to cut rates early, then the possibility of a soft landing remains quite high. In simpler terms, if the market collapses first, the S&P may have to endure an average decline of 20%, but if the Federal Reserve collapses first, it is not impossible for the market to continue rising in 2026.
As mentioned earlier, one of the main reasons for the recent decline is the significant disagreement within the Federal Reserve regarding rate cuts in December. The conservative faction led by Powell believes that there is no need to cut rates in December. However, after the ADP data was released on Tuesday, although there wasn't a significant increase in expectations for a rate cut in December according to CME and Kalshi, the layoff tracking data released by Goldman Sachs indicates that the U.S. labor market is transitioning from "overheated" to "weakening," with a significantly increased probability of rising unemployment in the coming months.
For most of this year, this indicator has remained in the range of -2 to -1, which is a typical "labor shortage + economic resilience" structure. However, starting in October, the layoff indicator has shown the most significant systematic increase in the past three years, quickly returning to around 0. More importantly, this is not caused by a single industry or a single indicator, but rather a simultaneous rise in seven sub-indicators: initial jobless claims, JOLTS layoff rate, CPS layoffs, Challenger layoff announcements, WARN notifications, and mentions of layoffs in corporate earnings reports.
Historically, years with such synchronized increases have only occurred in 2007, 2008, and 2020, indicating that a turning point in the labor market has emerged. If this upward trend continues, the probability of a significant rise in unemployment over the next 3 to 6 months will increase, and once the unemployment rate rises from 4.1% to 4.55%, it will trigger the Federal Reserve's most sensitive Sahm Rule, indicating that the economy has entered a recession. By that time, even if the Federal Reserve is reluctant to cut rates, it will have to face real economic pressure.
At the same time, the VIX and VVIX are also sending completely identical signals. The VIX is currently maintaining a range of 24–26, having rapidly risen from a long-term range of 16–20 to the "moderate pressure zone." Although there is still room before reaching the extreme panic level of 45–50, it is already a clear signal that the market is repricing "economic downturn risks." The VVIX has jumped directly from below 100 to 122, breaking through the critical watershed of 110 over the past decade, indicating that the options market is preemptively trading tail risks. It also shows that market sentiment has shifted from "cautious" to "nervous," and the trend of VVIX is particularly critical, as it has historically been one of the most sensitive leading indicators before policy turning points.
Historically, a VVIX greater than 110 has a very clear implication: the options market begins to actively trade tail risks, which usually means that credit pressure is spreading, the probability of economic downturn is increasing, and funds are withdrawing from high Beta sectors. More critically, the VVIX has acted as a "countdown timer" for policy turning points during all major macro pressure cycles. From the data of the past 10 years, after VVIX exceeds 110, two highly consistent patterns emerge:
Once the VVIX consistently stands above 110, the Federal Reserve typically releases clear dovish signals within 1–3 months. Whether it is pausing rate hikes, ending balance sheet reduction, cutting rates, or even directly implementing QE, these actions occur after the VVIX has maintained a high level for a period of time. In 2016, Q4 2018, during the 2020 pandemic, and on the eve of the 2023 banking crisis, the VVIX showed a significant rapid jump and repeatedly touched 110. During these cycles, the VVIX operated in a high volatility range, highly synchronized with policy shifts.
Once the VVIX consistently stands above 110 for 6–12 months, the S&P 500 almost always experiences a significant rebound, with the rebound magnitude around 20%–35%. This is not due to panic itself, but rather the combination of "extreme volatility + the Federal Reserve being forced to pivot" creates a new starting point for the liquidity cycle, making a high VVIX a medium-term positive.
Returning to the current cycle, although the VVIX has rapidly risen from 98 to 122 this month, it still belongs to a phase of repeatedly testing the 110–120 range, rather than a true trend stabilization. If the VVIX continues to strengthen and forms a continuous high structure, closing above 110 for more than 5–7 days, then according to historical patterns, the Federal Reserve will release clear dovish signals by the first quarter of 2026 at the latest. Conversely, if the VVIX cannot stabilize and falls back below the 110 range, it indicates that the market temporarily believes that economic pressures are still manageable, and the policy pressure points will be delayed.
For the market, if the VVIX remains above 110, then the VIX is likely also at a high level, indicating that the risk market may continue to decline unless the VVIX starts to fall, which could allow the VIX to decrease and the risk market to stabilize.
Overall, from various comprehensive data, the current risk market is indeed at a clear crossroads. On one hand, retail purchasing power is marginally declining, with the net buying ratio of retail investors in weeks where the S&P falls more than 1% dropping from nearly 100% in the first half of 2025 to about 60% in early November. The positions in tech stocks have also shifted from continuous net buying to nearly flat, marking the first significant cooling of retail marginal funds. At the same time, institutional reallocation has just begun, with bond funds seeing inflows exceeding $45 billion for five consecutive weeks in November, and the inflow scale of value and financial stock ETFs being about 1.5 times that of tech stock outflows, indicating a typical "growth to value" rotation structure is beginning to form.
Meanwhile, the number of bankruptcies continues to rise, and layoff indicators are rapidly increasing, which is continuously heightening investors' concerns about a recession. However, the Federal Reserve has not yet acknowledged the economic downturn risks nor released clear dovish forward guidance, further reinforcing the market's sensitivity to policy gaps.
On the other hand, from a historical perspective, the simultaneous rise of bankruptcies and unemployment rates almost always forces the Federal Reserve to eventually move towards easing. Even if the Federal Reserve chooses to hold firm in the short term, the VIX and VVIX will continue to rise, forming a typical structure of "policy pressure accumulation → market panic acceleration." Unless the Federal Reserve is willing to endure a substantial recession, it will ultimately have to pivot, which is why there is a short-term game, while the medium to long-term path of liquidity re-release remains highly probable.
The biggest unknown currently is how much risk the market will release if the Federal Reserve continues to stand still. From the pressure testing of volatility structures, if the VVIX further pushes towards the 140–150 range while the VIX rises to 40–50, then the S&P may have about 15%–20% of downside potential. This structure is very similar to Q4 2018 or March 2020, representing a typical "policy pre-window," where the market declines first, and policy follows. In other words, the current question is not whether to ease, but rather to what level the Federal Reserve will allow the market to decline first. The later the policy is released, the greater the eventual easing effect tends to be.
Currently, CME shows a 48.9% probability of a rate cut in December, which can be seen as a real-time barometer of market pressure on the Federal Reserve's policy path. If this probability rises in the coming weeks, it indicates that market confidence in easing is recovering, and the pessimistic risk premium will decrease accordingly; conversely, if the rate cut probability continues to decline, it means the market believes the Federal Reserve may be underestimating economic pressures, and sentiment will further shift towards caution or even pessimism.
From a macro perspective, the continued decline in rate cut expectations will lead to a passive tightening of financial conditions, further accumulating market pressure, and this accumulation itself will increase the necessity for the Federal Reserve to take more dovish actions at the December meeting. In simpler terms, weakening expectations will make short-term sentiment more pessimistic, but in the medium term, it will instead force the Federal Reserve to enter the easing path more quickly.
Related: Boosted by NVIDIA's impressive Q3 earnings report, cryptocurrencies and tech stocks rise.
Original article: “A Market at a Crossroads: Liquidity Squeeze, Institutional Re-entry, and the Fed's Policy Standoff”
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