A steady rise in short interest is helping establish a floor for upward momentum
Market participants were greeted with hotter-than-expected inflation data the same week they greeted a new Federal Reserve Chairman, Kevin Warsh. Plus, they weighed headlines from President Donald Trump’s summit with China’s President Xi Jinping, which was interpreted as potentially inflationary, perhaps because there was no coordinated effort to end the U.S./Israel conflict with Iran.
The yield on the 10-year Treasury bond surged from 4.36% to nearly 4.6% during the week, with most of the damage being done on Friday, as the 10-year yield traded at its highest level since May 2025. For what it is worth, the 10-year peaked at 4.6% in May 2024 and May 2025 before pulling back by 100-basis points and 50-basis points, respectively. Might we see a third consecutive May peak in the 10-year yield at 4.6%?
“With the 10-day moving average sloping higher at the rate of about 23 points a day, it is projected to be around 7,360 by week’s end. As such, even if this week brings a 40-point drop, we would not be ready to declare that a momentum shift into lower gear has occurred... It is anyone’s guess where sellers may finally begin to overwhelm buyers. A potential resistance area could be in the 7,500-7,530 area. The 7,500 mark is a clean round number and 7,530 is exactly 10% above last year’s close. As such, anyone anchoring to the SPX’s year-to-date gain may look to slightly reduce risk. Round-number percentage levels often represent hesitation or pivot levels, and there is likely a psychology around this phenomenon.”
-Monday Morning Outlook, May 11, 2026
Friday’s jump in yields sparked a selloff in equities, especially in stocks that had rallied sharply in recent weeks, such as semiconductors. Even so, my momentum measure for the S&P 500 Index (SPX—7,408.50) remains intact, as the index is still above its 10-day moving average, which stood at 7,375 at week’s end and is projected to reach about 7,500 by the end of this week.
Since crossing above the 10-day moving average on April 1, the SPX has not closed below it and has used it twice as support.
Friday’s decline followed a test of the potential resistance zone I highlighted last week at 7,500-7,530. The SPX reached 7,517 on Thursday and closed at 7,501. Beyond the psychological significance of 7,500, investors may have taken profits as the index neared 7,530, which marks a 10% gain from the 2025 close.
For what it’s worth, in August 2025, the SPX paused at the level that marked 10% above its 2024 close. It was just that - a pause in momentum, not a notable pullback. The first major pullback after the March 2025 low would not come until October.
A pause in the current momentum would not come as a major surprise, with option buyers showing extreme optimism - buying puts (downside bets or hedges) at a very low rate relative to calls (upside bets) on SPX component stocks.
Remember, per the graph below, this same group was showing extreme pessimism at the late-March bottom, buying puts at a high rate relative to calls.
Now, the ratio of put buying to call buying is at extremely low levels that have preceded choppy periods. But if this ratio remains low or goes even lower, it could be in the context of continued momentum. A turn higher in the ratio would highlight a potential shift in short-term trader sentiment that precedes a decline or a pause in the upside momentum.
But a “sky is the limit” sentiment landscape is not apparent in all sentiment indicators that we track. For example, for the past two years, I have made the argument that this is a highly-shorted market that is bullish for the intermediate-term and longer-term investor.
Short interest figures were released by the exchanges last week, with the data as of May 1. I would have thought that a more than 3% rally in the SPX from mid-April to May 1 was short-covering related. But to my surprise, total short interest on SPX component names increased by 2%. Total short interest on these components is now at 2016 highs. Short covering in 2017-2021 was supportive of a huge rally. When shorts left the building, the SPX became vulnerable, and a build in short interest helped contribute to a weak 2022.
The implication is that the “buy the dip” mentality that has been so prevalent could continue to be the mark of this bull market, whether it is momentum players at work, or shorts throwing in the towel and ultimately establishing a floor.
Todd Salamone is Schaeffer's Senior V.P. of Research
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