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JP Morgan warns that this could be at risk due to declining short interest in key ETFs such as SPY and QQQ.
Analysts at the bank point out that this decline was “providing steady support for US stocks over the past year, helping to suppress volatility.”
In simpler terms, fewer investors are betting against the market through short positions. JP Morgan fears this trend has gone too far, creating an “implied short-volume trade” that could backfire.
“Given how low their short interest is at the moment,” the report states, “this implied short trade appears somewhat stretched by historical standards.”
The concern is that if negative news reaches the market, it could lead to a reversal of the trend. Investors who were shorting the market will then scramble to buy back, which could lead to a sharp decline in stock prices.
