US Stocks Today | Massive short squeeze fogs market’s view on Iran peace prospects

At first blush, the biggest rally for US stocks in more than 10 months suggests investors on Tuesday were suddenly overwhelmed by optimism that the Iran war would be ending soon. Yet there was something else at play that obscures how confident investors really are that peace is on the horizon: A massive short squeeze.

A Goldman Sachs Group Inc. basket of the 50 most-shorted stocks soared 7.1% for its second-biggest rally in almost a year, and more than twice the gain of the S&P 500 Index. An index of profitless technology firms jumped 6.6%.

Headlines suggesting both the US and Iran might be looking for a way out of the month-old war triggered a rush to dump bearish bets, traders at Goldman Sachs and JPMorgan Chase & Co. say. With the gloom around the market’s prospects deepening, wagers against companies in the S&P 500 had stood near a three-year high among institutional funds, according to data compiled by Citigroup Inc. And across US-listed exchange-traded funds, the number of shares shorted reached a record, according to Jefferies Financial Group Inc.


“Some investors were aggressively betting on another down leg in the S&P 500, but as volatility moderated and sentiment improved they had to rush to close out those positions,” said Dec Mullarkey, managing director at SLC Management. “Short sellers have been vulnerable for a while but as some hint of an off-ramp emerges, markets quickly turned up.”


Hedge funds and trend-following funds such as CTAs had been aggressively shorting stocks. Trading desks also projected that pension funds were poised to direct large month-end flows toward buying equities, while the pressure point of short gamma among options dealers would roll off with Tuesday’s expiry, providing a further bullish impulse.

In short, fast money was just waiting for a spark to light the fuse for a rally and US President Donald Trump’s reference to the war potentially ending within two to three weeks proved enough.
The Nasdaq 100 Index jumped 3.4% on Tuesday, while the Magnificent 7 cohort of tech megacaps added more than $700 billion in value in the third-biggest one-day gain since 2020. The S&P 500 gained 2.9%. Risk-on momentum continued on Wednesday, with the S&P 500 futures rising 0.8% at 7:43 a.m. in New York and Europe’s main equities gauge adding 2.5%.

“Investors have been counting on a swift off-ramp to war essentially since it began, but I think from a market or global economy perspective it’s important to define what the true clearing event to revisit risk and take down recession odds really is,” wrote JPMorgan industrials sector specialist sales Paige Hanson. “How do we define this ‘ending’ as it pertains to what we collectively care about for stocks and global economy path forward?”

The volume of shares traded on Tuesday failed to match the euphoria evident at the index level. Traders at Goldman described Tuesday as only a four out of 10 in terms of overall activity.

On Goldman’s derivatives desk, traders described seeing “large hedges unwound” in the S&P 500, Nasdaq and VIX and ETFs. Trader Shayna Peart observed “positioning being taken off as the day went on.”

For this bounce to be sustained, investors might need to see more detail and clarity on the path to de-escalation. Trump will give an address at 9 p.m. Wednesday, providing an update on the war, White House Press Secretary Karoline Leavitt said.

Traders have questions about how soon the Strait of Hormuz can reopen to shipping and how deep and prolonged the drop in oil prices can be. Meanwhile, the earnings season is approaching, where the market will look for signs of how the conflict affected first-quarter results and the wider economy.

(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)