Signs of easing in U.S.-Iran diplomatic channels, combined with extremely bearish positioning, triggered a mechanical rebound, with U.S. stocks surging over 2.2% from their lows during the overnight session. The core market bet hinges on a single premise: the conflict is not expected to escalate further in the near term. According to reports, diplomatic sources from Pakistan indicated that the U.S. and Iran have agreed to continue negotiations, although disagreements persist regarding the agenda, objectives, format, and location of the next round. U.S. Vice President Vance stated publicly that "the ball is in Iran's court," suggesting the negotiation window remains open; Iranian President Pezeshkian also expressed willingness to continue talks within the framework of international law. Amid these dual signals, WTI crude fell over 2% to $96.91 per barrel on Tuesday, while Brent crude dropped 1.88% to $97.49—the bullish effect of blockade threats was overwhelmingly subdued by expectations for diplomatic de-escalation. Previously, hedge fund bearishness had even surpassed levels seen during the peak of the "Liberation Day" sell-off, and the highly concentrated short positions provided ample fuel for this positioning-driven rebound. Regarding positioning, Goldman Sachs models estimate that Commodity Trading Advisors (CTAs) purchased $19 billion in U.S. stocks last week and are projected to buy another $43.5 billion under a flat market scenario in the coming week, approaching historical record levels. Hedge funds turned net buyers for the first time in eight weeks. The key market divergence now lies in whether the diplomatic de-escalation signals will persist or if a new round of conflict will reverse the situation.

Extremely Bearish Positioning Provides "Fuel" for Rebound

The primary driver of this rebound stems from a severe imbalance in positioning structure. Data from Goldman Sachs indicates that the level of bearishness in hedge fund positions last Friday had exceeded the peak seen during the early April "Liberation Day" sell-off. In terms of specific flows, global equities saw their first net buying in eight weeks, primarily driven by long buying, with short covering as a secondary factor, at a ratio of approximately 3.6:1. All major regions experienced net buying, led by emerging markets in Asia and Europe. Macro basket products saw net buying for the second consecutive week, mainly fueled by short covering. At the institutional level, asset management companies have been net buyers of S&P 500 futures for two consecutive weeks. Global equity mutual funds recorded $37 billion in weekly net inflows, a significant acceleration from the previous week's $12 billion. Market sentiment has also improved. Goldman Sachs' U.S. stock sentiment indicator rebounded sharply this week to +0.7, a notable recovery from -0.9 two weeks prior. The CNN Fear & Greed Index rose from 23/100 to 38/100. The volatility fear index plummeted to 7, its lowest level in two months.

CTA Buying Nears Record Levels, Systematic Forces Provide Sustained Push

If short covering acted as the "igniter" for the rebound, then systematic buying by CTAs serves as the ongoing "propellant." Goldman Sachs' latest model estimates that trend-following CTA funds purchased $19 billion in U.S. stocks last week. Looking ahead, under a flat market scenario, CTAs are projected to buy an additional $43.5 billion in U.S. stocks in the coming week, which amounts to $82 billion when calculated on a global equity basis—a scale nearing historical records. Previously, CTAs had compressed their equity exposure to extremely bearish levels entering April; now, stabilizing prices have triggered a reversal in trend signals, leading to a concentrated release of systematic buying pressure. At the retail level, the AAII survey showed the bull ratio rising to 35.7%, while the bear ratio fell by 8.4 percentage points. Retail-favorite sectors saw significant rebounds. However, J.P. Morgan data indicates retail behavior has evolved from "buying the dip" to "skipping the decline and selling at highs," reflecting a more defensive stance. Retail trading volume last week was below the 2nd percentile historically, suggesting lingering doubts about the rebound's sustainability. The technology sector had undergone aggressive de-risking, leaving positioning cleaner and exposure lighter, yet fundamentals did not deteriorate in sync with prices, creating a "gap between price and earnings expectations." Market makers are in a short gamma state, making cheap call options attractive. Once positioning fully resets and prices stabilize, call option prices could be rapidly repriced higher.

U.S.-Iran Negotiations: Broken but Window Remains Ajar

Another key driver of the rebound is the market's repricing of the expectation that U.S.-Iran conflict will not escalate short-term. The marathon Islamabad negotiations broke down on the 12th. Vice President Vance stated in an interview that the Iranian delegation showed some flexibility on two core issues but "did not move far enough." The U.S.'s two non-negotiable conditions are the removal of Iran's enriched uranium and ensuring Iran lacks uranium enrichment capability. Vance stated that, given the inability to reach an agreement under the "current team and current timeline," both sides decided to return to their respective capitals. Iranian Foreign Minister Abbas Araghchi responded on platform X that Iran participated "in good faith" but encountered "extremism, moving targets, and blockades" when close to finalizing a memorandum of understanding. However, multiple signals indicate the diplomatic channel is not entirely closed. According to Pakistani diplomatic sources, both sides agreed to continue talks, with disagreements remaining on details like agenda and location—Iran prefers Islamabad, while the U.S. is considering alternatives. Reports also indicate that President Pezeshkian, in a call with French President Macron, expressed Iran's willingness to continue negotiations within international law and abide by ceasefire terms, attributing the previous failure to U.S. "excessive ambition." Vance has also repeatedly emphasized his belief that "a significant deal is possible" and stated he awaits Iran taking "the next step."

Oil Prices Under Pressure: Blockade Threat vs. Diplomatic Signals

Despite the subsequent U.S. announcement of a maritime blockade on Iranian ports and coastal areas—theoretically a supply-tightening bullish factor—the market reaction was a decline in oil prices. Vance characterized the blockade as an "additional economic pressure" tool and stated the full reopening of the Strait of Hormuz is a key U.S. demand. He noted that part of the premise for the prior 14-day ceasefire was Tehran agreeing to reopen the Strait, warning that failure to do so would "fundamentally change" negotiations. According to analysts, the blockade directly threatens Iranian oil exports via the Strait of Hormuz, which transited approximately 1.7 million barrels per day last month, and would further tighten physical oil and refined product markets. However, oil prices are reacting inconsistently to the same shock—the typical transmission mechanisms via equities, volatility, and currencies are beginning to fracture. Market observers note that when the same shock elicits divergent reactions, it often signals a narrative shift. Diplomatic signals are overshadowing blockade threats as the dominant pricing logic: Vance handing the initiative back to Iran, rather than declaring talks over, preserved room for a diplomatic solution, which is the core reason investors breathed a temporary sigh of relief.

Outlook: Fragile Sentiment, Next Headline is Key

Goldman Sachs cautioned in its latest positioning report that sentiment remains fragile. Beyond the mechanical drive from systematic buying, short covering, and very selective re-positioning, investors remain in a wait-and-see mode, anticipating the next Iran/Hormuz headline—the risks of re-escalation and de-escalation are nearly symmetrical, suggesting continued volatility ahead. Regarding buybacks, Goldman estimates about 98% of companies are currently in their buyback blackout period, with buyback flows about 30% below normal levels. The blackout period is expected to end around April 28th, after which corporate buybacks should resume providing market support. In summary, this rebound is primarily driven by positioning repair rather than fundamental improvements. Short covering and systematic CTA buying have provided strong upward momentum, but the true directional judgment will still depend on whether U.S.-Iran negotiations yield clearer diplomatic signals in the coming days.