The key question on everyone’s mind now is whether the market rebound over the last month marks the beginning of a broader advance, or the late stage of a flow-driven rally.
The bull case rests on both positioning and fundamentals. The rally’s concentration in Semiconductors, while narrow, is often a precursor to broader market participation rather than a sign of exhaustion. This is supported by a resilient macro backdrop and expectations for a solid earnings season. From a flows perspective, prior hedge fund de-grossing and still-low net exposure leave room for re-risking, while CTAs remain below maximum allocation, implying additional demand could materialise on sustained trends. At the same time, ongoing corporate buybacks continue to provide a steady source of support, reinforcing a constructive backdrop in terms of overall flow.
The bear case, however, is increasingly centred on asymmetry and market structure. With major equity and technology indices already at all-time highs and near key resistance levels, any upside may require incremental flows that are less readily available. Positioning among long-only investors remains elevated, while muted demand for downside hedging points to a degree of complacency. Moreover, a significant portion of recent support from systematic strategies, particularly volatility-sensitive allocators, already appears to have been deployed, potentially reducing their marginal impact going forward. Near-term flows may also turn less supportive, with pension fund month end rebalancing likely acting as a headwind after the recent rally. Dealer gamma remains deeply negative, increasing the likelihood of self-reinforcing moves in either direction and any negative catalyst, such as a renewed escalation in the conflict with Iran, could trigger a sharp reversal, particularly given the speed and concentration of the recent advance.
Given the ongoing geopolitical risks, we add another half of our usual position size in Long SX5E Jun26 5700 puts. Broader macro thoughts can be found in GM Weekly Equity Views.