Citadel Trader "Short Covering to Long": Top 10 Reasons Why the Market Will Experience a "Tactical Rebound"

Former Goldman Sachs capital flow expert and current Citadel equity and derivatives strategy head Scott Rubner has officially abandoned his previous tactical bearish stance, shifting to bullish. The key catalysts are declining volatility and rebalancing of options positions.

He believes that, due to extremely pessimistic market sentiment, seasonal factors providing support, and resilient retail fund flows, U.S. stocks will experience a “tactical rebound” in mid-month, with normalization of volatility serving as the main trigger.

He emphasizes that, despite ongoing geopolitical tensions, AI-related news impacts, and private credit concerns, the indices remain confined within a “narrow corridor.” The market is more driven by technicals and positioning rather than fundamentals.

The implication for the market is that short-term risk appetite may not stem from new positive news but from “unleashing constraints,” especially the gamma structure changes around March options expiration and the systemic leverage potential once volatility is compressed. Here are the top ten reasons:

1. March Options Expiration Hits Record High

The March 20 options expiration will be the biggest technical event this month, with about 35% of U.S. equity options expiring. This will clear current gamma positions and break the mechanical tether to the index.

Since the start of the year, the S&P 500 (SPX) has only fluctuated within a 4.3% high-low range (the narrowest start in 20 years), accumulating a large amount of call gamma near 7,000 points. This positioning forces market makers to dampen rallies, mechanically suppress rebounds, and limit subsequent momentum. The asymmetry appears on the downside—due to less structural gamma support below, hedging flows may accelerate declines, creating a downward bias beneath a “locked” index.

As of February, SPX daily absolute volatility reached 21.7%, yet the index only rose +0.5% (absolute volatility is 44 times returns, in the 95th percentile over the past 40 years). Post-expiration, the market will gain greater directional flexibility.

2. Retail Funds Continue to Support the Market

Retail investors remain the most steadfast force, with significant and sustained buying activity (in stocks and options).

In January 2026, Citadel recorded its largest net buying month ever; February was the fifth-largest, reaching new highs since April 2021.

Retail willingness to buy on dips continues to dominate early 2026 fund flows. So far this year, on our platform, the average net nominal trading volume on down days for the S&P 500 is 2.5 times that on up days. Although overall daily average net volume slowed in February, the intensity of buying on dips increased: net nominal volume on down days was 4.3 times that on up days (versus 2.1 times in January).

Options participation remains structurally high. In 2026, daily retail options volume is about 14% higher than 2025 levels and nearly 47% above the 2020-2025 average, indicating sustained engagement rather than sporadic bursts.

This activity is also evolving. February data shows trading shifted toward the start of the week, with increased Monday participation and reduced activity on Fridays. This change coincides with the rollout of zero-day to expiration (0DTE) options.

Retail investors still provide support for downside stability—but are not yet ready to trigger a decisive breakout.

3. Tax Refunds About to Enter the Market

Tax season is becoming increasingly relevant, strongly correlated with flows into risk assets. Historically, tax refunds accelerate in late February and March, with February 22 typically being the peak day. As of March 1, only 30% of the annual refunds have been distributed; most will be paid out over the next two months, reaching 75% by May 1.

This year’s refunds are expected to be larger, aligning with seasonal liquidity patterns in money market funds. Historically, net inflows into money funds increase from February to March, initially accumulating liquidity in cash instruments before reallocation.

This does not directly mean funds will immediately flow into equities. However, higher cash balances combined with seasonal refund effects suggest additional retail liquidity remains available through March.

4. Institutional Demand for Downside Protection Surges

The one-month skew of the S&P 500 is at the 96th percentile over the past year, with implied volatility elevated. As risk premiums are priced in, the skew continues to steepen.

Any signs of easing in global geopolitical tensions will prompt clients to quickly unwind protective positions and create delta buy signals, a trend increasingly evident over the past two trading days.

5. Cross-Asset Credit Hedging Demand and Extreme Oil Volatility

Given volatility in the software sector, cross-asset investors have increased hedging in core credit products. These remain among the most actively traded hedges on trading desks. In February, open credit ETF hedge positions hit record highs.

Alongside this, bond market volatility has risen sharply from January lows. Amid escalating geopolitical tensions, crude oil volatility (OVX) has surged to levels seen at the start of the Russia-Ukraine conflict in 2022.

6. Macro Product Trading Volume Is Massive but Liquidity Is Scarce

Daily trading in ETFs, macro strategies, and 0DTE options continues to hit new records. Yesterday, ETF volume accounted for 47% of total trading, a five-year high. This indicates investors are using ETFs for hedging while maintaining core exposures.

However, risk transfer capacity is limited; the top-of-book liquidity for ES1 (S&P futures) is only in the 4th percentile over the past two years.

7. Tech Sector Positioning Is Extremely Low, Ready for a FOMO Rebound

Any upward catalyst in tech stocks could quickly trigger a FOMO-driven rebound, especially as sector volatility has begun to decline. High-quality stocks will outperform lower-quality ones. The resumption of buying will likely focus on the old leaders: high-quality tech.

Since information technology makes up 32.7% of the S&P 500, its performance remains crucial. Despite broad market strength—67% of components outperform the index over the past 30 days (the 98th percentile historically)—tech lag has kept the index from meaningful gains.

Underneath, the lightest-weighted sectors have led gains, while the heaviest-weighted sectors lag, resulting in only a -42 basis point decline so far this year.

In fact, the distribution of individual stock returns is increasingly right-skewed, with a high number of stocks generating excess early-year gains relative to historical levels. Yet, these moves are concentrated in smaller-weighted stocks, limiting their impact on the overall index.

Without tech participation, the index cannot meaningfully rebound.

8. Volatility Normalization Will Trigger Reverse Flows

The VIX is no longer just a sideline indicator; it acts as a quarterback. Elevated volatility levels will induce mechanical deleveraging.

Yesterday, VIX spiked to 28.15—the highest since November. Spot prices are significantly discounted relative to near-month futures, with the one-month implied volatility of the S&P 500 reaching levels unseen since November (around 18V).

Once volatility is compressed, space will open for volatility-target strategies, risk parity, and CTAs to systematically re-leverage and increase equity exposure.

9. Lower Correlation Will Favor Stock Picking

Implied correlation over one and three months has reached its highest since November 2025. A decline in implied correlation indicates a waning macro dominance, creating a more constructive environment for diversification and fundamental stock selection.

10. Seasonal Factors in March-April Favor Upside

The 2026 seasonal pattern aligns closely with historical norms. Since 1928, March has typically been a modestly positive month (61% probability of gains, average increase about 53 basis points), followed by April, historically the second-best month.

Looking back to 1928, the S&P 500 has had positive returns in March 61% of the time, with an average gain of about 53 basis points.

Overall, despite macro concerns like geopolitical escalation and AI disruptions, the market remains confined within a narrow range. Defensive positioning, thin liquidity, and call walls near 7,000 on SPX mechanically limit volatility. As March options expiration approaches and volatility normalizes, a tactical rebound is likely. April may offer a more sustained re-risking window.

Risk Disclaimer

Market risks are present; invest cautiously. This does not constitute personal investment advice nor consider individual user objectives, financial situations, or needs. Users should determine whether any opinions, views, or conclusions herein are suitable for their specific circumstances. Investment involves risk, responsibility is your own.