A Market Rebound Amidst Volatility

US equities showed resilience on Wednesday, as a strong rebound in Momentum (+4.4%) helped slow the broader market selloff. While early trading faced downward pressure from persistent tariff-related concerns and systematic risk control supply, late-session developments provided some relief, allowing equities to finish off their intraday lows.

The initial weakness in the market was driven largely by renewed tariff commentary, which put pressure on sectors classified as Tariff Losers (-1.9%). Additionally, Defensives (-1.8%) saw a downturn after outperforming on Tuesday, contributing to the overall market decline. However, the market found stability as investors reassessed their positioning.

Balanced Flows and Shifting Investor Sentiment

The UBS high-touch trading desk reported balanced flows throughout the session. Long-only investors, who had been steady sellers in previous days, turned more neutral, suggesting some stabilization in sentiment. Hedge funds also exhibited balanced activity, but single-stock short positions saw an uptick, indicating a shift toward more offensive positioning. Despite this, excess flow analysis from UBS strategist Rebecca Cheong showed a significant $76 billion in sell-side activity. Encouragingly, retail investors became steadier buyers in the latter part of the session, contributing to the market’s rebound.

Volatility Trends and Derivative Market Insights

In the options market, S&P volatility levels softened, particularly in the front end, as choppy price action made it difficult for volatility to sustain its elevated levels. This marked the second consecutive day of constructive headline flows, with notable bullish activity in SPX call spreads extending to year-end. Additionally, traders unwound VIX hedges, including 105,000 March call spreads (part of a broader 320,000 total open interest), while also initiating downside VIX buying. Meanwhile, IWM short-dated upside calls saw increased interest, particularly in Tuesday and Friday trading sessions.

While the market remains volatile, the late-session rebound and shifting investor sentiment suggest potential for near-term stabilization. With options activity signaling some optimism and retail investors stepping in as buyers, market participants will be closely watching upcoming economic data and policy developments to gauge the next move in US equities.