With index-level short interest near record highs, equity bulls are hoping for a squeeze. But with so much riding on Magnificent 7, which have already rallied big into earnings, the possibility of a sell-the-news phenomenon cannot be rejected outright.
 

At the end of June, NYSE and Nasdaq short interest posted new highs – 18.7 billion and 16.9 billion respectively. Mid-July, short interest fell 2.1 percent and 1.7 percent period-over-period, in that order. Of course, it remains very elevated. Equity bulls are hoping for a squeeze. Should one develop, bears will be in pain.

Sector-wise, semiconductors just witnessed a massive squeeze. SMH (VanEck Vectors Semiconductor ETF) surged 72.6 percent from the April 7^th low of $170.11 to last Monday’s intraday high of $293.53, which was a record. Bears probably lent a helping hand in this.

At the end of March – and again mid-May – SMH short interest was just north of 13 million (Chart 1). Mid-July, it tumbled 20.8 percent p/p to 7.3 million, which was the lowest since end-May 2022. If a similar squeeze – or even remotely close to it – evolves on the major indices above, bears will be a hurting bunch.
 

Bulls are doing their bit. Margin lending has picked up speed. In April, FINRA margin debt stood at $850.6 billion, having reached a record $937.3 billion in January, past the prior high of $935.9 billion from October 2021.

Then in June, margin debt shot up 9.5 percent month-over-month to cross $1 trillion – $1.01 trillion, to be exact. In the last two months, margin debt went up 18.5 percent. This is also a time the major equity indices have rallied massively, with the large-cap indices at new highs.

A small divergence can be seen in Chart 2, as margin debt has risen to a new high, yet the Russell 2000, which has a very high correlation with the metric, is nowhere near its highs from last November.
 

Small-caps, which have a very high exposure to the domestic economy versus their large-cap peers which also have overseas exposure, are often considered a risk-on asset. As is margin lending; when investor mood is risk-on, the willingness to take on leverage goes up, as has been the case in recent months.

The current divergence between margin lending and small-caps is telling. The Russell 2000 enjoyed a magnificent rally from the April 7^th low of 1733 to last Wednesday’s intraday high of 2283, but overcoming 2300 has proven difficult. Bulls have been trying to reclaim the level for several sessions, but unsuccessfully.

Earlier last November, the small cap index tagged a new intraday high of 2466, just edging past the prior high of 2459 from November 2021 (Chart 3). Last week, it closed at 2261, barely hanging on to a rising trendline from April’s low.
 

Large-caps, in the meantime, are acting different. The S&P 500 last week broke out to a fresh intraday high of 6396, with a close of 6389 (Chart 4).  From the April 7^th low of 4835, the S&P 500 is up 32.1 percent, more than gaining back the 21.3-percent decline between 19 February and 7 April.

Along the way, it has had several breakouts, with the most recent taking place at 6300. In late June, it broke past 6100s, where bulls hope a retest in due course ignites buying interest. For that to happen, any decline should be orderly.

As things stand, the daily Bollinger bands are tightening. When this happens, a sharp move – in either direction – follows. Because the S&P 500 has rallied for nearly four months now, odds favor if there is a sharp move, it will be lower.
 

The same holds true for the Nasdaq 100 as well. The tech-heavy index is up 40.7 percent from its April 7^th low of 16542. Last week, it closed at 23272, with a fresh intraday high of 23326 posted on Friday (Chart 5).

Right here and now, the upward momentum is intact, with the daily RSI just under 72. But the Nasdaq 100 has also remained overbought for a while now. In the event of downward pressure, nearest support lies at 22900s, followed by 22100s, which the index broke out of five weeks ago.
 

An excuse to sell can potentially come from earnings. Last week, Google parent Alphabet (GOOG) and Tesla (TSLA) reported their June quarter. The stocks had rallied nicely into this. Post-earnings, GOOG was up but gave back most of the gains, and TSLA gapped down. These are two of the so-called Magnificent 7 stocks. Four more are on tap this week, with Microsoft (MSFT) and Facebook parent Meta (META) reporting Wednesday, and Apple (AAPL) and Amazon (AMZN) due out Thursday. Nvidia (NVDA) does not report until August 27^th as it is on a July quarter.

These seven stocks wield an excessive influence on the index, as well as on the S&P 500. In QQQ (Invesco QQQ Trust), the seven account for nearly 43 percent, while in SPY (SPDR S&P 500 ETF) this is north of 32 percent (Chart 6). Conceivably, even if earnings – and most importantly the outlook – from the ones reporting this week exceed expectations, it is always possible it is all priced in and a sell-the-news phenomenon develops.

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