Since February 19th, we’ve seen an unsettling spectacle in the stock market. The S&P 500 has erased a mind-blowing $5 trillion in what is being called the sharpest drop since the 2022 bear market. This decline has been far from ordinary. The selloff is one-sided and relentless. And what’s even more telling is the surge in put option volume. We’re talking about a record-breaking 30 million contracts in just five days. That’s a level of pessimism we’ve rarely seen. Are we on the edge of a short squeeze? Only time will tell, but the writing is on the wall.
Just two weeks ago, the Nasdaq 100 was trading at all-time highs. Since then, it’s dropped a staggering 12.5% in only 14 trading days. To say this kind of movement is abnormal would be an understatement. Historically, a market that falls this quickly and dramatically tends to rebound, and fast. Could this be the setup for a massive short squeeze? It’s certainly in the cards if sentiment starts to shift.
The most interesting part of this is the positioning of hedge funds. Heading into 2025, we saw hedge fund exposure to the “Magnificent 7” stocks fall to its lowest in 22 months. There’s been a massive divergence between the Nasdaq 100 and hedge fund positioning—something we haven’t seen since the 2022 collapse. Now, hedge funds have flipped to a net positive stance on equities, with a surge in S&P 500 futures positioning over the past week. This is the first time we’ve seen this since the post-election rally in November 2024. With this shift, it’s possible we could see the market bounce sharply.
The Fear and Greed index is also flashing red. Extreme fear is everywhere, bringing us back to levels we saw in March 2020. We know from past experiences that extreme fear can’t last. Just as extreme greed couldn’t be sustained during the height of the bull market, extreme fear isn’t sustainable either. Sentiment drives this market, and right now, it’s screaming for a change. The market can’t stay this fearful forever. As dealers and hedge funds adjust, a short squeeze could be imminent, and it could catch a lot of people by surprise.
On the macro front, Lance Roberts makes an interesting point. Dealers are short on gamma to levels we haven’t seen since the August lows during the Yen Carry Trade blow-up. This sets the stage for a sharp, reflexive rally, but it also raises some larger questions about the state of the economy. Is this a controlled demolition of the markets? Maybe. The current selloff has widened credit spreads, but they’re still historically narrow. So, are we really looking at a recession, or is this just a market flush? It’s tough to say, but it sure feels like the markets are about to pivot.
It’s a time for caution, but also for opportunistic positioning. As always, the market rewards those who can read the writing on the wall and have the patience to wait for the right moments. The current moment feels like one of those times. A short squeeze may be in the cards, but only if the market sentiment shifts fast enough.
Sources:
https://x.com/KobeissiLetter/status/1899466956161339898
https://x.com/LanceRoberts/status/1899426303343771671