Short covering + CTA buying spree, the logic behind last night's rebound in U.S. stocks: At least in the short term, the U.S.-Iran conflict will not escalate?

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There are signs of easing in the US-Iran diplomatic window, combined with an extremely bearish position structure triggering a mechanical rebound. Overnight, US stocks surged strongly by more than 2.2% from the low. The core logic driving the market is singular: the conflict will not escalate further in the short term.

According to CCTV News, Pakistani diplomatic sources stated that the US and Iran have agreed to continue negotiations, but still have differences regarding the agenda, objectives, format, and location of the next round of talks. US Vice President Vance publicly stated, "the ball is in Iran’s court," implying that the negotiation window remains open; Iranian President Pezezhkian also expressed willingness to continue discussions within the framework of international law. Amid these dual signals, on Tuesday, WTI crude fell over 2% to $96.91 per barrel, Brent crude fell 1.88% to $97.49 per barrel—the bullish effect of blockade threats has been fully suppressed by expectations of diplomatic easing.

Previously, hedge funds' bearishness even exceeded the peak selling frenzy of the "Liberation Day"; the highly concentrated short positions provided ample fuel for this round of position-led rebound.

From the perspective of positions, Goldman Sachs estimates CTAs (Commodity Trading Advisors) bought $19 billion in US stocks last week, and are expected to buy another $43.5 billion in the coming week if the market stays flat, approaching historic highs; hedge funds turned net buyers for the first time in eight weeks. The current key divergence in the market: Can diplomatic signals of easing remain, or will there be a reversal to a new round of conflict?

Extremely Bearish Positions Fuel the Rebound

The core driver of this rebound first stems from a serious imbalance in position structure.

Goldman Sachs data indicates that as of last Friday, hedge fund bearish positions exceeded those during the peak of the "Liberation Day" sell-off earlier in April this year.

In terms of flows, global equities achieved their first net buy in eight weeks (+1.2 standard deviations, on a yearly basis), mainly driven by fresh long buying, with short covering as a supplement. The ratio between buying and covering is roughly 3.6:1. All major regional markets saw net buying, led by Emerging Asia and Europe. Macro broad products saw net buying for the second consecutive week, mostly from short covering (ratio of around 3.5:1).

At the institutional level, asset management companies have been net buyers of S&P 500 futures for two weeks in a row; global equity mutual funds saw a $37 billion weekly net inflow (of which US stocks contributed $23 billion), a sharp acceleration from the previous week’s $12 billion.

Market sentiment has also improved. Goldman Sachs' US stock sentiment indicator rebounded sharply to +0.7 this week, from -0.9 two weeks ago. CNN's Fear & Greed Index rose from 23/100 to 38/100. The volatility panic index, which had hovered around 9 since the outbreak of hostilities, suddenly dropped to 7, the lowest in two months.

CTAs Near Record Buys, Systemic Forces Take Over

If short covering is the "spark" for the rebound, then systematic CTA buying is the "accelerant" that provides sustained upward momentum.

Goldman's latest model estimates that trend-following CTA funds bought $19 billion in US stocks last week; looking forward to the next week, CTAs are expected to buy another $43.5 billion in US stocks if the market stays flat, and as much as $82 billion based on global stock metrics, approaching historical highs. Previously, CTAs had slashed equity positions to extremely bearish levels entering April, but now price stabilization has triggered a reversal trend signal, releasing concentrated systematic buying pressure.

At the retail level, AAII survey shows bullish sentiment rose to 35.7%, while bearish sentiment dropped by 8.4 percentage points. Retail favorite sectors rebounded significantly, with Bitcoin-sensitive stocks up +15.51% for the week. However, JPMorgan data indicates that retail behavior has shifted from "buying the dip" to "skipping the decline and reducing positions at highs," indicating a more defensive posture. Retail trading volume last week was below the historical 2nd percentile, showing lingering doubts about whether the rebound can last.

The technology sector previously experienced aggressive derisking, resulting in cleaner, lighter positions, but fundamentals have not deteriorated in tandem with prices, creating a "gap between price and earnings expectations." Market makers are in short gamma status, and cheap upside options remain attractive. Once positions are fully reset and prices stabilize, upside option prices could reprice rapidly.

US-Iran Negotiations: Broken but Window Remains Open

The other main driver for the current rebound is the market repricing the likelihood that the US-Iran conflict will not escalate in the short term.

The marathon negotiations in Islamabad on the 12th ended without agreement. In an interview, Vance stated that Iran's delegation had made concessions on two core issues, "they moved toward us... but not far enough." The US has two non-negotiable demands: removal of Iran’s enriched uranium and assurance that Iran cannot enrich uranium.

Vance said that given the "current teams and timetable," agreement could not be reached, so both sides will return to their respective capitals. Iran's Foreign Minister Abbas Araghchi responded on the X platform, saying Iran participated in the negotiations in good faith, but was only one step away from the "Islamabad Memorandum of Understanding" before encountering "extremism, moving targets, and blockades."

Nevertheless, multiple signals show the diplomatic channels are not fully closed. Pakistani sources say both sides agreed to continue talks, with differences remaining on details such as agenda, objectives, format, and location—Iran prefers Islamabad, while the US is considering other options.

According to Xinhua, Iranian President Pezezhkian told French President Macron on the 13th that Iran is willing to continue negotiations within the international law framework and will adhere to the ceasefire terms, attributing the failure to reach a prior agreement to the US's "excessive ambition." Vance repeatedly emphasized, "I think there really is a big deal to be made," and said he will wait for Iran to "take the next step."

Oil Prices Under Pressure: Blockade Threats vs Diplomatic Signals

Despite the US immediately announcing a maritime blockade of Iranian ports and coastal areas, which theoretically is a supply tightening bullish factor, the market reacted by sending oil prices down.

Vance characterized the blockade as a means of "extra economic pressure," stating that a full reopening of the Strait of Hormuz is one of the US's key demands. He pointed out that the previous 14-day ceasefire agreement included as a condition Tehran’s agreement to reopen the Strait, "but we haven’t seen a full reopening yet," warning that "if they don’t, it will fundamentally change our negotiations." According to Australian Commonwealth Bank analyst Vivek Dhar, the blockade directly threatens Iran’s oil exports through Hormuz—last month, about 1.7 million barrels per day of Iranian oil transited the channel, and "a blockade will further tighten both physical crude and refined product markets."

However, oil prices have responded inconsistently to the same shocks—normally the transmission mechanism through stocks, volatility, and exchange rates is breaking down.

Market participants point out that when the same shock starts producing different reactions, it usually means the narrative is shifting. Diplomatic signals have outweighed blockade threats, becoming the dominant logic for current market pricing: Vance handed the initiative back to Iran, instead of declaring negotiations over, leaving room for a diplomatic solution. This is the core reason investors are briefly breathing easier.

Outlook: Fragile Sentiment, the Next Headline is Key

Goldman Sachs warns in its latest positioning report that sentiment remains fragile. Beyond systematic mechanical buying, short covering, and very selective new positions, investors remain cautious, waiting for the next Iran/Hormuz headline—the risks of escalation and de-escalation are almost symmetrical, signaling ongoing volatility ahead.

In terms of share buybacks, Goldman estimates currently about 98% of companies are in a buyback blackout period, buyback flows are down about 30% versus normal levels, and the blackout will end around April 28, at which point corporate buybacks will resume providing market support.

In summary, this rebound is mainly driven by position repair rather than fundamentals. Short covering and CTA systematic buying provide strong upward momentum, but the true direction will depend on whether clearer diplomatic signals emerge from US-Iran negotiations in the next few days.

Risk Warning and DisclaimerThe market involves risks; investment requires caution. This article does not constitute personal investment advice and has not taken into account the particular investment objectives, financial situation, or needs of individual users. Users should consider whether opinions, views, or conclusions in this article suit their specific circumstances. Investments based on this are at users' own risk. ```