Signals of a short squeeze emerge in US stocks in the fourth quarter: CTA positions retreat significantly, and $1.3 trillion in share buybacks are poised to begin.

US stock quantitative funds have just completed a rare major portfolio cleanup.

The combined holdings of CTA (Trend-Following Quantitative Funds) plummeted from extremely overweight at the end of August to slightly bearish, a swing of more than three standard deviations within a month—a phenomenon almost unprecedented in recent years. This release of selling pressure has significantly opened up potential buying opportunities.

Meanwhile, U.S. companies have authorized a record $1.3 trillion in buybacks this year, and the execution window will gradually reopen starting October 15.

Position clearing, buyback ammunition in place, and the strong seasonality of the fourth quarter of a midterm election year—conditions for a short squeeze are taking shape.

The warehouse is cleared and ammunition is ready to be deployed.

According to research by strategist Rubner, the Z-score of CTA positions (a measure of how far positions deviate from the norm) plummeted from +2.35 at the end of August to -0.80, falling from extremely bullish to below neutral. With the release of selling pressure, the direction of fund flows has reversed.

Corporate buying power is considerable. $1.3 trillion in buybacks have been authorized, with a significant portion awaiting execution after the Q3 earnings quiet period. The buyback window will gradually open starting October 15th, and historically, corporate buyback activity typically accelerates further in November.

Seasonality also favors the bulls. Rubner data shows that since 1930, the S&P 500 has risen an average of 5.6% in the fourth quarter of midterm election years, almost double the all-time fourth-quarter average of 2.9%. October and November have historically been the strongest performing months in midterm election years.

Tech stocks refuse to fall

Despite the interest rate shock, the technology sector has shown remarkable resilience. Nasdaq 100 futures are approaching the key resistance level of 31,200 points, with the 50-day moving average rising again; the Philadelphia Semiconductor Index has broken through short-term resistance and is nearing its all-time high.

The low sensitivity of AI capital expenditures to interest rates is key. According to Goldman Sachs, bond issuance by hyperscale cloud vendors (Google, Amazon, etc.) is projected to reach $420 billion by 2027, but interest expenses will still represent a small percentage of their profits. According to Morgan Stanley, these vendors have a net leverage ratio of only 0.4x, and cash equals 132% of their debt—AI infrastructure has not encountered balance sheet bottlenecks.

There is an asymmetry here: AI spending itself does not depend on low interest rates, but if interest rates eventually fall, tech stock valuations will directly benefit—spending does not slow down under high interest rates, and valuations are flexible under low interest rates.

The resetting of expectations in the semiconductor sector has provided additional fuel for a short squeeze. According to Goldman Sachs, pricing expectations for traditional memory and HBM (high-bandwidth memory), which had previously been significantly lowered, are now beginning to recover, with more investors looking for upside potential in pricing. JPMorgan Chase points out that the profit outlook for semiconductor hardware is solid, demand for TSMC's AI accelerators is strong, and advanced process utilization exceeds 100%.

Expectations reset, fundamentals improve, and technicals breakout—the classic formula for a short squeeze.

The biggest macroeconomic variable in the fourth quarter remains crude oil. According to Goldman Sachs, while global crude oil inventories are above the minimum operating level, the buffer has thinned significantly, and a $100 oil price is not contradictory to the current supply-demand balance. The crude oil volatility index (OVX) is currently in line with the level when oil prices are below $80, suggesting that tail risk may be under-priced.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.