Bearish Positioning Eases
We are seeing a significant reduction in bearish bets on the S&P 500. Speculators have covered over 32,000 short contracts, indicating that the extreme pessimism from earlier this year is fading. This is the least bearish that hedge funds and other large traders have been since the fourth quarter of 2025. This shift in positioning follows the February CPI report, which showed core inflation dropping to a 2.8% annual rate, beating expectations. The Federal Reserve also signaled a more patient stance on interest rates at its meeting last week, removing language about further tightening. These events have reduced the perceived risk of a recession that worried us throughout last year. The market has already begun to react, with the S&P 500 rallying over 5% so far in March, forcing many shorts to buy back their positions. This type of short squeeze is similar to what we observed in the second half of 2024 when fears of an earnings recession failed to materialize. We are currently seeing the CBOE Volatility Index (VIX) drop below 15 for the first time this year, reflecting lower demand for downside protection. For derivative traders, this suggests that selling volatility may become a more viable strategy. The easing demand for puts could make selling cash-secured puts on strong individual stocks or credit spreads on the index more attractive. With fewer speculators betting on a decline, the upward momentum could have room to run in the coming weeks.Options Signal Reduced Fear
Further data supports this less fearful outlook, as the equity put/call ratio has fallen to 0.72, its lowest reading in five months. This shows that options traders are buying fewer puts relative to calls, aligning with the CFTC data. This trend suggests that the path of least resistance for the market may be higher as we head into the second quarter. Create your live VT Markets account and start trading now.
Start trading now – Click here to create your real VT Markets account
