[Market Analysis] "Why Isn't the Stock Price Falling?" —— Stocks Standing Firm Amid Safe-Haven Bombs, What's the Next Trigger?

The Iran conflict continues, the blockage of the Strait of Hormuz has caused oil prices to soar, bonds, exchange rates, and credit markets to fluctuate, while the stock market remains surprisingly stable. The S&P 500 index stays within 4% of its all-time high, and the VIX (fear index) is only one-third of the average volatility of other asset classes. How is this possible?

The belief that “the government will eventually rescue the market” remains the main support.

Michael Hanett from US Bank diagnoses that “market positioning is not leaning toward bearish, but rather closer to bullish.” The consensus is that the war is expected to be short-lived, and that policymakers will ultimately step in to support the market. Barclays also explains that “investors still believe in the ‘Trump put’,” which is why current stock declines are smaller than during past oil crises.

But beneath the surface, a different picture emerges.

Goldman Sachs’ commodities brokerage data reveals a starkly different reality. ETF short-selling surged 10% in a single day, marking the second-largest single-day increase since 2016. ETF trading volume has exceeded 35% for ten consecutive trading days, reaching 42% last Thursday—levels comparable to the extreme panic when the VIX hit 80.

Asset managers are net selling S&P 500 futures at nearly record levels. Trend-following strategies have mechanically sold off $75 billion worth of global stocks over the past month, and are expected to soon turn into net short positions.

Rich Pribrotski, head of Goldman Sachs’ Delta One division, explains this phenomenon: “Many funds are currently adopting a ‘long individual stocks + short index’ structure. This results in the index being pushed upward, while the best-performing stocks remain stagnant—a paradox.”

The irony of hedges losing money—‘reverse tightening’

Charlie McEligot from Nomura calls this the “reverse tightening” phenomenon. Put options purchased to hedge against Iran risk, inflation shocks, slowing employment, and private credit concerns are eroding in value because stock prices haven’t plummeted but instead are consolidating sideways, undermining holders’ gains and risk budgets.

Eventually, “failed hedges” are liquidated on a large scale, leading to a surge in Delta rebalancing demand, which in turn prevents stock prices from falling further, creating a vicious cycle. In fact, over the past month, VIX ETNs have experienced $40 million in Vega (volatility exposure) selling.

The unlikely scenario

McEligot keeps asking clients: “What happens if the market becomes numb to bad news about Iran and starts to rise? When no one holds enough stocks, won’t everyone begin chasing upside via call options?”

Most clients dismiss this scenario, citing multiple risks—Iran, oil prices, inflation, employment slowdown, private credit risks. But McEligot argues, “It’s precisely because no one expects it that it’s worth paying attention to.” His logic is: as stocks keep absorbing bad news without falling, those with hedges will eventually give up and start to close positions—potentially sparking a rally.

The next watershed—Super Central Bank Week and ceasefire headlines

Two variables will determine market direction. One is the timeline for the reopening of the Strait of Hormuz. Polymarket predicts about a 40% chance of a ceasefire by the end of April, but Goldman Sachs believes the market has already priced in a resolution much sooner.

The other is the unprecedented Super Central Bank Week. The Federal Reserve, Bank of Japan, European Central Bank, Bank of England, and the central banks of Canada, Australia, and Sweden will all make decisions within the same week—first time since 2021. Despite oil prices soaring and fueling inflation, maintaining a tightening stance is expected, but any dovish comments from any of these central banks could act as a catalyst, fueling the “buy higher” narrative.

Pribrotski reminds us to review the pattern from the Ukraine war. Back then, even when oil prices exceeded $120 per barrel, headlines about ceasefire negotiations through mediators temporarily boosted markets, only for the deal to eventually break down. “The day after the first ceasefire talks are announced is often a good time to sell risk assets,” he warns. He suggests that the current Iran situation could follow a similar script.