Market Report · January 2026
Remember these words: in the world of investing, analytical skills are essential, but the risk management That is what truly determines survival. My macro thesis was bearish, well-founded, and thorough. The market, however, has a habit of remaining irrational longer than one can remain solvent. This is the story of why it held up, and how I continued to make profits without fully exposing myself.
Starting point
A few months ago, I published an analysis in which I outlined my view on the AI hype and the market’s excessive leverage. My thesis was clear, well-reasoned, and, at its core, bearish. Even so, anyone who understands this world knows that the market has a habit of defying even the most sophisticated models and remaining irrational for longer than one can remain solvent—unless one is adequately hedged.
In this report, I want to review that macroeconomic thesis—which did not pan out as I had expected—why the market held up, and, more importantly: How I've remained profitable without fully exposing myself. One of the strategies I’ve already discussed was tactical hedging using leveraged ETFs, such as Direxion Daily Technology Bull 3X Shares ($TECL). This strategy allowed me to generate profits in a scenario that ran counter to my main macro outlook: while the market did not fall as much as expected, I captured returns through controlled risk management and by avoiding full exposure.
The Basic Thesis
In October 2025, I published «The Broken Equilibrium: How AI Euphoria and Leverage Have Pushed the Market to the Brink.» Without going into all the details, in that analysis I identified several critical patterns that explained the market’s behavior.
My main concern was not with the discretionary investor, but rather with the programmatic flows that are price-insensitive. Quantitative models indicated that CTAs (Commodity Trading Advisors) and Volatility Control funds were positioned with equity exposure near all-time highs. They operate under strict trend-following and target volatility rules: if the S&P 500 had decisively broken through the 50-day moving average (DMA50) or key support levels (5,700 at the time), the algorithms would have triggered Estimated automatic sales of 30,000–50,000 M$ in one week. A mechanical process capable of creating a negative feedback loop, in which selling generates volatility, and volatility forces investors to deleverage even further, regardless of fundamentals.
The options market showed clear technical weakness: market makers had entered territory of negative gamma. In a positive-gamma environment, they act as buffers (they buy when prices fall and sell when they rise). But when they cross the «flip line» downward, the dynamics reverse: they are forced to sell as the market falls to cover the growing delta of the puts they have sold. This creates a liquidity vacuum on the bid side and acts as a catalyst for further declines. I calculated that, for every 1% of additional decline, they would have to offload billions in notional delta, amplifying any initial correction.
The macroeconomic environment was threatened by a political catalyst: Trump's explicit threat to impose 100% Tariffs to nations seeking to de-dollarize (the BRICS bloc). From an asset allocation perspective, this introduced a risk of stagflation: tariffs of that magnitude are not just a consumption tax, but a supply shock capable of strengthening the DXY, draining global liquidity in dollars, and putting pressure on emerging markets and S&P 500 multinationals. The market began to price in a «trade war 2.0» that was more aggressive than the one in 2018, justifying a widening of the risk premium and a defensive rotation.
The Post-Mortem
My analysis pointed to an imminent «regime shift»: a transition from an environment of low volatility and moderate correlations to one of high volatility and correlations close to one. Market developments invalidated that signal. The error did not lie in the input data, but rather in the balance of opposing forces. I underestimated the significance of three structural pillars that acted as a veritable dam.
The Strategy
«Being right» is secondary to «making money.» Even with a bearish outlook, risk management requires considering alternative scenarios. If the market did not correct, it implied that the AI narrative remained intact and that technology would continue to lead the market. Maintaining an overly defensive or net-short portfolio in that context would have been inefficient from a capital allocation standpoint.
To preserve asymmetry and tactical flexibility, I implemented a Positive-convexity exposure via a 3x leveraged technology ETF ($TECL), which allowed for exposure to a scenario contrary to the main thesis without compromising the overall structure of the portfolio. Its leverage meant that the cost of exposure was much lower, optimizing capital efficiency and, consequently, the maximum loss.
The choice of a 3x instrument was not merely speculative, but strictly mathematics. While I was waiting for a correction that never quite materialized, the main risk was the opportunity cost of staying out of the market. I needed an instrument that, in a bull market, would generate a convex and significant return with minimal capital deployment. Using a 3x position allowed me to allocate a limited percentage of NAV to this hedge, with two clear scenarios:
This asymmetry made it possible to hedge the opportunity cost risk and directional deviation risk with a greater capital efficiency than buying call options directly, while also avoiding the negative impact of theta decay in a sideways market.
Interactive tool
Enter your portfolio’s NAV, the percentage you allocate to the hedge, the ETF’s leverage, and the expected movement of the underlying asset (the technology sector). The tool calculates the capital at risk, the leveraged return, and the P&L of the hedge, as well as its impact on the total NAV. It helps illustrate why a small percentage of the NAV is sufficient to generate a convex response.
The result
The market did not break down. Technology once again led the flows. While some of the market’s short positions were forced to reduce their exposure, the position in $TECL ceased to be a hedge and became a net alpha generator.
Leveraged exposure allowed me to capture the intensity of the rebound with a multiplier of three, generating a positive cash flow that not only offset the opportunity cost but also added incremental returns to my portfolio. The key was not to correctly anticipate every market movement, but rather building a portfolio structure capable of monetizing divergent scenarios without compromising my overall risk profile. That, in the end, is the lesson that matters: risk management isn't about getting it right, but about surviving and turning a profit even when the main investment thesis doesn't pan out.
Frequently Asked Questions
It was a bearish macro thesis published in October 2025: the AI euphoria and systemic leverage (CTAs and volatility-controlled funds near peak exposure) had pushed the market to its limit. If the S&P 500 broke below key support levels, mechanical selling and negative gamma from market makers could create a bearish feedback loop.
Three pillars acted as a containment barrier: the corporate bid (price-insensitive share buybacks, ~5–6 M daily) and the suppression of volatility by the short-vol complex; AI as a secular shield that decoupled the market from the macro cycle; and the technical rebound from the S&P 500’s 6,550 level, which prevented a cascade of CTAs and returned market makers to positive gamma, thereby destroying volatility.
It involves hedging against the risk that the market will rise (not fall) when your thesis is bearish. With a bearish conviction, maintaining a highly defensive or short portfolio would be inefficient if the rally continues. Right-tail hedging preserves asymmetry by allowing you to participate in the bullish scenario contrary to your thesis without compromising the overall structure of the portfolio.
In terms of capital efficiency: a 3x instrument generates a convex response with reduced use of NAV, avoiding the theta decay associated with buying calls in a sideways market. If the market corrects, losses are limited to the allocated capital and structural entry points improve; if it continues to rise, the movement is amplified threefold. This asymmetry allows for profiting from divergent scenarios without compromising the overall risk profile.
Markets by Diego is the financial analysis platform of Diego García del Río, a Spanish economist and independent private investor, and founder of Hill Valley Consulting. He publishes asset analyses, macroeconomic reports, and strategies involving options and leveraged ETFs, along with tracking of actual trades in international markets.
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