The financial markets have witnessed a brutal selloff over the past few weeks, with the S&P 500 erasing over $5 trillion in market value since February 19th. This marks its most one-sided decline since the 2022 bear market. Meanwhile, the Nasdaq 100 has plummeted by 12.5% in just 14 trading days, highlighting the severity of the downturn.
With put option volumes hitting record highs, surpassing 30 million contracts over the last five days, traders have been overwhelmingly bearish. However, history has shown that such extreme positioning is rarely sustainable. Could a massive short squeeze be on the horizon?
Institutional Positioning: The Key to Market Direction?
Prior to this recent decline, hedge funds had already slashed their exposure to the Magnificent 7 stocks (Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla) to a 22-month low. This created a rare divergence between the Nasdaq 100 and institutional positioning, something last seen before the 2022 market crash.
However, in a significant shift, hedge funds have now turned net positive on equities for the first time since November 2024, according to S&P 500 futures positioning. This suggests that institutions might be preparing for a rebound, rather than further downside.
Extreme Fear in the Markets: A Contrarian Indicator?
Investor sentiment has reached panic levels. The Fear & Greed Index is now nearing the same extreme fear levels seen during the March 2020 crash. Historically, the market struggles to sustain extreme greed, and the same holds true for extreme fear. Such sentiment shifts often precede major market reversals.
Additionally, recession fears and global tariff concerns have already been priced into the market. With so much pessimism baked in, the risk-reward setup for a bounce is growing stronger.
Trump’s Tesla Comments: A Sign of Confidence?
In a surprising turn of events, President Donald Trump publicly expressed his support for Tesla and Elon Musk, stating that he plans to buy a new Tesla as a show of confidence. This marked Trump's first sign of market support amid the ongoing crash, signaling a potential sentiment shift.
Trump's backing of Musk could be seen as a broader signal to investors, especially given his influence over market psychology. Could this be a catalyst for renewed investor confidence?
Key Market Factors to Watch
As we sum up the current market conditions, here are the major themes at play:
1. Global tariffs and recession fears are already priced in
2. Extreme Fear dominates stock and crypto markets
3. Short positioning has reached extreme levels
4. The Magnificent 7 stocks are in deep bear market territory
5. Institutional investors have started increasing their equity exposure
6. Potential reversal in Trump’s market sentiment
With all these factors aligning, the setup for a potential short squeeze or at least a strong relief rally is growing stronger. Whether the market has truly bottomed remains uncertain, but one thing is clear—extreme fear often creates opportunity.