Head of Equity and Equity Derivatives Strategy at Castle Securities: Short squeeze will help the S&P 500 rebound
Scott Rubner, Head of Equities and Equity Derivatives Strategy at Citadel Securities, stated that record-sized short bets are at risk of being squeezed, creating conditions for a US stock market rebound, with hedge funds and systematic strategies poised to drive the next wave of buying.
Rubner said in an interview that if geopolitical tensions ease, the conditions for a market rebound are very sufficient, considering that the US stock market currently has one of the largest short positions we've ever seen. He noted that this structure makes the market highly sensitive to the next positive catalyst, but also cautioned this is not a “buy stocks today” signal.
This market landscape reflects how some professional investors are responding to recent volatility. Many hedge funds, especially multi-strategy funds that tactically use short-selling tools to reduce net exposure, are not selling their core stock holdings, but are aggressively shorting ETFs to hedge against further downside risk.
ETF trading activity has reached record highs, with its share of total volume rising sharply. Rubner said this has created a large pool of short positions built on preset trading rules. According to Citadel Securities data, ETF trading accounted for about 35% recently, peaking near 47%, as investors use ETFs to quickly adjust exposure.
If tensions in the Middle East ease and market volatility declines, these short positions may be quickly unwound. He stated: “There is a large amount of short positions in the market built based on rules rather than client intent, and these positions can rapidly reverse.”
This possibility of rapid reversal was already demonstrated in the US stock market on Monday: after US President Trump pledged to pause military strikes on Iran’s energy infrastructure for five days, US stocks rose. Since the US offensive began in late February, the US stock market has been under pressure.
If the situation stabilizes further, systematic strategies could bring incremental buying, as these strategies have been significantly deleveraging.
CTAs, risk parity funds, and volatility-targeting strategies typically follow market trends rather than fundamentals. After the S&P 500 index broke below its 200-day moving average around 6622, these strategies reduced exposure to the index, amplifying the downturn. Citadel Securities’ volatility control model has reduced equity exposure by more than 20%.
Rubner stated: “Given the previous large-scale selling by these strategies, the market is now tilting back toward the buy side.”
He pointed out that all the elements for a rebound are in place, but haven't truly been triggered yet. If global tensions ease, potential gains could be “very swift.”
Rubner’s bearish call on US stocks in February proved accurate, as the S&P 500 fell over 2% that month. But as market sentiment became increasingly pessimistic, seasonal factors turned positive, and retail flows remained resilient, he withdrew his bearish view in early March.
Key shifts emerging in the derivatives market
After over $5 trillion in options contracts expired last week, market makers' positioning changed. Previously, market makers amplified volatility, but now that mechanism has reversed.
Rubner said: “The market has shifted to a long gamma state, which is a force for stabilization rather than exacerbating declines.” This has removed a major mechanical selling pressure that previously dominated S&P 500 trading, allowing the index to respond more freely to new flows in both directions.
Retail investors remain resilient
Amid sharp market volatility, retail investors continue to show strong resilience. Rubner said they have not engaged in panic selling, instead sticking to buy-the-dip and sell-the-rally strategies. Since the Iran conflict erupted, retail investors had only three days of net selling. “Retail investors are not panicking—they buy when prices fall and sell when they rise.”
Retail flows are also starting to show tactical shifts. Rubner wrote in a Monday report: “We saw this again this morning. Before Trump's announcement, retail flows on platforms were relatively stable, but after the news broke and the market rallied, they began taking profits; last week, overall flow was strong net buying.”
Meanwhile, sentiment indicators—which typically serve as contrarian signals—have deteriorated. Citadel Securities’ measure of retail risk appetite has fallen sharply from the February high, reflecting more caution among individual investors. Institutional investor sentiment is even more bearish. Rubner said discussions with clients across the regions reveal universally gloomy sentiment. He said, “Macro sentiment remains extremely bearish, and that's usually a signal for me to do the opposite.”
Funds may rotate back into US stocks
Rubner said funds may rotate back into US stocks, particularly large tech companies, reversing the early 2026 trend of shifting toward international markets and cyclical stocks. If capital returns, it will likely concentrate in high-quality companies seen as “safe havens.”
He said: “Investors are flowing back to US stocks and to the highest quality companies.”
Seasonal factors are also critical. Since 1928, April has been the second-best month for S&P 500 performance. Even if global tensions persist, Rubner believes most risks are already reflected in current prices. “I'm not sure how much further the market can fall, given there’s limited room for clients to add more short exposure. Current short positions are at historic highs, while upside potential hasn't been fully allocated.”
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