The US stock market is staging a "calm bull"! The S&P 500 has experienced a decline of no more than 2% for 107 consecutive days, marking the longest period of stability in over a year

According to the Zhitong Finance APP, U.S. stock investors are currently exhibiting remarkable calm. Trade tensions, slowing economic growth, and even high valuations have not hindered the S&P 500 index from continuously reaching new historical highs.

As the core benchmark index of U.S. stocks, the S&P 500 index has not seen a single-day decline of at least 2% for 107 consecutive trading days, marking the longest period of stability since July 2024. Compiled data shows that even though the tariff turmoil in early April caused a brief fluctuation, the index has since climbed, with a cumulative increase of 34% and a market capitalization growth of nearly $16 trillion.

Despite risks being omnipresent, from stubborn inflation to the gradually slowing expansion of the U.S. job market, nothing seems to shake the market. On Tuesday, Federal Reserve Chairman Jerome Powell reiterated that policymakers may face daunting challenges when weighing further interest rate cuts, which temporarily pressured the S&P 500 index. However, traders have recently appeared unfazed, as the index has not experienced a consecutive decline of at least 1% for over five months.

"Investors are currently very willing to ignore any bad news—but complacency is a risk for the stock market's rise," said Julie Biel, portfolio manager at Kayne Anderson Rudnick. "If inflation rises beyond traders' expectations in the coming months, it may force the Federal Reserve to cut rates less than investors hope."

Even the highest unemployment rate since 2021 has not shaken the market; as of Monday, the S&P 500 index has set 28 new historical highs this year.

Despite Powell's cautious wording, traders remain optimistic about interest rate cuts—markets have largely priced in expectations of a cumulative 50 basis point cut by 2025. The resilience of the stock market also stems from confidence in the economic fundamentals: investors believe the U.S. economy has weathered the most severe impacts of Trump's tariff policies, and improvements in corporate earnings along with the AI boom will further boost economic growth.

The risk lies in policymakers potentially retracting their forecasts for further interest rate cuts, which could greatly disappoint Wall Street.

So far, there are no signs of weakening momentum in the stock market's rise. Data from EPFR Global and Bank of America shows that in the week ending September 17, fund managers poured nearly $58 billion into U.S. stocks, marking the largest single-week inflow of the year.

Short Covering: An Important Driver Supporting the Market

The S&P 500 index has even broken the "curse" of September being the worst month for stock market returns. Although the driving factors behind stock market trends are often complex and difficult to discern, one key driver behind this stable market is becoming increasingly clear: short covering.

According to data dating back to 2008, a basket of the most shorted stocks compiled by Goldman Sachs has surged 14% this month to date, far exceeding the S&P 500 index's 3% increase during the same period, and is on track to achieve the best September performance for this basket index since 2010. This phenomenon suggests that some investors are choosing to cover their short positions ahead of the Federal Reserve's interest rate decision announcement Currently, the 14-day Relative Strength Index (RSI) of this basket index has risen to the most severe overbought level since the peak of the "meme stock craze" in early 2021. At that time, retail traders had driven several stocks to experience drastic fluctuations without any apparent logical support. Generally speaking, such overbought levels indicate that the risk of a short-term price correction is approaching.

In addition, under the optimistic expectations of strong consumer spending and robust corporate earnings, the market has also shown other signs of "investor complacency." Wall Street's main fear gauge—the Cboe Volatility Index (VIX)—is currently well below the 10-year average and has remained below the critical 20-point threshold (20 points is typically seen as the level at which traders begin to be wary of risks).

As the stock market continues to set new records, hedge funds and large speculative institutions are further betting that "the low volatility trend will continue." Data from the U.S. Commodity Futures Trading Commission shows that as of the week ending September 16, net short positions in the VIX index reached 102,000 contracts, close to the highest level since August 2022.

Chris Murphy, co-head of derivatives strategy at Susquehanna, believes that the massive shorting of the VIX index and the significant rise in heavily shorted stocks suggest that the current rally in the stock market may soon stall, even if only temporarily.

"Although various signs indicate that the market needs to take a breather soon, this is likely to be temporary," Murphy said, "because the S&P 500 still has plenty of room to continue oscillating upward, after all, market euphoria has not yet reached extreme levels, and skepticism remains widespread. This is undoubtedly a positive signal for the bulls in the stock market."