Castle Securities Stock and Equity Derivatives Strategy Head: Short Squeeze Will Support S&P 500 Index Rebound

Citadel Securities’ Stock and Derivatives Strategy Head Scott Rubner said that record-sized short bets are at risk of being liquidated, creating conditions for a rebound in the U.S. stock market. Hedge funds and systematic strategies are expected to drive the next wave of buying.

Rubner said in an interview that if geopolitical tensions ease, the market has very favorable conditions for a rebound, considering that “we are seeing one of the largest short positions in U.S. stocks ever.” He noted that this structure makes the market highly sensitive to the next positive catalyst but also warned that it’s not a “buy stocks today” signal.

This market setup reflects how some professional investors are responding to recent volatility. Many hedge funds, especially multi-strategy funds that tactically use short tools to reduce net exposure, have not sold core holdings but instead have heavily shorted ETFs to hedge against further declines.

ETF trading activity has surged to historic highs, with a significant increase in its share of total volume. Rubner said this has created a large pool of short positions based on preset trading rules. According to Citadel Securities, ETF trading accounted for about 35% of recent weeks’ volume, peaking near 47%, as investors quickly adjust their exposure via ETFs.

If tensions in the Middle East ease and market volatility declines, these short positions could be quickly liquidated. He said, “There are a lot of short positions built on rules rather than client intent, which could reverse rapidly.”

Monday’s U.S. stock market already demonstrated this potential for rapid reversal: stocks rose after President Trump announced a five-day pause on military strikes against Iran’s energy infrastructure. Since the U.S. launched its offensive in late February, the market has been under pressure.

If the situation further stabilizes, systematic strategies’ capital could provide incremental buying, as these strategies have been heavily de-leveraging.

CTAs, risk parity funds, and volatility-targeting strategies tend to follow market trends rather than fundamentals. After the S&P 500 broke below about 6,622 points (its 200-day moving average), these strategies reduced their exposure, amplifying the decline. Citadel Securities’ volatility control models have cut stock exposure by over 20%.

Rubner said, “Given the large-scale selling these strategies have done previously, the market’s bias has now shifted back to the buy side.”

He pointed out that the conditions for a rebound are in place but have not yet fully triggered. If global tensions ease, the potential upside could be “very rapid.”

Rubner’s bearish outlook on U.S. stocks in February proved correct, with the S&P 500 dropping over 2% that month. But as market sentiment became more pessimistic, seasonal factors improved, and retail investor flows remained steady, he withdrew his bearish view in early March.

Derivatives Market Has Experienced Key Changes

After over $5 trillion in options contracts expired last week, the market maker’s position structure has shifted. Previously, market makers amplified market volatility, but now this mechanism has reversed.

Rubner said, “The market has shifted to a multi-gamma state, which is a restoring force rather than a factor that worsens declines.” This has eliminated much of the mechanical selling pressure that previously dominated S&P 500 trading, allowing the index to respond more freely to new capital flows.

Retail Investors Remain Resilient

During periods of intense market volatility, retail investors have shown strong resilience. Rubner said they have largely avoided panic selling and instead stick to a strategy of buying on dips and selling on rallies. Since the Iran conflict erupted, retail investors have only been net sellers for three days. “Retail investors are not panicking; they buy when prices fall and sell when prices rise.”

Retail investor flows are also beginning to shift tactically. Rubner wrote in his Monday report, “We saw this again this morning. Before Trump’s announcement, retail flows on the platform were relatively steady, but after the news, as the market rose, they started to lock in gains; last week, they were overall strong net buyers.”

Meanwhile, sentiment indicators, often used as contrarian signals, have worsened. Citadel Securities’ measure of retail risk appetite has fallen sharply from February highs, indicating more cautious individual investors. Institutional investor sentiment is also more pessimistic. Rubner said, “Discussions with clients across regions generally reflect a very bearish mood. Macro sentiment remains extremely bearish, which is often a contrarian signal for me to take the opposite position.”

Funds May Reallocate Back to U.S. Stocks

Rubner said capital could rotate back into U.S. equities, especially large tech stocks, reversing the trend that shifted toward international and cyclical stocks earlier in 2026. If funds flow back, it will likely focus on “safe-haven” high-quality companies.

He said, “Investors are returning to the U.S. stock market and to the highest-quality companies.”

Seasonality is also a key factor. Since 1928, April has been the second-best month for the S&P 500. Even if global tensions persist, Rubner believes most risks are already priced in. “I’m not sure how much further the market can fall because the space for clients to add to short positions is limited. Current short positions are at historic highs, but upside potential has not been fully priced in.”

Risk Warning and Disclaimer

The market carries risks; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual user’s investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their specific circumstances. Invest accordingly at your own risk.