JPMorgan warns that the S&P 500 could be vulnerable due to declining short interest in major ETFs like SPY and QQQ.
Analysts at the bank note that this decline has been "providing a steady flow support to US equities over the past year, helping to suppress volatility."
In simpler terms, fewer investors are betting against the market through short positions. JPMorgan's concern is that this trend has gone too far, creating an "implicit short vol trade" that could backfire.
"Given how low their short interest is at the moment," the report states, "this implicit short vol trade looks rather extended by historical standards."
The worry is that if negative news hits the market, it could trigger a reversal of this trend. Investors who had been shorting the market would then scramble to buy back in, potentially leading to a sharp drop in stock prices.