Boosting US stocks, suppressing volatility, has the "short interest retreat" in US stocks reached its limit?

Over the past year, the US stock market has shown a strong upward trend, with the S&P 500 index hitting new highs recently. What is the driving force behind this?On June 20th, a research report released by the global market strategy team led by Morgan Stanley analyst Nikolaos Panigirtzoglou pointed out a notable phenomenon in the US stock market: the short interest positions of the two major stock index ETFs in the US have reached historic lows - the ETF SPY tracking the S&P 500 index and the ETF QQQ tracking the NASDAQ 100 index - providing stable upward momentum for the US stock market.Data from the report shows that since the second quarter of 2023, the short interest positions of SPY and QQQ have steadily decreased, hitting historic lows one after another.This means that investors have reduced their bets on market declines, and as short positions are gradually covered, they have provided a "continuous" support for the US stock market over the past year. The report concludes that the decline in short interest positions of these two major ETFs over the past year is equivalent to an "implicit short vol trade".Implicit volatility refers to the general expectation of market volatility in the future. The withdrawal of short positions from the two major ETFs in the US stock market means that bearish investors are decreasing, and correspondingly, selling pressure in the market will also decrease, reducing the expectation of volatility.Behind the Rise of the US Stock Market, Is It Fragile?The report explains that the withdrawal of short positions in SPY and QQQ ETFs reflects the net increase in investments in the US stock market by hedge funds over the past year and the reduction of short sellers, mainly driven by three factors:In the rapid rise of the US stock market, maintaining short positions has become more difficult;Due to the requirement of US regulatory agencies for transparent disclosure of short trading information, short sellers face higher trading costs, exacerbating the risk of being forced to cover and close positions;In the post-pandemic era, US retail investors have flooded into the stock market, and the "meme stock" frenzy in January 2021 has deterred short sellers.However, seeking low volatility investment strategies means that the market's sensitivity to negative news is increasing.The report points out that from a historical perspective, the current implicit short volatility trading is already quite "extended," therefore, once negative news or events occur, it can easily trigger market panic, leading investors to reassess their views on the market, increase selling pressure, reverse the previous trend of short covering, accelerate the decline of the stock market, and expose the US stock market to greater fragility