The S&P 500 has closed higher for nine consecutive weeks, gaining 5% in May and is poised to extend its run to ten weeks—a feat not seen since 1985.

Amidst concerns over geopolitical tensions, private credit risks, and AI's impact on the labor market, US equities continue to reach new all-time highs. What is driving this relentless rally?

Recent analysis of market fund flows and positioning provides the answer: while institutional investor activity has been relatively subdued, the market is being buoyed by three primary forces—persistent retail buying, robust corporate share repurchases, and steady accumulation by Commodity Trading Advisors (CTAs). Data indicates these three buyer groups are largely disregarding valuation and concentration concerns, providing consistent support for equities.

Concurrently, a key risk appetite indicator has surged to a record high, while a volatility fear index has plummeted to near historic lows. Market sentiment, while not yet euphoric, reflects an unusually strong bias towards bullish positioning.

Hedge Funds: High Leverage, Not the Primary Driver

Prime brokerage data shows the total gross leverage for hedge funds rose to a five-year high, while net leverage climbed to a level in the 85th percentile over the past year. Net leverage for fundamental long/short funds reached the 99th percentile.

In terms of trading direction, global equity net buying was significant, driven almost entirely by long additions. North America and emerging Asia saw the largest net purchases, with the Financials, Consumer Discretionary, and Healthcare sectors favored. The Information Technology, Consumer Staples, and Communication Services sectors, however, experienced net selling.

Notably, the Information Technology sector saw its largest total position reduction in over a month, primarily from long selling, though its overall and net positioning share remains near five-year highs. In Europe, risk appetite inflows have persisted for five weeks, but the overall book remains in net sell territory, with new short positions outpacing long selling.

Despite elevated hedge fund leverage, overall institutional activity is lower than the market's performance would suggest, indicating the primary drivers of the rally lie elsewhere.

Retail Investors: Steady Participation, Neutral Sentiment

Retail investor fund flows have been characterized as "relentlessly positive." Even with a slight dip in participation late in the period, the overall buying bias remains intact.

Sentiment indicators show a slight increase in bullishness and a decrease in bearishness among individual investors, though the bearish percentage remains above its historical average. Overall sentiment sits in neutral territory.

A widely followed fear and greed index remains in "Greed" territory, while a US equity sentiment indicator also holds steady in neutral. This combination suggests retail investors are not irrationally exuberant, but their consistent buying provides a crucial foundation of support.

Corporate Buybacks: Operating at Full Throttle

Data from US buyback desks shows execution momentum remains strong, with recent weekly volume nearly double the year-to-date average and double the level from the same period last year. Activity is concentrated in the Technology, Financials, and Consumer Discretionary sectors.

Equity issuance in North America remains limited, posing minimal supply-side pressure.

Analysis notes that as the Q2 earnings blackout period approaches, corporations are accelerating the migration of repurchases to pre-set 10b5-1 plans to ensure continuity. Currently, discretionary open market orders account for about 40% of total buyback flow. Blackout periods typically reduce desk volume by approximately 30%, suggesting the supportive effect of buybacks may moderate in the coming weeks.

Commodity Trading Advisors (CTAs): Steady Accumulation

Model estimates indicate CTAs have been modest net buyers of global equities over the past week. Their current global equity long position is estimated at approximately $93 billion.

Looking ahead, models project CTAs will continue to be modest net buyers over the next five days and one month. In a flat market scenario, they are projected to buy a net $5.53 billion over the next week. Buying would increase in a rising market, while only a declining market scenario triggers a small projected net sale.

Over a one-month horizon, however, the potential selling size in a down-market scenario expands significantly, highlighting the asymmetric risk of CTA strategies—modest buying in trending markets can turn into substantial selling if the trend reverses.

Key trigger levels for the S&P 500 have been identified for short, medium, and long-term horizons.

Dealer Positioning and Risk Gauges

Dealer Gamma is currently positive, providing a modest buffer against volatility. Positive Gamma means dealers tend to buy on dips and sell on rallies, which can dampen price swings.

However, data shows that if the market experiences a one-sided move of approximately 4%, Gamma would flip deeply negative. In such a scenario, dealer hedging activity could instead amplify market volatility.

From a broader risk perspective, a key risk appetite indicator has reached its highest level on record. Simultaneously, a volatility panic index has fallen to near historic lows. The implied correlation of S&P 500 constituents has also dropped to a record low, reflecting extreme market optimism regarding stock-specific diversification.

Wall of Worry Persists, Data Catalysts Ahead

Despite the multiple pillars of support, investors must still navigate an existing "wall of worry" and intense factor volatility.

Upcoming macroeconomic and micro data releases, including key manufacturing and services indices, labor market reports, and earnings from the Consumer and TMT sectors, will be closely watched.

At the mutual fund level, global equity funds saw a slight net outflow in the latest week, with demand for US equity funds remaining but outflows from European, Japanese, and China equity funds. Institutional investors were slight net sellers of S&P futures, though non-dealer net long positioning remains near historically high levels, exceeding $250 billion.