The US equity market is on the brink of what could be a significant short squeeze, according to UBS strategist Rebecca Cheong. With various market forces converging, investors might soon witness a sharp rally fueled by short-covering and strategic inflows.

Record-High Short Interest

One of the key indicators pointing to a potential squeeze is the extreme level of short interest in the S&P 500. Currently sitting at the 97th percentile over the past five years, this suggests that a large number of traders are betting against the market. If buying pressure mounts, these short positions could be forced to cover, amplifying upward momentum.

Pension and Target Date Funds Set to Inject Billions

Adding to the bullish setup, pension funds and target date funds are positioned to buy into the quarter with an estimated $100 billion inflow. This would mark the largest such allocation since March 2020, a period that saw a significant market rebound. The sheer size of this expected capital infusion could put substantial upward pressure on equities.

Broad Buying Across Investor Types

Multiple investor groups are also stepping in to take advantage of what they see as oversold conditions. Retail investors, long/short hedge funds, and foreign buyers have all shifted into buying mode, further strengthening the case for a short squeeze. This broad-based demand could accelerate gains as shorts rush to cover their positions.

Post-FOMC Buy Flow Signals Momentum

Following the recent Federal Open Market Committee (FOMC) meeting, the market experienced an excess buy flow of approximately $70 billion. This surge in liquidity indicates that investors are positioning for potential upside, adding fuel to the short squeeze narrative.

Volatility Ahead: Sharp Rises and Falls Expected

While the conditions for a squeeze are evident, volatility remains a factor. Cheong’s intraday recovery score remains neutral, suggesting that the market may experience sharp rises and falls rather than a steady climb. Traders should be prepared for potential whipsaws as liquidity and positioning dynamics play out.

With record short interest, substantial institutional inflows, and increasing investor demand, the US equity market is primed for a significant move. While volatility remains a concern, the potential for a short squeeze is growing. If these factors align, the coming weeks could see a dramatic rally that catches many off guard.