US stocks rebounded to record highs after the Iran war-fueled selloff, and there are signs under the market’s surface that suggest the rally is about to last longer. Despite the ongoing US-Iran conflict, the market’s large recovery and prolonged high energy prices have fueled talk of a market deficit. Still, there are multiple indicators, from bullish options positions to buying from volatility-linked funds, that suggest the bullish momentum may continue.

“We’ve seen really strong upside for the S&P 500 over the past two weeks,” said Sonu Varghese, global macro strategist at Carson Group.

“Momentum breeds momentum, and new highs are a sign of momentum,” Varghese said.

Buying from hedge funds and high frequency trading firms is providing some optimism.

“First, there was overwhelming pessimism and conservatism among institutional investors,” said Mark Hackett, chief market strategist at Nationwide, adding that some of that has reversed. Meanwhile, volatility-linked funds, which hemorrhaged stocks in March as markets faltered further after the start of the US-Iran war, have been net buyers, providing further support to the market. According to Nomura, one class of these funds — commodity trading advisors (CTAs) — is leading the way with nearly $20 billion of equity bought in the past week alone. Separately, leveraged ETFs bought another $27.5 billion in the past week, Nomura estimates.

Nomura cross-asset and equity derivatives strategist Joanna Wang said, “The orderly position in US equities is still historically soft – there is still room for a rebuild before it becomes a source of volatility.” The new high itself could also draw more discretionary buyers into the market.

“When they see the market going higher and reaching new highs, they buy more because of the fear of missing out,” said Todd Morgan, chairman of Bel Air Investment Advisors. Allbirds shares more than quintupled on Wednesday in another sign of investor enthusiasm after the footwear maker said it was raising capital and moving into AI computing infrastructure.

Inverse pursuit in options

While the index levels prices almost unchanged since late January, conditions and sentiment have changed materially.

“There was a dramatic realignment in positioning in March,” said Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group, noting that investors entered under owning the market in April.

“That’s why we’re seeing such a violent chase,” he said, referring to the recent influx of aggressive bullish options.

This causes sharp swings in call skew, the premium investors pay for upside bets. The three-month 25 delta call skew, normalized by at-the-money volatility, has gone from the most defensive in nearly three years to the most bullish in 3-months over a three-week period.

“Historically, geopolitical conflicts have had sharp but short-term effects on equity markets,” said Garrett DeSimone, chief quantitative analyst at OptionMetrics.

“This is consistent with equity implied volatility and tends to normalize even as the underlying conflict continues, as the market shifts in pricing,” DeSimone said.

There is no bull trap here

History also favors stock bulls.

Since 1957, when the S&P 500 has logged a new record after recovering from a pullback of 5% to 10%, it has tended to extend those gains into a month in the following two weeks, a Reuters analysis of LSEG data shows.

Two weeks after such a recovery, the S&P 500 posted an average return of 0.66%, rising to 1.01% a month later—broadly in line with the median forward return for any comparable period since 1957, suggesting that stocks have historically built at a stagnant pace rather than new highs.

For investors wary of the bull trap — where a declining asset appears to turn higher, attracting buyers, only to resume its downward trend — the historical record is reassuring.

In about two-thirds of the 38 cases when the S&P 500 exceeded a 5%-9.9% pullback, stocks were higher two weeks and one month later.

Even in the one-third of cases where stocks fell, the pullback was relatively contained, with average declines of 1.46% and 3.38% at the two-week and one-month marks, respectively.

Notably, stocks never fell below recent lows within two weeks to a month of the recovery, the data showed.

But even with supporting data, not everything about the market makes sense.

“If I told you in late February that oil futures would be $30 higher by mid-April, bond yields would be about 35 basis points higher, expectations of two rate cuts would evaporate, and consumer sentiment would be at record lows, would you reasonably expect the major equity indexes to be flirting with all-time highs, all-time highs? A strategist at Interactive Brokers asked

“I’m pretty sure it’s a ‘no’… (but) when speed rules, the basics are optional,” Sosnick said.