From the intraday low 12 sessions ago, the S&P 500 is up five percent, with back-to-back gap-up sessions in the last two. This is taking place at a time when Nasdaq and NYSE short interest sits nears record highs. In the latter months of 2025, markets seem looking for a reason to rally, although small-caps are not fully participating.
 

It just feels like a short squeeze – albeit subtle – is taking place in equities.

Mid-September, NYSE short interest set a record at 19.1 billion. In the subsequent two periods, it came under slight pressure to end mid-October at 18.7 billion. Over on the Nasdaq, a fresh high of 17.3 billion was recorded at the end of September, with mid-October finishing at 16.9 billion (Chart 1).

From stretched valuations to geo-political and US tariff uncertainty to talks of AI (artificial intelligence) bubble, there is no shortage of reasons to want to go short at this juncture. Shorts have been building positions for a while now, but they have gotten aggressive in the last 11-12 months. At the end of last October, NYSE short interest was 15.7 billion, while Nasdaq’s was 13.9 billion at the end of November.
 

From multiples’ standpoint, the S&P 500 has gotten more expensive over the last multiple sessions. On 10 October, the large cap index bottomed intraday at 6551, which was just above the rising 50-day moving average at the time (now 6604).

The index has been rallying relentlessly since 7 April when it bottomed at 4835. Back then, as of the 8^th, these companies this year were expected to earn $265.27, which as of Monday last week was revised lower to $257.86. In the meantime, the S&P 500 has rallied to yesterday’s close of 6875 – a fresh high.

Since that April low, the index has taken care of one after another technical hurdle (Chart 2). Most recently, the October 10^th low was a defense of horizontal support at 6550s, which again attracted bids in the following week. This led the foundation of yet another breakout at 6750s last Friday, with back-to-back gap-ups in the last two sessions.

As things stand, even if the S&P 500 comes under pressure and loses 300 points near-term, things will be just fine if bulls step up in defense of 6550s.
 

At this point, markets simply are looking for a reason to go up. Equity bulls are rallying the major US equity indices not only on good news but are also successfully massaging the not-so-good to suit their own bias. Last Friday, September’s consumer price index was reported, and it was perceived as out-and-out good, as the S&P 500 ended the week on a high note, followed by Monday’s strength.

In the 12 months to September, headline and core CPI was up 3.01 percent and 3.02 percent respectively, versus the Federal Reserve’s goal of two percent. Inflation has dropped meaningfully from the four-decade highs of 2022 (9.1 percent headline in June and 6.6 percent core in September) but has proven stubborn in the last several months. In April, the core bottomed at 2.78 percent and the headline at 2.31 percent (Chart 3).

Concurrently, the Fed has now adopted an easing bias, with the fed funds rate at a range of 525 basis points to 550 basis points until September last year to the current range of 400 basis points to 425 basis points. The FOMC begins a two-day meeting today, and another 25-basis-point cut is priced in, followed by another in December. Fed funds futures traders have their money on two more cuts in the first half next year – in March and June – ending 2026 between 300 basis points and 325 basis points.
 

Ironically, small-caps continue to hesitate to thrive on prospects of lower rates. Small-cap businesses inherently have a larger exposure to the domestic economy than their large-cap cousins which also have international exposure. Lower rates – at least on theory – should help the small businesses, which by nature also tend to be leveraged.

The Russell 2000 sits near its highs, but a threat of triple top remains. The small can index has had a phenomenal time since 9 April when it bottomed at 1733. Last November, it retreated after ticking 2466, which edged past the prior high of 2459 from November 2021. On 18 September (this year), those highs were surpassed, tagging 2470 intraday. In the subsequent weeks, more strength followed, with a tag of 2542 two weeks ago, but in the week this was achieved the index reversed hard to close at 2452. Yesterday, last month’s high was tested with a session high of 2540, which ended up attracting some selling, with a close of 2520 (Chart 4).

The bottom line is that small-cap bulls need to do a lot more to convincingly do away with the threat of a triple top.
 

Tech, on the other hand, continues to be propelled higher by a narrow few – the so-called Magnificent 7, five of which with a combined market cap of $15.5 trillion report their September quarter this week – Microsoft (MSFT), Google owner Alphabet (GOOG) and Facebook owner Meta (META) on Wednesday, Apple (AAPL) and Amazon (AMZN) on Thursday. Nvidia (NVDA) – the highest market cap company in history at $4.7 trillion – does not report its October quarter until November 19. Tesla (TSLA) reported its September quarter last week.

Ahead of this week’s earnings bonanza until last week’s close, the Nasdaq 100 was up 53.3 percent from the April 7^th low of 16542. Yesterday, it added another 1.8 percent to 25822. Last Friday, the tech-heavy index bolted out of 25100s with a gap-up. This was followed by another gap-up on Monday. Depending on how this week’s tech earnings shake out and how the index reacts to it, nearest support lies at 25100s, followed by another at 23700s (Chart 5).
 

The oddity in all this is that in the options market the overbought condition the 10-day moving average of the CBOE equity-only put-to-call ratio was in is being unwound without putting much pressure on the major indices.

The ratio dipped as low as 0.502 on the 2^nd this month (Chart 6). This was a very low reading and reflected the amount of investor optimism being built in options. It then began rising, even as the S&P 500 began its sideways journey bound by 6750s, which it broke out of last Friday. The ratio in the meantime reached 0.56 last Thursday, before ending Monday at 0.534 – still very low and in need of unwinding. If past is prelude, as this happens, equities tend to come under pressure as the built-in optimism gets unwound in options.

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