Battered Wall Street short brigade is refusing to admit defeat

Just like that, the panic on Wall Street has vanished almost as quickly as it arrived.Only weeks ago, traders from Singapore to New York were bracing for the economic fallout from President Donald Trump’s trade war. Global markets had shed trillions in value and American financial dominance faced its sharpest scrutiny in years.

Now, the investment landscape looks markedly different. Trump is touting tariff progress on a near-daily basis — helping cool stagflation concerns while pumping up the “buy America and fade the fear” narrative once more. In turn, risky assets have mounted a swift rebound. The S&P 500 has just closed out its second-best week of the year, while credit and crypto have rallied anew.

Yet for all that, a cohort of naysayers is pushing back. Short interest in the world’s biggest exchange-traded fund tracking the Nasdaq 100 has grown and now sits almost three times its February low. And in corporate bonds, bearish positioning is rising, with shorts on BlackRock Inc.’s high-yield ETF reaching a six-month high.

One reason for the lingering caution: scars of April are still fresh. A Barclays Plc model that tracks extreme price moves — in everything from stocks and Treasuries to gold and high-yield debt — shows markets are as fragile as the Covid dark days, all thanks to Trump’s policy shocks.

No wonder some investors see little reason to celebrate, for now.

“The market rebound has been driven more by a feeling of relief that the worse case will be avoided than by a sense of renewed optimism,” said Mark Freeman, chief investment officer at Socorro Asset Management LP, whose portfolio currently holds a neutral position. “Investors still don’t have a high degree of visibility, which is clearly impacting confidence.”

The penalty for being a skeptic continues to rise. Session after session, bears emboldened by last month’s market traumas are being pummeled in a recovery that has made heroes of retail day traders, who didn’t blink as fears escalated around Trump’s tariff salvos.This week alone saw the S&P 500 jump 5%, Bitcoin touch $105,000 and the Cboe Volatility Index drop below the widely watched level of 20. A basket of the most-shorted stocks surged 8%, delivering one of the harshest blows to bearish investors in years.

Risky assets advanced, driving the Nasdaq 100 back to bull market territory, after a temporary truce in the US-China trade war. Trump’s claim that he would set tariff rates for US trading partners in weeks allayed the concern that prolonged tariff negotiations would curb spending and growth.

Yet investors can be forgiven for doubting the sustainability of the swift cross-asset rebound, at a time when markets are becoming more vulnerable to shocks. Barclays strategists, including Stefano Pascale, have been tracking price volatility across 12 ETFs spanning assets globally. They found the frequency of extreme daily swings has risen to levels rivaling periods like the 2008 financial crisis and the 2013 Federal Reserve-induced taper tantrum.

From a contrarian standpoint, however, the enduring sense of disciplined skepticism may be the market’s strongest safeguard.

“Wall Street with all their MBAs and PhDs has a real difficult time predicting where he’s going and evaluating what he’s doing,” said Craig Callahan, chief executive officer and a portfolio manager at Icon Advisers Inc. He considers stocks fairly valued and expects the S&P 500 to rise 8-10% in the next year. “People are shorting and just not believing. So it is a continuation of the unloved bull market.”

Still, signs of economic strain are growing. April retail sales slowed, debt delinquencies hit a five-year high, and consumer sentiment fell to its second-lowest reading on record, even as near-term inflation expectations retreated in the bond market.

That unease is showing up at the speculative edge of markets. Leveraged ETFs that amp up bullish bets have seen $6.1 billion in outflows over the past four weeks. Conversely, inverse products, designed to profit from falling prices, have attracted $3.7 billion in inflows. It’s a notable reversal from just weeks ago, when long funds were gaining traction and short funds were seeing withdrawals.

Institutional managers are treading carefully, too. Hedge funds, according to Goldman Sachs Group Inc.’s prime brokerage data, have covered some shorts and added to longs in recent sessions. But their net leverage, a key proxy for risk appetite, remains in the lower half of a five-year range.

That cautious tone echoes what Ryan Grabinski has been hearing from clients since late March.

“Despite the market rally over the past six weeks, one consistent theme is widespread skepticism about its staying power amid persistent uncertainty,” wrote Grabinski, a strategist at Strategas Securities, in a note.

He cites lingering concerns over tariffs, ongoing fiscal negotiations in Congress, and a debt ceiling that could hit as early as August.

“It’s becoming increasingly difficult to pinpoint the next catalyst that could drive markets meaningfully higher,” he wrote.