Lesson Learned from the Past Four Weeks: Being too consistent in shorting the US stock market.

Wall Street Reversal: Is the Short Trap Collapsing, Forcing Investors to Change Their Stance? After a tumultuous April in the market, Wall Street is experiencing a spectacular rebound, making many hasty defensive decisions appear too rushed. According to media reports, crowded trades betting on a weakening dollar, shorting the stock market, and betting on increased volatility have suddenly become fragile, behind which are Trump's easing stance on tariffs and a series of positive economic data driving a sentiment of warming. Previously, Goldman Sachs trader Brian Garrett warned, "If you are bearish, then you are the consensus..." He added, "It doesn't mean you are wrong, but you belong to the majority." According to AAII survey, investors have never been so continuously bearish - for 11 consecutive weeks, over 50% of respondents held negative views on the market. This far exceeds the historical record of 7 consecutive weeks in 1990, as well as the 4 weeks in the 2008 financial crisis and 5 weeks in 2022. This extreme pessimism has ironically become fuel for the current market rebound. Pain of Wrong Bets: Asset Classes Reversing Across the Board The pain of wrong bets is showing in various asset classes. The U.S. dollar has slightly risen in the past three weeks, defeating investors who had raised their short positions to a seven-month high. The S&P 500 index has risen on 11 out of the last 14 trading days, erasing losses caused by tariff concerns, contrary to the expectations of those investors who sold U.S. stocks at a record pace. Junk bonds are back in profit, with the iShares iBoxx USD High Yield Corporate Bond ETF rising nearly 4% in the past month; the Chicago Board Options Exchange Volatility Index (VIX) has been declining for several weeks since early April, dealing a blow to stubborn volatility buyers whose long positions reached a six-year high in March and have been maintained at these levels. The sharp turnaround in sentiment on Wall Street is due to Trump's softened stance on trade. In addition, a series of data showing resilience in the job market and moderate inflation, as well as Federal Reserve Chairman Powell's remarks on the economy remaining strong, have all contributed to prompting investors to unwind recession trades. Deutsche Bank AG data shows that stock positions plummeted to near their lowest levels since 2020 in April. As the S&P 500 index began to recover, these investors were forced to follow suit, adding fuel to the rebound. According to data from State Street's Global Market Sentiment, overall, institutional investors currently hold a neutral position on major currencies and U.S. stocks. Not as Bad as Imagined? Key Depends on Progress in Trade Negotiations State Street's senior multi-asset strategist Marija Veitmane believes that investors' continued defensive stance on risk assets is not a bad thing: "The combination of positioning adjustments and low expectations makes me slightly optimistic about stocks." Ilan Benhamou of J.P. Morgan's derivatives sales team said the future depends on the progress in trade negotiations, as investors are waiting for the U.S.-China Economic and Trade Talks that are set to begin this weekend. Priya Misra, portfolio manager at J.P. Morgan Asset Management, warned: "Uncertainty and tariffs will weigh on the economy, and once we see that in economic data, risk assets will face a reality check and be in trouble." Despite the market rebound, investors remain cautious. According to data from Bank of America and EPFR Global, in the past four weeks, funds focused on U.S. stocks have redeemed around $24.8 billion, the most in two years. In the currency market, speculators have pushed long positions in the yen to a historic high. Charlie McElligott, Managing Director of Cross-Asset Strategy at Nomura Securities International, summed up: "These trades are now too crowded. What we've seen in the past three weeks is a reduction in the likelihood of the worst-case scenario. The current situation is far from as bad as we once feared." This article is adapted from "Wall Street Insight," written by Li Xiaoyin, GMTEight editor: Zhang Jinliang.