The S&P 500 has rebounded to a record high following a sell-off triggered by the US-Israel conflict with Iran, with several internal market indicators suggesting the rally may still have room to run.
Multiple signals are underpinning market optimism. Despite ongoing uncertainty surrounding the US-Iran conflict and persistently high energy prices, several signs have emerged indicating the rebound momentum could continue. "We've seen very strong upward thrust in the S&P 500 over the last two weeks," said Sonu Varghese, Global Macro Strategist at Carson Group. "Momentum begets momentum, and new highs are a signal of momentum."
Purchases from hedge funds and high-frequency trading firms have injected a degree of optimism into the market. Mark Hackett, Chief Market Strategist at Nationwide, noted that institutional investors were previously characterized by "overwhelming pessimism and conservative positioning," a trend that has now begun to reverse.
Notably, volatility-controlled funds, which were significant sellers during the market turbulence following the outbreak of the US-Israel conflict with Iran, have now turned into net buyers, providing further support to the market. According to Nomura estimates, Commodity Trading Advisors alone bought approximately $20 billion in stocks in just the past week, while leveraged ETFs purchased around $27.5 billion.
"Systematic positioning in US equities remains historically light – there is room to rebuild before it becomes a source of instability," said Joanna Wang, Cross-Asset and Equity Derivative Strategist at Nomura.
Market positioning and sentiment have shifted significantly even as the index price is largely flat compared to late January. Chris Murphy, Co-Head of Derivative Strategy at Susquehanna Financial Group, pointed out that investors entered April with low market exposure, "which is why we're seeing such aggressive chasing."
This shift has led to dramatic swings in the call skew – a measure of the premium investors pay for bullish bets – which moved from its most defensive level in nearly three years to its most bullish level in three months within a three-week period.
"Historically, the impact of geopolitical conflicts on the stock market tends to be sharp and short-lived," said Garrett DeSimone, Head of Quantitative Analysis at OptionMetrics. "This aligns with the phenomenon of equity implied volatility and skew normalizing even as underlying conflicts persist, as the market begins to price in a resolution."
Historical data shows that rallies often continue after such rebounds. Since 1957, when the S&P 500 has recovered from a 5% to 10% pullback to set a new high, it has typically extended those gains in the subsequent two weeks to one month. The median return for the S&P 500 two weeks after such a recovery is 0.66%, expanding to 1.01% after one month.
For investors concerned about a "bull trap," the historical record is reassuring. In the 38 instances where the S&P 500 overcame a 5%-9.9% pullback, the market was higher two weeks and one month later about two-thirds of the time. Even in the one-third of cases where the market declined, the pullbacks were relatively contained, with median declines of 1.46% and 3.38% at the two-week and one-month marks, respectively. Data shows the market has never fallen below its recent low within two weeks to one month following a recovery.
A note of caution was raised by Steve Sosnick, Chief Strategist at Interactive Brokers: "If at the end of February I told you that by mid-April crude futures would be up $30, bond yields would be up about 35 basis points, expectations for two rate cuts would vanish, and consumer confidence would be at record lows – would you reasonably expect major indices to be near record highs at the end of that timeframe? I'm pretty sure the answer is no... But when momentum takes over the market, fundamentals are optional."
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