Faced with a strong rebound in the US stock market, institutions "squeezed" by retail investors are in an awkward position

Recently, the U.S. stock market has unexpectedly rebounded strongly amidst various disturbances. The S&P 500 index has surged 14% in just one month since hitting a bottom on April 8.

However, the main drivers of this rally are not the professional institutions on Wall Street, but rather fearless retail investors who are aggressively "bottom-fishing"—institutions had previously exited the market en masse due to concerns over slowing economic growth and trade frictions.

Institutions, which are now holding substantial cash but missing out on the rally, are facing a "short squeeze" pressure from the market, putting them in a rather awkward position.

Retail Investors Fearlessly Scoop Up Stocks, Institutions Left Confused

"This market is exhausting," said Ken Mahoney, CEO of Mahoney Asset Management, expressing the sentiments of many institutional investors, "There is simply no script to follow."

In the face of an uncertain economic outlook and fluctuating trade policies, professional investors have generally opted for caution. Mahoney's firm currently holds about 40% cash, but has also begun to "reluctantly" buy some relatively undervalued software stocks under the market's aggressive onslaught.

In stark contrast to the cautious steps of institutions is the fervor of retail investors.

Data from Bank of America shows that as of May 2, its individual investor clients have net bought stocks for 21 consecutive weeks, marking the longest continuous buying period since records began in 2008.

When the market saw a significant correction at the end of February, it was retail investors who were aggressively buying, while institutions exited the U.S. stock market at nearly record speeds.

Jay Rice, a 64-year-old former Wall Street broker now day trading in Arizona, embodies this retail force. He is actively investing in tech giants like Nvidia and Amazon, and is managing potential volatility by splitting large trades into smaller batches.

"When the market is this turbulent, trading is indeed more difficult, but I like this state," Rice said over the phone. "Trump's erratic trade threats may make things very difficult, but I'm still buying."

Are Institutions Forced to "Get On Board"?

The continuously rising market seems to be forcing institutions to reconsider their entry.

Colton Loder, head of management at alternative investment firm Cohalo, sharply pointed out:

"This is an unpopular rebound. But simply based on the significant reduction in positions, it is very likely to trigger buying in the coming weeks, regardless of what news comes in regarding trade or monetary policy." The technical aspect of the market also seems to be "cooperating" with this trend—significant declines in volatility have increased the pressure for institutions to cover their positions.

According to data from Tier 1 Alpha, the one-month actual volatility of the S&P 500 index dropped by 17 points on Thursday, as the historic 9.5% rebound on April 9 was excluded from the one-month calculation. This decline in volatility will lead to a rapid normalization of the risk premium model, allowing investors to increase their market exposure.

"This is not about taking on more risk," Mahoney explained, "We are accumulating cash to use when forced to chase prices like now. But we remain cautious."

Meanwhile, some trend-following funds, such as Commodity Trading Advisors (CTAs), have also begun to show signs of covering their positions.

According to observations from Goldman Sachs' trading department, CTAs, which had been continuously selling stocks due to severe volatility caused by trade frictions, have recently started to gradually increase their stock holdings. UBS Group also pointed out that although CTAs' stock exposure remains low compared to the past five years, it has shown signs of recovery.

The market's attention is also focused on key technical levels. Bram Kaplan from JP Morgan analyzed that when the S&P 500 index reaches 5800 points (about a 2.5% increase from last Friday's closing price of 5660 points), CTAs will turn into short-term buyers.

The Dilemma and Awkwardness of Institutions May Persist in the Short Term

Despite facing pressure to cover positions, the core concerns of institutional investors have not been alleviated, with the primary one being the uncertainty surrounding the Federal Reserve's monetary policy path.

Wall Street had previously anticipated that the Federal Reserve might cut interest rates next month, but Fed Chairman Jerome Powell and other policymakers have emphasized the need to wait for clearer economic data before making judgments. Atlanta Fed President Raphael Bostic explicitly stated in a blog post on Friday:

"Uncertainty in the economy remains widespread... In such an unclear outlook, I believe adjusting monetary policy is not a prudent move."

This uncertainty has led to significant divergence in the market's views on the sustainability of this rebound. Stephanie Lang, Chief Investment Officer of wealth management firm Homrich Berg, warned: "You can't always chase these kinds of rebounds." She prefers to focus on defensive companies with improving profit prospects, such as those in the healthcare and utilities sectors.

More pessimistic views consider the rebound to be at its end. Dennis Debusschere, founder of 22V Research, views this rise as a "fading rebound" and points out that tariff issues remain a significant risk, and the internal structure of the stock market is still weak, leading his firm to increase short positions in higher-risk small-cap stocks.

Technically, the S&P 500 index is still 7.9% lower than its historical high on February 19. More importantly, the index fell below the key upward trend line that began in October 2022 during this bull market in March. To reclaim this trend line, the index needs to rise above 6000 points, which Cohalo's Loder believes is undoubtedly a more challenging task "We just want to get through all of this safely," Mahoney's words may reflect the common sentiment of many institutional investors currently caught between the retail frenzy and market uncertainty. "Anything can change in an instant due to a tweet."

In such a highly sensitive and uncertain market, the awkward and difficult situation faced by institutions "squeezed" by retail investors is likely to persist in the short term.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk