Equities continue to post strong gains for a third consecutive week as the market prices in a de-escalation of tensions and the swift reopening of the Strait of Hormuz, with only limited demand destruction expected for the economy in the months ahead. A combination of falling oil prices, subdued rates volatility, deeply negative dealer gamma, and low top-of-book liquidity has pushed U.S. equities to all-time highs. Of particular note, the Nasdaq’s RSI has shifted from oversold to overbought in just 11 sessions, the fastest such transition on record, compared to the historical average of 60+ days. The Liberation Day move ranks as the second-fastest, requiring 25 days to complete the same shift.
Similar to the Liberation Day sell-off, the initial impulse of this rally has largely been driven by systematic and hedge fund positioning, as funds have had to reallocate back into the market from peak bearish levels. As noted in our 1Q Recap – bearish tilt delivered, the same indicators that supported our bearish stance at the start of the year reached levels that justified playing the upside ahead of the melt up, despite choosing to maintain downside positioning given the serious risks of a prolonged or further escalation of the conflict. The market now appears to be chasing the upward move, with institutional call option flows on pace for one of the largest weekly purchases since late 2024, while indices approach key resistance levels. The broader move appears to be predominantly in Tech names and more specifically in semis, on track for their largest monthly inflows. This is reflected in the breadth of the S&P 500 dropping to its lowest levels since mid-2023, with Info Tech and Communication stocks accounting for c.70% of the SPY rally.
Although an extension of tomorrow’s ceasefire deadline is very likely, at current index levels we still see asymmetric risks to the downside and propose half our usual position size in Long SX5E Jun26 5700 puts.
Broader macro thoughts can be found in our GM Weekly Equity Views.