Beyond the Rally: Why Trend Followers’ Shorts May Not Stay Unwound
6min read The recent surge in U.S. equities has prompted trend followers to unwind short positions, betting that the market’s upward momentum will persist. But bank of america (BofA) warns this optimism may be premature. In its 2025 market outlook, analyst Michael Hartnett frames the rally as a “pain trade” — a short-lived rebound fueled by speculative hope rather than fundamental strength. For investors, the critical question is whether three key conditions will materialize to validate the rally or if it’s a trap waiting to spring.
The Three Pillars of a Sustainable Rally
BofA identifies three prerequisites for a lasting U.S. market turnaround:
A U.S.-China Trade Deal with Meaningful Tariff Reduction
Current U.S. tariffs on Chinese goods hover at 145%, far above the 60% threshold Hartnett cites as a critical benchmark. While trade talks have resumed, China has yet to confirm progress. The stakes are high: Deutsche Bank estimates delayed resolution could cost the U.S. economy 0.5% GDP growth annually. Until tariffs fall significantly, the market’s optimism over trade easing remains unfounded.Fed Rate Cuts to Ease Treasury Yields
The Fed’s hinted rate cuts — with a 60% chance of a 25-basis-point cut in June — have buoyed bond and equity markets. But BofA stresses that sustained relief requires more than talk. Treasury yields spiked in April to 3.2%, reflecting inflation fears and uncertainty. Until the Fed acts decisively, the rally’s foundation remains shaky.Consumer Spending Holds Steady Amid Inflation
While U.S. households have so far weathered market volatility, rising inflation and equity losses are eroding wealth, especially for high-income groups. A $33 billion surge in cash holdings in recent weeks signals growing caution. If consumers retrench, the U.S. economy’s “soft landing” narrative — and the rally it supports — could unravel.
Global Capital Favors the “Humility Trade”
The report underscores a broader shift: global investors are abandoning U.S. assets in favor of alternatives. BofA notes $29.4 billion flowed into Treasuries over four weeks, while gold saw its 15th consecutive week of inflows ($3.3 billion). This exodus reflects skepticism toward U.S. “exceptionalism” and a preference for safer havens.
Hartnett’s advice? “Sell hubris, buy humiliation.” For trend followers, this means resisting the urge to chase the rally. Instead, BofA recommends tilting toward commodities, emerging markets, and gold until the three conditions are met.
The Fragile Reality of the Rally
Despite the S&P 500’s 7.3% rebound from April lows, BofA sees red flags. The rally has been driven by a handful of mega-cap tech stocks, with Apple, Microsoft, and Amazon accounting for 40% of the index’s gains. Meanwhile, the rest of the market remains stagnant or declining. Such narrow momentum rarely lasts.
Conclusion: Proceed with Caution
BofA’s analysis paints a clear picture: the U.S. rally is a “pain trade” — a fleeting opportunity for those willing to bet against fundamentals. Until tariffs drop meaningfully, the Fed cuts rates, and consumers prove invulnerable to inflation, investors would be wise to avoid overcommitting.
The data is stark: 145% tariffs vs. a 60% target, $33 billion in cash hoarding, and a 3.2% Treasury yield all point to unresolved risks. Trend followers who unwind shorts now may find themselves scrambling to re-enter positions if these conditions fail to materialize. For now, the “cleanest” bet, per Hartnett, remains a U.S. dollar decline and a pivot to global markets. The rally, it seems, is less a sign of strength and more a test of investors’ patience.
In this environment, the old adage holds: “Don’t fight the Fed — but don’t ignore the data either.” Until the Fed acts and trade tensions ease, the party may be over before it truly begins.
