Short Squeeze
The stock market soared over the past two weeks on potential ending of the war—this is more likely short squeezing, and this week may see a reversal
The stock market soared last week. The low was just prior to April, and on SPY ETF, it was 629. The high printed was 712, a move of 83 points, which equates to a 13.2% climb—impressive, to say the least. When you look at volume, however, that was low. It would be reasonable to assume that on such a large, and short-term move, there would be substantial volume. Instead, there was the opposite. This tells me that there were not many participants moving, but instead, short sellers got out… fast!
Two things, then:
Are valuations reasonable considering economic activity?
What will this week give us considering the tit-for-tat we’re seeing again with the Strait closure as well as vessel seizures?
There’s a chart below that summarizes what I believe is telling regarding the economy, and how the market may react (University of Michigan Consumer Sentiment versus Personal Expenditures).
If there were no real buyers, as volume would suggest, and economic activity is more likely than not going to be suppressed, valuations may adjust again in the next few weeks to months. At the same time, with the new tit-for-tat events happening between Iran and the United States, the market may check itself as early as immediately.
Consumers are in the most dismal mood since Consumer Sentiment numbers have been tracked. The strong correlation between sentiment and expenditures tells us that revenues for companies are going to miss, and because of that, the stock market may get checked quickly—the economy is far more than just AI.
Because of all of this, I am going in and taking short positions against this, albeit, I have been trying to get into short positions and missing for a few days now.
Oil
At the open, in Asia trading, oil popped right back up to where it was just prior to the relief selling. Oil is still low comparatively when you consider the recent highs. I do not expect that the price will drift too far higher, and taking short positions over a very long period will eventually play out.
I do not expect any additional tit-for-tat, and all we are likely seeing at the moment is posturing for better negotiation terms. Oil prices, then, should begin to come back down rapidly.
Confidence
This, to me, is the real story: The University of Michigan Consumer sentiment index has fallen to a new, all-time low. Consumers now feel more dismal about their futures than they did at the onset of COVID. On the one hand, this is in part because of the war with Iran, which that is ending at the negotiations tables. The damage is the current price of gasoline. Even that is beginning to fall with prices falling about 50% from the peak gain (Here in Santa Fe, there was a $1.50 spike in price at the onset, but now gasoline is only about $0.75 higher than the start of the war).
The story, however, is that consumers are ultimately the drivers of the economy. There is a highly strong correlation between expenditures and confidence indicators. Therefore, with such low confidence numbers, expenditures are highly likely to fall as well, and that will translate into falling revenues for companies. With earnings season just around the corner, it is very possible that companies tell a story of slowing revenue growth. That would translate into stock prices needing to adjust lower.
AI Prediction
I do not believe the moves we just witnessed were rational, but instead, short covering. I also fully anticipate that the future will be slightly dismal based upon revenue and earnings projections. This is the basis for my current short position.
The Query
The stock market rallied significantly last week. Looking at the volume, however, there was lower volume than normal. What I believe actually occurred is short covering and no real money moving into the markets. Is this likley accurate? The next thing to note is the dismal consumer confidence numbers that were released by the University of Michigan. With such a strong correlation between consumer confidence numbers and personal expenditures, this does nto bode well for revenue projections from companies with earnings season aroud the corner. What do you see occurring?
The Response
Short answer
Yes — that is likely at least mostly accurate.
The combination of:
a sharp rally,
lighter-than-normal volume,
and commentary pointing to a large short squeeze
fits much better with short covering / mechanical buying than with broad, high-conviction institutional accumulation.
Recent market coverage explicitly described the move as a short-covering rally on shaky footing and noted that hedge funds covered shorts at the fastest pace since 2020, while systematic flows also helped push prices higher (Morningstar/MarketWatch, Swissinfo). CNBC also showed how strong the rally was last week, which is exactly the kind of backdrop where squeezes can become self-reinforcing (CNBC).
So I would frame it as:
The rally was real in price, but probably not fully real in sponsorship.
Why your read makes sense
Low-volume rallies can still continue for a while, but they are usually more fragile because they suggest:
fewer large discretionary buyers,
more forced buying from shorts,
and more momentum/systematic chasing than genuine conviction.
That matters because once the squeeze exhausts, the market needs a new buyer:
long-only institutions,
improving earnings revisions,
better breadth,
or stronger macro data.
If those do not show up, rallies like this often stall, churn, or retrace.
On consumer confidence: this is the bigger issue
The latest University of Michigan consumer sentiment reading was indeed very weak — 47.6 in the preliminary April reading, described as a record low in the current environment, with inflation expectations also jumping (University of Michigan, Fortune).
That absolutely matters heading into earnings.
Your logic is right:
weak confidence tends to lead to
more cautious discretionary behavior,
weaker demand visibility,
and softer management commentary.
But I would add one nuance
Confidence and spending are correlated, but not perfectly or immediately.
The latest BEA data showed real PCE up only 0.1% month over month in February, so spending was still positive, but not strong (BEA Personal Income and Outlays). That suggests the consumer is not collapsing, but also not robust enough to comfortably absorb another shock.
So the setup is less:
“consumer spending is already breaking,”
and more:
“consumer sentiment is warning that forward spending and guidance may soften next.”
That is a very important distinction for earnings season.
What I think happens next
My base case is:
1. The broad market gets harder to push higher
The easy part of the move was the squeeze.
From here, the market needs:
earnings beats,
solid guidance,
improving breadth,
and evidence that the consumer is holding up.
Without that, I would expect:
more chop,
failed breakouts,
and more violent post-earnings reactions.
2. Earnings season becomes much more about guidance than the quarter
The reported quarter may still look okay in many cases.
The real issue is whether management teams say things like:
“the consumer remains cautious,”
“lower-income cohorts are under pressure,”
“traffic softened late in the quarter,”
“promotions increased,”
“visibility is limited.”
That is where the risk is.
FactSet says earnings season has started relatively well versus expectations, but that does not remove the risk that forward commentary deteriorates as more companies report (FactSet).
3. The index may hold up better than the average stock
This is the kind of environment where:
mega-cap tech,
select financials,
and a few high-quality secular growers
can keep the headline index looking okay, even while:
consumer discretionary,
transports,
lower-end retail,
restaurants,
and cyclicals
start to struggle.
So I would watch for a market where the S&P looks resilient, but internals get weaker.
My highest-probability market path
If I had to summarize what I see occurring:
Near term: the rally loses some momentum as the short-covering impulse fades.
During earnings: mixed results, but increasingly cautious consumer-related guidance.
Under the surface: more weakness in consumer-sensitive and cyclical names than the index suggests.
At the index level: probably not an immediate collapse, but a more selective and fragile tape.
So I do not think the most likely outcome is:
straight-up continuation on the same momentum.
I think the more likely outcome is:
narrower leadership, higher volatility, and greater sensitivity to guidance misses.
What would prove your thesis right?
Your thesis gets stronger if we see:
weak upside volume continue,
narrow breadth,
equal-weight lag,
soft forward commentary from consumer-facing companies,
estimate cuts to revenue more than EPS,
and more “beat-and-lower” reactions.
What would invalidate it?
I’d get less bearish on your thesis if:
breadth broadens,
volume improves on up days,
management says demand held up better than feared,
card-spend / retail data remain solid,
and sentiment proves to have been a temporary shock rather than a spending signal.
Bottom line
Yes — I think your interpretation is quite plausible:
last week’s rally looks more like a short-covering / mechanical move than a true “real money” risk-on stampede.
And yes, the Michigan consumer confidence collapse is a real warning sign for:
discretionary demand,
revenue guidance,
and the durability of the rally.
So my base view is:
the market rallied on relief and positioning, but earnings season is likely to expose whether the consumer can actually support current expectations.
My Take
I am finally back into the market taking a synthetic short position on SPY ETF with a short vertical call spread and long vertical put spreads. Each leg expires 2 months rom now, and I am sitting on a credit. If the market sits here for the next two months, I earn a small amount because of the credit. If the market moves lower, I can increase my profits with the long vertical puts, while the short calls erode in value. The market would have to rally above the 725 level for me to lose out, and that is something that I have a tough time seeing happen.