UBS: The current "short squeeze" in the US stock market has ended, it's time to sell
UBS warns that the current short squeeze in the U.S. stock market is nearing its end: its tracked short squeeze index has recently surged by 43%, but indicators measuring real risk appetite continue to weaken. Historical patterns show that, on average, the S&P 500 and Nasdaq indices decline by 11% and 13% respectively within three months following a similar strong short squeeze. At the same time, the current liquidity situation is further deteriorating, with retail investors, foreign capital, and pension funds expected to continue selling, and corporate buybacks will also enter a quiet period
As the short squeeze in the U.S. stock market drives the index to rise sharply, UBS's proprietary trading department has issued a warning: this round of gains has gone too far, and investors should consider reducing their positions. The bank's proprietary indicators show that despite the market appearing strong on the surface, the actual risk appetite is continuously declining.
According to the news from the trading desk, Rebecca Cheong, head of institutional trading at UBS, pointed out in a recent report that despite the recent severe short squeeze rebound (the UBXXSHRT short squeeze index rose by 43%), the bank's proprietary "4M Intraday Recovery Score" (an indicator measuring autonomous risk appetite) has continued to decline, turning neutral on June 18. Based on historical data analysis, in similar short squeeze scenarios and risk appetite contexts, the S&P 500 index has averaged an 11% decline within three months, while the Nasdaq index has dropped by 13%.
At the same time, the market is also facing multiple funding pressures, including imminent pension rebalancing sell-offs and a sharp decline in corporate buybacks. UBS advises investors to consider reducing their holdings and exiting the market.
Historical Data Reveals Patterns After Short Squeeze Rebounds
According to the UBS report, its key indicator measuring investors' autonomous risk appetite—the "4M Intraday Recovery Score"—issued a brief bullish false signal on April 11 and has been declining ever since, entering the neutral zone (below 15%) on June 1, and further dropping to 9 on June 19.
According to UBS statistics, among the four short squeeze rebounds exceeding 30% since 2022, three occurred while the "4M Intraday Recovery Score" remained below 25%, and the stock market subsequently experienced corrections.
In these three cases, the short squeeze index UBXXSHRT averaged a decline of 29%, the S&P 500 index averaged an 11% decline, and the Nasdaq QQQ averaged a 13% decline within three months.
Multiple Capital Flows Turn to Selling
Current funding signals further reinforce UBS's bearish judgment:
1. Active funds continue to flow out: The retail investor fund flow monitored by UBS (RMM Flow) shows that there were net sell-offs on four out of the past five trading days; foreign capital through U.S.-listed ETFs also showed net selling on four out of five days.
2. Institutional selling pressure is approaching: UBS expects that the rebalancing operations of pension and target-date funds at the end of the quarter will trigger up to $56 billion in global stock sell-offs (while buying bonds), with $31 billion targeting international stocks and $25 billion targeting U.S. stocks
3. The support from stock buybacks weakens: The key supporting force of corporate stock buybacks will also significantly weaken. UBS expects the scale of corporate buybacks to drop to $30 billion next week, and then further decline to $15-20 billion per week before early August, as companies enter their buyback quiet period.
Risks of Large-Cap Tech Stocks Highlighted
UBS specifically warns of the under-hedging risk faced by large-cap tech stocks.
The report points out that the current short position ratio of Nasdaq 100 index constituents is at a one-year low (13th percentile), the put/call option ratio for QQQ is at a five-year low (8th percentile), and the volatility risk exposure (VIX Vega Exposure) is also at a five-year low (20th percentile).
Based on the above analysis, Cheong summarized: “This is a dangerous configuration, especially in a short squeeze scenario that has gone too far and led to under-hedging of large-cap tech stocks. From a capital flow perspective, aside from the selling pressure triggered by geopolitical news, retail investors, overseas investors, and institutional accounts such as pension funds are expected to sell, and there is a lack of support from corporate buybacks.” Therefore, UBS recommends that investors adopt a defensive strategy.
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