The Tail Becomes the Dog

I was listening to a podcast this past week, where the following was mentioned by Nomura cross-asset strategist Charlie McElligott when describing the current market's character: “A world of not just this market structure that feeds momentum, with leveraged ETFs, the prevalence of options trading and the ‘tail wagging of the dog’. I'm not even sure if I can say ‘tail wagging of the dog’ now I just think it is ‘the dog’, options are 'the dog'."

For those unaware, traditionally:

• Stock Market = Dog

• Options Market = Tail

Meaning options in the past were a small, reactive segment that moved in response to the broader stock market. Today, daily market behavior often feels less like a vote on fundamentals and more like a byproduct of operations and technicals. If you’ve been watching the S&P 500 trade stubbornly around key strikes, you’re not imagining things. And that’s largely because in modern markets, options are no longer the tail that wags the dog. They’ve become the dog.

How Did We Get Here?

The rise of:

• 0DTE options (zero-days-to-expiration),

• Leveraged ETFs and volatility-targeting funds, and

• Ultra-fast, rules-based trading strategies

...has reshaped the daily rhythm of the market. It’s not unusual now to see volumes in SPX or QQQ options that outpace volume in the ETFs themselves – a remarkable inversion of purpose. Price is increasingly a function of flow, rather than the inverse. 

When traders buy massive quantities of short-dated calls, dealers are forced to hedge, buying underlying stock as the market rises. When markets fall, they must sell. This dynamic creates a feedback loop that compresses volatility until it suddenly doesn't, pins markets to strikes, and makes intraday price action more a function of gamma exposure than macro reality. In a grindy uptrend, derivative income managers sell calls to generate income, then must buy underliers as they creep up to manage risk, which pushes markets higher, which triggers more calls getting hit, and the cycle continues. It partially explains the market’s fascinating ability to digest recent and future expected weak economic data in a way dissimilar to the past.

This isn’t to say fundamentals don’t matter – just that they matter eventually, in a market increasingly driven by what happens now.

In fact, that’s kind of the point: over time, quality justifies its existence. Investors can still protect themselves and add excess returns in public markets by focusing on businesses with strong balance sheets, real earnings power, and durable competitive advantages. Diversification across such companies adds resilience. The noise of market structure may distort prices in the short run, but the value of good businesses tends to make itself clear over time. It just requires a different kind of patience than the one demanded by modern flows.

The Return to Private Markets as a Refuge for Fundamentals

Some may say in contrast, private companies – for all their illiquidity and opacity – offer a kind of return to first principles:

• Capital raised based on long-term vision and cash flow projections.

• Less reactive pricing, untethered from the gamified mechanics of weekly expirations or meme-fueled volatility.

• A slower, more deliberate market environment where valuation is contingent on management and bottom lines, not a moving target.

  
  

This isn’t a romanticization of private equity – just an observation that in a world where public equities are increasingly priced on the structure of trading itself, private enterprises still (mostly) rely on the messy but meaningful evaluation of durability and long-term value creation.

The Takeaway

If public markets are drifting toward synthetic flows and reflexive momentum mechanics, they have reached a point of maturity that implies a degree of stability unseen before. Uncertainty about the economy (particularly about corporate spending decisions (CapEx, hiring, inventories)) is counterintuitively fueling stock demand, even though historical wisdom would determine it should cause fear. Positive macro developments are also fueling stock demand in a conventional fashion. I’d say this means continued retail conviction in an indexing core (which is our base strategy here at Castfirm) and continued relative underperformance of active managers on aggregate. "Buying the dip" should largely continue to work, to the collective chagrin of short strategists everywhere. It also means managers must come up with more creative, though always risk-aware, ways of deriving alpha.

I'm not sure of how this current stable dynamic could feasibly end barring some sort of catastrophic break in the system, but if I had to wager a guess, I’d say if it does happen, however that may be, it will be painful for many individual investors.

Does this mean private markets are where one goes for true investment – not just exposure? I’m not sure that equivalency is exactly accurate. Private markets are far from perfect. But it’s no surprise that brokers are increasingly making way for retail access to private investments, and demand for exclusive returns, in turn, shows no sign of slowing.

Disclaimer

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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