JPMorgan warns that the index could be vulnerable due to a decline in short interest in large ETFs such as SPY and QQQ.
The bank’s analysts noted that the decline “has provided sustained support to the U.S. stock market over the past year, helping to quell volatility.”
Simply put, fewer investors are betting against the market through short positions. JPMorgan is concerned that the trend has gone too far, creating a “hidden volatility short trade” that could backfire.
“Given how low their short interest rate is at the moment,” the report says, “this implicit short trade in volatility appears to be quite extensive by historical standards.”
The concern is that if negative news hits the market, it could trigger a reversal in this trend. Investors who were short the market will then try to buy back shares, potentially causing stock prices to plummet.