In my previous post, I reminded everyone to pay attention to the short-term trading opportunity at the bottom of VIX, as well as the still-bullish opportunity in short-term crude oil deferred-month contracts, namely the September WTI crude oil contract. A week has passed, and both of those calls have played out:
VIX has already bottomed and turned higher:
The September crude oil futures contract has rebounded continuously from the bottom, already rising 17 points from its low:
This time, let’s talk about the warning I have been repeatedly giving everyone: the issue of a medium- to short-term phased pullback in U.S. stocks.
As the U.S. dollar index and U.S. Treasury yields have both moved higher recently, global bond yields have broadly risen, and a pullback in global risk assets, characterized by a phased top in U.S. equities, is highly likely to have already begun. Based on recent macro data and technical indicator trends, the core conclusion of this report is: U.S. stocks are likely to undergo a 5% to 7% correction in the near term, but market volatility during the pullback may be very large, so trading should be handled with caution. In the short term, there may be a dip-buying opportunity in U.S. long-duration Treasury bonds, but because they still face fundamental risks of breaking down and declining in the medium to short term, any attempt to buy the dip must come with, and strictly follow, stop-loss discipline.
1. Has the Pullback in U.S. Stocks Already Begun?
Recently, several markets with leading-indicator significance have shown signs of trend breakdown or phased topping. Looking specifically at SOX, the Korean stock index, the Nikkei, and the Shanghai Composite, we can see that this round of asset topping is taking place simultaneously across multiple markets. This broad cross-market resonance significantly increases the certainty of this pullback.
However, the short-selling pressure and downside magnitude in this pullback are relatively limited. Goldman Sachs’ institutional positioning data shows that although institutions have already reduced their total exposure to U.S. stocks significantly, their net leverage ratio remains at neutral levels, and the long-short ratio has not changed materially.
At the same time, the CBOE put/call ratio is only at an early rebound stage and has not broken through an important historical range. These data suggest that dip-buying sentiment may still be relatively strong, and actual selling pressure is not yet large.
Once this ratio exceeds the green resistance line in the chart, selling pressure may truly begin to be released.
In addition, the AI supply chain is currently showing strong earnings, and the market still holds high expectations for its future revenue growth and capital expenditures. Therefore, when choosing short or hedging targets, the Nasdaq should be avoided, because it is heavily influenced by large AI-weighted stocks and tends to be too volatile. A more prudent choice is the Russell index (small caps), which is relatively weaker and lacks a high-weight AI cluster to provide support.
2. The Logic Behind the 5% to 7% Pullback in U.S. Stocks
There is both historical data and a technical-model basis supporting the likely size of this U.S. equity correction. According to a Wall Street investment bank’s statistics, since 2003, there have only been six instances in which the S&P 500 ETF (SPY) fell more than 1% immediately after the RSI reached 75 or above. In five of those six cases, the decline from peak to trough over the following weeks was at least 7%, with only 2023 being an exception due to sideways consolidation.
Combining this with our technical model, the current S&P pullback could most likely test the area around 7,000. That projected retreat implies a drawdown of roughly 7%, so a 5% to 7% correction is a reasonable range for this round.
But it must be emphasized that this range only reflects a relatively high probability, and actual trading must still be handled cautiously. Historically, during some extremely overbought periods, the market can continue rising for more than a month before a significant correction finally occurs. In particular, Nvidia will release earnings in the early hours of May 21 Beijing time. That report will be decisive for the market’s short-term direction, roughly over the next week. If the earnings significantly exceed expectations, the S&P could immediately rebound back above the 20-day moving average and even retest the prior high. Therefore, it is not recommended to take large positions before the earnings release.
3. Options and Futures Strategies for the Pullback
For the current market environment, the following specific strategies may be considered:
First, a short strategy in stock index futures. It is recommended to establish a bearish position in the Russell index and use the 20-day moving average of S&P equity index futures as the core reference. If the index falls back to the 20-day moving average, take profits first and wait to see whether it breaks decisively below that level; conversely, if it rebounds and breaks above the 20-day moving average, stop out strictly and wait for the next shorting opportunity.
$S&P 500(.SPX)$ $E-mini S&P 500 - main 2606(ESmain)$ $Micro E-mini S&P 500 - main 2606(MESmain)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ 100(NDX)$ $E-mini Nasdaq 100 - main 2606(NQmain)$ $Invesco QQQ(QQQ)$ $NASDAQ(.IXIC)$ $Micro E-Mini Nasdaq 100 - main 2606(MNQmain)$ $Nasdaq ETF(BK4593)$ $E-mini Dow Jones - main 2606(YMmain)$ $Micro E-mini Dow Jones - main 2606(MYMmain)$ $Dow Jones(.DJI)$
Second, a VIX strategy. Investors who are looking for a short-term correction can buy and go long VIX at the current level. The risk control standard should also be the 20-day moving average; if it breaks below that level, stop out immediately.
$Cboe Volatility Index(VIX)$ $ProShares VIX Short-Term Futures ETF(VIXY)$ $ProShares Ultra VIX Short-Term Futures ETF(UVXY)$ $Volatility Index - main 2606(VIXmain)$
Third, a bear put spread strategy. The recommended underlying is the Russell small-cap ETF (IWM). In practice, two-week-dated options could be used, with strikes potentially set at 285 on the high side and 270 on the low side. This structure also requires relatively little margin.
Fourth, gradually consider laying out puts on high-quality targets. As this correction nears its end—that is, when the Cboe Put/Call ratio retests and breaks below the green line in the chart, while the S&P falls below the 20-day moving average and approaches the roughly 7% resistance area shown above—the puts on star stocks may already be close to their most expensive levels. At that point, one can look for fundamentally strong names such as Google, Nvidia, and Micron, and sell lower-strike puts. A practical rule is to sell puts below the 20-day moving average, so that when the correction ends and the market rises again, you can earn option premium income. The risk in this strategy is that if S&P futures break below 7,016, you must stop out immediately. For more conservative investors, it is safer to wait for a right-side rebound before selling puts.
4. The Logic Behind Buying Long Bonds on the Dip and Risk Control
In the bond market, TLT, the U.S. long-duration Treasury ETF, has now fallen back to its earlier low area. In the short term, long bonds do have some dip-buying value. The rebound logic is that after a pullback in U.S. stocks, some safe-haven capital may flow back into the bond market; meanwhile, current 30-year Treasury yields are elevated, and the U.S. financial system is under considerable pressure. The market expects Trump or the Fed to take further steps to push yields lower. Based on that expectation, a short-term rebound in TLT is reasonable.
$iShares 20+ Year Treasury Bond ETF(TLT)$
However, buying the dip at the current level still carries a significant risk of a breakdown. First, from a technical perspective, long bonds have not yet shown a clear bottom divergence signal. Second, Middle East geopolitical issues, such as the fact that the Strait of Hormuz has not yet fully reopened, are preventing a large amount of Middle Eastern oil from being exported normally. If this situation lasts for more than a month, crude oil will face a higher future risk premium, which in turn could raise the risk of U.S. inflation getting out of control. Rising inflation expectations would directly lead to further heavy selling in Treasuries.
Given these risks, this is not yet an absolutely safe bottoming area. If investors choose to buy TLT here, they should avoid using leverage and must set a strict stop-loss line — if the price falls below the previous low, they must exit unconditionally.
5. Brief Suggestions for Precious Metals
Beyond equities and bonds, the near-term approach to precious metals should remain restrained. Because the dollar’s upward trend has not yet ended, and the market is also pricing in a further breakout higher in yields, silver has been extremely volatile recently and it is difficult to judge whether there is more downside ahead. It is therefore advisable to stay out for now. For gold, its consolidation cycle is not yet over. One can consider an options strategy by selling puts expiring two weeks later at the 4,100 strike, which corresponds to the prior low. Since the probability of a major escalation in the U.S.-Iran conflict is currently low, gold is likely to remain range-bound in the short term, and the chance of breaking below 4,100 is relatively small.
$Gold - main 2606(GCmain)$ $E-Micro Gold - main 2606(MGCmain)$ $1-Ounce Gold - main 2606(1OZmain)$ $E-mini Gold - main 2606(QOmain)$ $SPDR Gold ETF(GLD)$ $Silver - main 2607(SImain)$ $E-mini Silver - main 2607(QImain)$ $E-mini Silver - Jul 2026(QI2607)$ $iShares Silver Trust(SLV)$
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