Large-caps broke out to new highs last week. Concurrently, Nasdaq/NYSE short interest – just below their respective highs – remains elevated; equity bulls can take advantage of this should they succeed in engineering a squeeze. Buybacks in this regard have provided a reliable tailwind.

The S&P 500 jumped 3.4 percent last week to 6173, which constitutes a new closing record (6188 intraday). The prior high was reached on 19 February when the large cap index tagged 6147. Between that high and the April 7^th low of 4835, the S&P 500 quickly gave back 21.3 percent. As severe as these losses were, they were not very lasting. In the subsequent weeks, the index not only managed to erase the losses but also broke out to a fresh high (Chart 1).

Momentum is strong. For the first time since last July, the daily RSI (70.21) has crossed 70. With that said, this also shows the overbought condition the index finds itself in. In the event bears enjoy success immediately ahead, bulls can always step up in defense of 6120s-6140s, or 6050s below that. It is only after these levels get breached that downward momentum can begin to get traction.

Things remain at a similar juncture on the Nasdaq 100 – another large-cap index. Between the February 19^th all-time high of 22223 and the April 7^th low of 16542, the tech-heavy index quickly plunged 25.6 percent. In the weeks that followed, tech bulls pressed hard, before facing strong resistance at 22100s lasting two to three weeks. The hurdle gave way last week, as the index jumped 4.2 percent to 22534, with an intraday high of 22603 (Chart 2).

Now that the bulls can deservedly brag about a new high, the breakout will be justified should a retest at 22100s occurs soon and it holds.

Bears are hardly giving up. If anything, they are showing more aggression.

As of mid-June, which is a couple of weeks before last week’s breakouts, short interest on both the Nasdaq Composite and the NYSE Composite remained near their highs. The buildup in short interest since the latter months of last year is particularly noticeable (Chart 3).

As of end-November last year, Nasdaq short interest stood at 13.9 billion; mid-June this year, this was 16.4 billion, within striking distance of the mid-May (2025) record of 16.5 billion. On the NYSE, short interest was 15.7 billion at the end of last October; by the middle of this month, this had grown to 18.5 billion, which just about matches the mid-February 2016 high and is a little below the end-July 2008 record of 18.6 billion.

While the elevated level of short interest speaks of the conviction the bears have in their trade – rightly or wrongly – a question arises as to how long they can hang on to a losing bet should the indices continue to march higher. In this regard, last week’s breakouts may have convinced at least some bears to exit their positions.

Among other things, equity bears are also fighting an upward trend in buybacks. During the March quarter, S&P 500 companies splurged $293.5 billion in buying back their own shares – a record. On a four-quarter rolling total basis, they spent $999.2 billion, only $6.2 billion from the 2Q22 record of $1,005.4 billion (Chart 4).

These purchases are not only done to cover employee options but also to reduce the share count, with the latter helping grow earnings per share. The only thing is that these buybacks tend to be highly concentrated, as the top 20 accounted for 48.4 percent of the March-quarter spending.

In terms of performance, there has been a wide divergence between large- and small-caps.

Even as large-caps have broken out to new highs, the Russell 2000 is still a ways off its high from last November when it ticked a new all-time high of 2466, which just edged past the prior high of 2459 from November 2021. It then came under pressure – as did the large- and mid-cap indices – and bottomed at 1733 on 9 April. The recovery that followed stalled at 2100 for a few weeks before breaking out early this month. Interestingly, and encouragingly for small-cap bulls, this was followed by sustained bids at that level. They are currently fighting the 200-day (2174), with the index finishing up three percent last week to 2173; a takeout of the average can open the door to 2300. But for that to happen, large-cap momentum should continue.

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