Equity bulls are hoping for a squeeze. With index-level short interest at/near a record, longs, if successful, will be able to build on last week’s positive momentum. Seasonality is on their side, but it is equally possible that this potential tailwind has been pulled forward this time.
 

Mid-November, Nasdaq short interest hit a new high (Chart 1). At 17.96 billion, it jumped four percent period-over-period. The prior high of 17.3 billion was set at the end of September. On the NYSE, the latest reading is 19.05 billion, just a tad lower than the mid-September high of 19.11 billion.

Short interest has been trending higher for a while now, but the latest upsurge began as soon as August got underway, with NYSE short interest at 17.96 billion and Nasdaq’s at 16.59 billion at the end of July (Chart 1).

The major equity indices reached a major low in early April and have since rallied feverishly. All along, shorts have taken this as an opportunity to build position and have been wrong thus far. While this does create a squeeze opportunity for longs, the fact that shorts are staying put also speaks of the latter’s conviction level.
 

Shorts have had three good weeks through the week before, as the Nasdaq 100 suffered its third consecutive down week, but not before defending major horizontal support at 23800s (Chart 2). This laid the foundation for last week’s 4.9-percent surge to 25435.

Earlier on 29 October, the tech-heavy index tagged a new all-time high of 26182 and reversed lower, finishing with a weekly shooting star. The subsequent selling lasted for three weeks, quickly giving back 8.9 percent through the intraday low of 23854 on 21 November.

The October high is 2.9 percent away. That said, with the daily now beginning to look extended, last week’s rally probably needs to be digested. The 50-day moving average rests at 25016.
 

The same average on the S&P 500 sits at 6725, versus last week’s close of 6849. Like the Nasdaq 100, the large cap index reached a fresh intraday high of 6920 on 29 October and came under pressure before bids showed up in the week before when on the 21^st it bottomed at 6522 – just under important horizontal support at 6550s (Chart 3).

In the week the S&P 500 peaked, a gravestone doji developed on the weekly. The downward pressure since resulted in a 5.8-percent decline through the low five sessions ago. The October 29^th high is just one percent away. Concurrently, the daily is nearing overbought territory.
 

Last week’s equity rally was the result of both technicals with bulls aggressively defending support and rising hopes for a cut in the fed funds rate in next week’s meeting. The FOMC meets December 9-10.

Until just a few weeks ago, futures traders had lost hope for a cut in next week’s meeting. Then came a speech by John Williams, New York Fed president, on 21 November saying “further adjustment in the near term” for interest rates was likely. New York has a permanent seat in the FOMC (Federal Open Market Committee).

Last week began with probabilities for a cut of over 75 percent and ended at well over 80 percent – currently at 88 percent. This is then expected to be followed by at least two more cuts next year, ending 2026 at a range of 300 basis points to 325 basis points (Chart 4), with next December split right down the middle. In September last year when the Federal Reserve began an easing cycle, the rates were between 525 basis points and 550 basis points. They are currently between 375 basis points and 400 basis points.
 

The current easing optimism is reflected in how the Russell 2000 rallied last week, adding 5.5 percent to 2500 – past its prior highs. Small-caps by nature have a large exposure to the domestic economy versus their large-cap cousins which are also exposed internationally. Small businesses also tend to be leveraged; hence lower rates will help – at least in theory.

A year ago in November, the small cap index retreated after ticking 2466. Three years before that, in November 2021, it rallied to 2459 and reversed lower. This year, on 18 September, those highs were surpassed, tagging 2470 intraday. In the subsequent weeks, the Russell 2000 then reached a new high of 2542 by October 15^th before going sideways and then dropping for four weeks in a row.

On the 20^th, the Russell 2000 ticked 2303 intraday, followed by 2307 in the subsequent session; 2300 represents major horizontal support as well as breakout retest (Chart 5). This support held its ground, leading to last week’s handsome rally. The October 15^th high is 42 points away.
 

The major indices rallied with such vigor in the last five sessions that they have quickly entered – or about to – overbought territory. Nowhere is this more evident than the ratio of VIX to VXV.

VIX measures market’s expectation of 30-day volatility on the S&P 500. VXV does the same, except it goes out to three months. During a risk-on investing environment for equities, as has been the case in recent sessions, demand for VIX-derived securities is lower than VXV. The opposite is true when sentiment turns to risk-off.

Last week, the ratio finished at 0.83, down from 0.98 in the prior week when stocks were selling off (Chart 6).

VIX went sub-16 last Friday, tagging 15.78 intraday, before closing at 16.35; five sessions before that, it ticked 28.27. Volatility has subsided quite a bit. On the daily, VIX is oversold, and with VIX:VXV in the red zone, odds probably favor volatility bulls right here and now.

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