The S&P 500 Index has surged past historical highs, driven by a wave of short covering, while the Nasdaq 100 has yet to follow suit. Macro strategist Simon White suggests that the Nasdaq still holds a significant amount of open short positions, and if stop-losses are triggered, it could become the next catalyst pushing the index to new record levels.
The S&P 500 saw two consecutive days of strong gains this week, rising 1.5% on Monday and another 1.8% on Tuesday, breaking through previous highs. This concentrated, rapid upward movement bears clear signs of a short squeeze, as stop-losses on short positions placed near the prior highs were triggered one after another. Goldman Sachs' "Most Shorted" basket has surged 13% over the past four trading days, confirming this assessment.
Meanwhile, short interest in the Invesco QQQ Trust (NASDAQ: QQQ) remains elevated, while the short interest ratios for ETFs tracking the S&P 500 and the Russell 2000 have notably declined. Simon White pointed out that the short-covering intensity in the Nasdaq lagged behind the S&P 500 yesterday, suggesting that a larger wave of covering may still be on the horizon. However, he also cautioned that risks from inflation and real interest rates have not dissipated, and the current rally could be a "bear trap."
Short Squeeze Drives S&P to New Highs
The S&P 500's strong performance over the past two days is closely tied to a concentrated unwinding of short positions across the market.
Simon White's analytical framework indicates that the S&P 500 has triggered a signal for a short squeeze. This occurs when the market experiences a single-day gain exceeding 1.5 standard deviations of the prior month's average daily move, a simultaneous significant drop in open futures interest, and the index itself reaching an eight-week high.
Historical data, dating back to 1998, shows that the average return one month after this signal is triggered is higher than the overall average. However, when the time horizon is extended to three, six, or twelve months, the returns are slightly below the historical average. This suggests that the upward momentum from a short squeeze is clear in the short term but does not necessarily indicate the start of a sustained trend.
Nasdaq's Abundant Shorts Could Fuel a Continued Rally
Compared to the S&P 500, the Nasdaq 100 has yet to break its all-time high, potentially leaving more room for short covering.
According to Bloomberg data, the short interest ratio for the Invesco QQQ Trust (QQQ), an ETF tracking the Nasdaq, remained high in the latest data from roughly 10 to 14 days ago, while the short interest ratios for ETFs tracking the S&P 500 and Russell 2000 have declined in tandem. A similar analysis of Nasdaq futures open interest shows that the index's short-covering intensity was relatively mild yesterday, indicating that many short positions have yet to hit their stop-loss levels.
The software sector is a notable case in point. Amid the rise of coding agents and thematic short-selling of software stocks, the median short interest ratio for the sector has recently spiked. These positions were established later, meaning their stop-loss prices may not have been reached by the current market move.
Momentum Chasers Could Provide Additional Fuel
Beyond short covering, the return of previously underweight investors to the market could form the next layer of the rally.
Simon White believes that as the S&P 500 breaks through its previous highs, some investors with insufficient exposure may join the chase, providing a supplementary force for the current rebound.
However, he offers a clear warning: inflation risks and upward pressure on real interest rates persist, and the current rally carries the risk of becoming a "bear trap." Investors should remain cautious about the macroeconomic environment while pursuing the upward trend.
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