CTAs Haven’t Leaned This Bearish Since the Rally That Followed

Editor’s note: Last week, I published an analysis on the elevated short wagers being placed against U.S. equities by quant‑driven strategies like Commodity Trading Advisors. At the time, I pointed out that if the tone between the U.S. and Iran were to shift toward an end to the current conflict, it could set the stage for a sharp rally in the U.S. stock market.

Yesterday, Iran’s state‑backed Islamic Republic News Agency reported that President Masoud Pezeshkian “seeks to end the war.” That marks a notable change in tone from Tehran and follows recent comments from the U.S. suggesting it is closer to achieving its objectives in Iran and could withdraw in the not‑too‑distant future.

Given that backdrop, I wanted to publish the previous note. The setup matters because the last time so many systematic strategies were leaning in the same direction was April 2025…

CTAs Haven’t Been This Short Since the Last 40% Surge

• Speculators are the most short the S&P 500 Index since last April.

• CTA short exposure to stocks is around the 95th percentile.

• Any good news out of the Middle East could trigger a buying frenzy.

Momentum hedge funds are all piled into the same short on U.S. equities… which means the stock market is primed for a sharp rally if an Iran peace deal materializes.

One thing you learn quickly on Wall Street is that fundamentals are only half the story. The other half is positioning—who’s leaning where, and how hard. Because when institutional money is all betting on the same outcome, the next major move is often dictated not by the news itself, but by how those positions unwind.

If everyone’s crowded into the same long idea, there’s no one left to buy. Prices stall, then slip, because the only liquidity left is on the sell side. Crowded shorts work the same way, just in reverse. When everyone’s leaning bearish, the next catalyst doesn’t have to be good. It just has to be less bad than feared. And suddenly every fund that sold the market lower is forced to buy it back.

Right now, that’s exactly the setup I’m seeing in U.S. equities. Momentum- and algorithm-driven hedge funds are all pressing the same short. They’re betting the Iran conflict keeps oil elevated, inflation sticky, and forces the Federal Reserve to raise interest rates. The last time we saw a similar setup was last April, just before equities rallied 40%...

However, If that rate‑hike thesis proves wrong, those shorts will have no choice but to cover. And that unwind would fuel a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

The investment strategy we're discussing is most commonly associated with Commodity Trading Advisors ("CTAs"). For those unfamiliar, they’re hedge funds that use algorithms to help them invest. That means everything they rely on is electronically driven, including buy-and-sell triggers. Because a computer model is making the call, CTA funds don't try to discern whether a buy or sell order is the right or wrong idea for the moment – they simply execute.

CTAs manage roughly $360 billion in assets. But, because they're hedge-fund managers, you have to consider that money to be long and short. This means they could have more exposure than what their asset size shows because the short and long sides of their books offset one another.

In addition, CTAs are using leverage to help juice their returns. So, when you consider that leverage could be about four to five times assets, that $360 billion number has an impact of roughly $1.5 trillion to $2 trillion.

The investing strategy was designed to take advantage of gradual moves upward or downward in the markets, and not so much for markets experiencing wild swings. CTA buy-and-sell indicators are based on the markets touching key trigger points. So, for instance, as the market makes new highs on the way up, CTA models tell the funds to buy more. And on the way down, as we make new lows, their models tell them to sell more.

But the recent speculation about rate cut potential and economic pessimism has pushed these funds toward extreme shorts in stocks. We can see this by looking at speculator positioning data from the Commodities Futures Trading Commission. Those numbers focus on professional investors who are making one-way bets on financial futures. In other words, they’re not hedged on the other side. As I noted earlier, speculators haven’t been this short since the lows last April…

According to brokerage firms UBS and Goldman Sachs, the short exposure in stocks is back to extreme levels. UBS noted that the short exposure in the

• S&P 500 is in the 99th percentile on a 5-year basis

• the Nasdaq Composite Index is in 97th percentile on a 5-year basis

• the Russell 2000 Index is in the 95th percentile on a 5-year basis.

In fact, it noted that the Russell short is near a record high.

So, like I said at the start, when everyone is piled into the same investment idea, we’d better pay attention. And right now, that bet is against U.S. stocks. So, if the start of discussions between the U.S. and Iran leads to a resolution in the not-to-distant future, oil flow out of the Persian Gulf will pick back up, look out! That means global energy prices will start to fall. The shift will imply any inflation rise would be temporary, causing the quants to cover their short bets.

And as that happens, it will underpin a steady S&P 500 rally.

Five Stories Moving the Market:

President Donald Trump said the U.S. would be leaving Iran in two to three weeks; Trump said his goal of eliminating the country’s nuclear threat “has been attained” and that the U.S. doesn’t need a deal with Iran to leave the country – WSJ. (Why you should care – the statement may ease concerns around a prolonged conflict but it may spark new ones about Iranian control of the Strait of Hormuz)

U.S. President Donald Trump will deliver a speech this evening to give an update about the war in Iran, according to White House Press Secretary Karoline Leavitt; Trump said the U.S. had largely accomplished its military goals and had accomplished a regime change – Bloomberg. (Why you should care – Wall Street will be interested in details around the shift in the regime now controlling Iran)

South Korea's exports beat forecasts in March to post their strongest growth in ​nearly four decades on a boom in chip demand ‌driven by artificial intelligence; exports from Asia's fourth-largest economy, a bellwether for global trade, rose 48.3% from ​a year earlier to a record high of $86.13 billion, ​according to preliminary trade date – Reuters. (Why you should care – rising agentic AI usage is likely to keep boost compute and semiconductor/memory demand moving forward)

Nike's forecast ​a surprise drop in fourth-quarter sales, as persistent ‌weakness in China and slow progress in clearing older inventory hamper turnaround efforts; Chief Financial Officer Matt Friend projected a 2% to 4% drop in current-quarter sales, compared ​with Wall Street estimates of a 1.9% rise – Reuters. (Why you should care – rising gas prices globally are likely to keep investors skeptical of the current outlook)

U.S. job openings fell and hiring slowed to the weakest since 2020 in February, pointing to cooler labor demand before the war in Iran triggered additional uncertainty; vacancies decreased to 6.88 million from an upwardly revised 7.24 million in January, according to Bureau of Labor Statistics data – Bloomberg. (Why you should care – the drop in job openings is bringing the labor market back to a pre-pandemic equilibrium)

Economic Calendar:

Earnings – CAG, CALM, NG

China – Caixin Manufacturing PMI for March

Japan – Tankan Large Manufacturers Index for Q1

Japan – au Jibun Bank Japan Manufacturing PMI (Final) for March

Australia – Commodity Prices YoY (1:30 a.m.)

Eurozone – HCOB Eurozone Manufacturing PMI (Final) for March (4 a.m.)

U.K. – S&P Global U.K. Manufacturing PMI (Final) for March (4:30 a.m.)

U.K. – Mortgage Rate for March (4:30 a.m.)

Eurozone – Unemployment Rate for February (5 a.m.)

U.K. – BoE Meeting Minutes (5:30 a.m.)

U.S. – Mortgage Refinance Index (7 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – ADP Nonfarm Employment Change for March (8:15 a.m.)

U.S. – Retail Sales for February (8:30 a.m.)

Fed’s Barr (Board Member, Voter) Speaks (9:10 a.m.)

U.S. – S&P Global U.S. Manufacturing PMI (Final) for March (9:45 a.m.)

U.S. – ISM Manufacturing PMI for March (10 a.m.)

U.S. – Business, Retail Inventories for January (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Canada – BoC Summary of Deliberations (1:30 p.m.)