S&P 500 extends winning streak to 9 weeks as hedges unwind

Wall Street's most crowded hedge trade is now its most expensive mistake.

The S&P 500 rose 0.22% to 7,580.07 on Friday, extending its winning streak to nine weeks — the longest since December 2023 — as investors abandoned defensive positioning and poured into risk assets.

"There's definitely euphoric sentiment in the market around AI. The rally has really been driven by earnings," said Ohsung Kwon, chief equity strategist at Wells Fargo.

The index gained 5.15% in May, while the Nasdaq Composite added 8.36% and the Dow Jones Industrial Average climbed 2.78%. All three benchmarks closed at record highs during the session. The tech sector led with a 1.87% gain, fueled by Dell Technologies surging 32.8% after raising its full-year profit and revenue forecasts. Microsoft climbed 5.4%. On the downside, Alphabet fell 2.5%, while consumer staples lagged as Costco dropped 3.9% and Walmart lost 2.6%.

The rally has forced a dramatic repositioning across Wall Street. The cost of downside protection has fallen to its lowest level this year, while Goldman Sachs' basket of the most-shorted stocks surged more than 30% over the past two months, squeezing bears who bet against the AI-driven advance. In the options market, the VanEck Semiconductor ETF shows extreme upside demand, with investors paying unusually high premiums for out-of-the-money call options even after the rally has already played out, according to Nomura Holdings data.

Hedging Costs Collapse as FOMO Takes Hold

The price of protecting against a routine decline has dropped to levels not seen since January, while tail-risk insurance for extreme crashes has also retreated to its 2025 lows. The skew — a measure of what investors pay to hedge against a sharp drop — has slid back to January levels, according to RBC Capital Markets.

"Many people think even if there's a pullback, money will immediately buy the dip," said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. "The old saying is 'hedge when you can, not when you have to.' The problem is skew looks cheap, and it keeps getting cheaper."

This de-hedging trend is unfolding even as economic data softens. Consumer confidence has declined, income growth is slowing, and April new-home sales fell. Yet stocks continue to grind higher, supported by optimism that the US and Iran are moving toward a deal that would reopen the Strait of Hormuz and ease oil supply concerns.

Brent crude fell 1.8% to $92 a barrel on Friday, while West Texas Intermediate dropped 1.5% to $87.59. The decline in oil prices has helped push US Treasury yields lower as inflation concerns ease, providing additional support for equities.

Bears Caught Offside

The pain is concentrated among short sellers. The Goldman Sachs most-shorted basket has surged more than 30% in two months, and any position betting against the rally has suffered heavy losses. Trading volume has picked up in recent weeks, suggesting more participants are entering the market, according to Melissa Brown, head of investment decision research at SimCorp.

Susquehanna International Group derivatives strategist Chris Murphy said the buying looks more like catch-up than euphoria: "Traders are clearly chasing upside protection, but it's not indiscriminate call buying — it's underweight investors buying exposure to tail upside. My sense is investors are no longer just hedging downside — many are hedging against missing the next leg up."

The S&P 500's nine-week winning streak has now matched the longest since the index's 2023 rally. History suggests further gains may follow: after the last eight-week streak in 1997, the index rose more than 22% over the following year, according to Carson Investment Research data. In five of the six winning streaks spanning eight to 12 weeks since 1955, the S&P 500 delivered double-digit returns in the subsequent 12 months.

Still, the concentration of positioning in AI and semiconductor names leaves the market exposed to a reversal. A collapse in US-Iran talks, a surprise inflation reading, or a disappointing earnings report from a key AI bellwether could trigger a rapid unwind of crowded long positions. For now, the path of least resistance remains higher — but the cost of being wrong is rising along with the index.

This article is for informational purposes only and does not constitute investment advice.