The REAL Reason Behind the Market Collapse

Over the past 2 months, the S&P 500 and cryptocurrencies have collectively wiped out -5.5 TRILLION market capitalization. We have just witnessed one of the most abrupt changes in sentiment since 2020. What's happening? Let us explain.

Start with a timestamp: The market knew about the trade war from mid-2024. In December, tariff threats escalated, and we saw all-time highs in the S&P 500 thereafter. Even after the trade war started on February 1, we saw MANY all-time highs.

Since February 20, the S&P 500 has wiped out a massive -4.5 TRILLION market capitalization. That's about 350 billion market capitalization EVERY DAY for the past 13 consecutive days. Nasdaq is now only 8% away from entering a bear market for the first time since 2022. What has changed so rapidly?

Trade wars are just a myth. The real reason behind the market decline is a sudden change in risk appetite. We have shifted from Extremely greedy to Extremely fearful in just a few days. Overly polarized, to the point where we have completely turned in the opposite direction.

What's even more interesting is that institutional capital exited BEFORE tech stocks fell. By 2025, speculative fund exposure to Magnificent 7 stocks had dropped to the lowest level in 22 months. Consider the contrast between Nasdaq and the fund's position.

On February 9, institutional investors built the LARGEST Ethereum short position in history. This happened as retail investors rushed into cryptocurrencies with hopes of the US Strategic Reserve. Cryptocurrencies have dropped over 1 trillion dollars even as ALMOST ALL of Trump's optimistic promises have come true.

Crypto even further supports our point: Look at all the cryptocurrency price movements that have taken place in the past 2 months. Even the US Bitcoin Reserve has become a 'sell the news' event. So, what has changed? Clearly, the sudden change in risk appetite.

In December 2024, the optimistic sentiment was so high that Apollo announced their 0% chance of recession in the US in 2025. Meanwhile, they saw a 90% possibility of tariffs being imposed in 2025. The market had been aware of the tariffs for many months, the decline NOT entirely due to tariffs.

Fear & Greed index in cryptocurrencies and stocks has hit the lowest level since the market crash of 2022 this month. Last year, cryptocurrencies saw an extreme Greed level of 92+; currently at a complete opposite level of 17. Psychology is the ultimate driver of prices in ANY market, regardless of fundamental factors.

When psychology changes too quickly, money flows out reaching record highs and causing "flash crashes" as we have seen. In the last week of February, cryptocurrency funds recorded a record outflow of 2.6 BILLION DOLLARS in a week. This figure is about $500 million higher than the previous record set in 2024.

Last week, small-cap funds in the United States saw $3.5 billion outflows, the highest level since December 18. Mid-cap funds just saw $2.1 billion outflows. Sector funds saw $4.5 billion outflows including $1.9 billion from technology companies alone. Once again, a SHIFT in positioning.

This means that anticipating changes in psychology will be the most profitable strategy in 2025. And when the Volatility Index, $VIX, surges more than 70% in a month, volatility will expand. We expect to see fluctuations of over 1,000 points in the Dow become a common occurrence.

Finally, actions in cryptocurrencies and stocks are becoming increasingly one-way. Red days are deep red days and vice versa, another sign that risk appetite is changing. Psychology is the OPTIMAL driver of price.