Castle Securities Stock and Equity Derivatives Strategy Director: Short squeeze will help the S&P 500 rebound

How will geopolitical easing trigger a stock market rebound?

Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, stated that record levels of short positions are at risk of being covered, creating conditions for a rebound in the U.S. stock market, with hedge funds and systematic strategies likely to drive the next wave of buying.

In an interview, Rubner mentioned that if geopolitical tensions ease, the conditions for a market rebound are very favorable, given the current U.S. stock market has one of the largest short positions we have ever seen. He indicated that this structure makes the market highly sensitive to the next positive catalyst, but he also cautioned that it is not yet a “buy stocks today” signal.

This market landscape reflects how some professional investors are responding to recent volatility. Many hedge funds, especially those using tactical shorting tools to reduce net exposure, have not sold core stock holdings but have significantly shorted ETFs to hedge against further declines.

ETF trading activity has surged to historical highs, with a substantial increase in its proportion of total trading volume. Rubner noted that this has created a large pool of short positions based on preset trading rules. According to Citadel Securities, ETF trading accounted for about 35% of trading volume in recent weeks, peaking near 47%, as investors use ETFs to quickly adjust exposure.

If tensions in the Middle East ease and market volatility decreases, these short positions could be rapidly covered. He stated, “There are a large number of short positions established based on rules rather than client active intent, and these positions could quickly reverse.”

Monday’s U.S. stock market already demonstrated the potential for such a rapid reversal: U.S. stocks rose after President Trump promised a five-day pause on military strikes against Iranian energy infrastructure. The U.S. stock market has been under pressure since the offensive began in late February.

If the situation stabilizes further, funds from systematic strategies may bring incremental buying, as these strategies had previously been significantly de-leveraging.

CTAs, risk parity funds, and volatility-targeting strategies typically follow market trends rather than fundamentals. After the S&P 500 fell below approximately 6622 points of its 200-day moving average, these strategies reduced their exposure to the index, amplifying the decline. Citadel Securities’ volatility control model has reduced stock exposure by more than 20%.

Rubner stated, “Given the large sell-off from these strategies previously, the market’s bias has now shifted back to buyers.”

He noted that the elements for a rebound are in place, but it has not yet been truly triggered. If global tensions ease, potential gains could be “very swift.”

Rubner’s bearish stance on U.S. stocks in February proved accurate, as the S&P 500 fell over 2% that month. However, as market sentiment grew increasingly pessimistic, seasonal factors improved, and retail flows showed strength, he retracted that bearish view in early March.

Key shifts in the derivatives market

After over $5 trillion in options contracts expired last week, the positioning of market makers has changed. Previously, market makers were amplifying market volatility, but this mechanism has now reversed.

Rubner stated, “The market has turned to a positive gamma state, which is a restorative force rather than a factor that exacerbates declines.” This has eliminated a major mechanical selling pressure that previously dominated S&P 500 trading, allowing the index to respond more freely in both directions to new capital flows.

Retail investors remain resilient

Amid the market’s violent swings, retail investors continue to show strong resilience. Rubner noted that they have not exhibited panic selling but have instead adhered to a strategy of buying the dips and selling on rebounds. Since the onset of the Iran conflict, retail investors have only shown net selling for three days. “Retail investors are not panicking; they buy on the way down and sell on the way up.”

Retail flows have also begun to show tactical changes. Rubner wrote in a report on Monday: “We saw this again this morning. Before Trump announced the news, retail flows on the platform were relatively stable, and after the news broke, as the market rose, they started to take profits; whereas last week they were overall strong net buyers.”

Meanwhile, sentiment indicators, often used as contrarian indicators, have worsened. Citadel Securities’ measure of retail investor risk appetite has significantly declined since its peak in February, showing a more cautious attitude among individual investors. Institutional investor sentiment appears more pessimistic. Rubner stated that the overall sentiment from interactions with clients across regions is gloomy. He said, “Macro sentiment remains extremely bearish, and this is usually a signal for me to consider a contrarian move.”

Funds may rotate back into U.S. stocks

Rubner indicated that funds may rotate back into U.S. stocks, particularly large tech stocks, reversing the trend that shifted towards international markets and cyclical stocks in early 2026. If funds flow back, they are likely to concentrate on high-quality companies regarded as “safe havens.”

He said, “Investors are flowing back into U.S. stocks and into the highest quality companies.”

Seasonal factors are also crucial. April has historically been the second-best month for the S&P 500 since 1928. Even if global tensions persist, Rubner believes that most of the risks are reflected in current prices. “I’m not sure how much further the market can decline because there is not much room left for clients to further increase their short exposure. Current short positions are at historical highs, while the upside potential has not been fully allocated.”