The spectacular stock market rebound came with a lack of any real conviction as a look beneath the surface reveals aggressive short covering and very low liquidity despite massive trading volumes.
Traders rushed to cover short positions they accumulated amid the market downturn after President Donald Trump’s tariff reprieve on Wednesday. Meanwhile, top-of-book liquidity — how much notional you can trade at price shown on the screens — on S&P 500 futures was sitting at all-time low according to Goldman Sachs Group Inc.’s prime desk, exacerbating the market moves. The S&P 500 surged 9.5% — its best day since October 2008. Contracts on the benchmark fell 2.1% at 5 a.m. in New York.
“The rally was exacerbated by technical factors and short covering, given the deep selloff seen since April 2,” said JPMorgan Market Intelligence analysts led by Andrew Tyler, warning that visibility is still very low for investors with further escalation on the US-China trade war and additional tariffs on sectors like pharma and semis still a possibility.
Roughly 30 billion shares traded on US exchanges on Wednesday. That’s the most ever, according to data compiled by Bloomberg going back nearly 17 years. Last week, hedge funds registered short bets in US macro products such as indexes and ETFs at the highest weekly volume on record. On Wednesday, Goldman Sachs’ basket of the most-shorted stocks jumped more than 12%, beating the S&P 500’s gain.
“Asset managers finished over $13 billion net buyers after chasing the move higher and buying back a lot of recently sold pockets — AI beneficiaries, semis, megacaps and pockets of cyclicals” said Goldman Sachs trading specialist Michael Nocerino in a note to clients, adding short flows in macro products were up 42% year-to-date. “We saw aggressive covers and long buying in tech.”
Certainly, the worst case scenario of an all-out trade war is avoided for now but disruption is here to stay. Stress has not vanished from the market, far from it. Granted, volatility is abating at a fast pace, but liquidity was so poor that massive rallies like that were always on the table, especially in a market driven by trade headlines. In fact, the VIX curve remains in the stress zone for now.
“The stock market rebound is a combination of speculative investors needing to cover short positions; less fear of recession and stagflation; and optimism that tariff rates will ultimately end up lower than they are threatened today,” said Bill Adams, chief economist for Comerica Bank.
Adams added that businesses will be relieved that trade policy could be less disruptive than expected earlier this week, but still sees a huge overhang of policy uncertainty to weigh on investment in the next few months. “Also, 125% tariffs on Chinese imports will be a huge problem for many businesses if they stay in place,” he said.
Goldman Sachs economists withdrew their recession call instantly, but for corporates, things aren’t looking rosy just yet. Analysts have started to price in damage to earnings before the first-quarter reporting season kicks off Friday. A Citigroup Inc. indicator gauging profit upgrades versus downgrades plunged on both sides of the Atlantic and is near the bottom of a five-year range, although it’s not flashing recession levels.
Financial markets have been very nervous. Besides the selloff in equities, the dollar has been weakening and US Treasuries were getting disrupted, sparking speculation that the Federal Reserve could step in. All in all, US assets have been getting dumped at an aggressive rate, while global growth expectations were being repriced.
“Some version of a Trump market put is back,” said Deutsche Bank AG strategist George Saravelos, adding the administration is finally signaling responsiveness to the very extreme market conditions. “Even if the tariffs are permanently suspended, damage has been done to the economy via a permanent sense of unpredictability in policy.”
--With assistance from Jan-Patrick Barnert.
©2025 Bloomberg L.P.
