The equity rebound in Q2 has been sharp. After a 7.6% rally, the S&P 500 is at fresh all-time highs, despite a fragile Middle East ceasefire and elevated energy costs.

However, the financial market plumbing might be providing a powerful tailwind. According to Neil Sethi, Managing Partner at Sethi Associates, Goldman Sachs' data shows that commodity trading advisors, or CTAs, could buy as much as $45 billion of U.S. stocks over this week, including roughly $34 billion tied directly to the S&P 500.

At the same time, hedge funds have covered bearish bets at the fastest pace since March 2020, helping fuel a squeeze higher.

However, the most important question remains whether this rally has real support beneath the flows.

Short covering rallies can be notoriously sharp, especially in crowded markets, yet they're not the same as conviction buying. Once the shorts get covered, the source of demand fades. Price movement doesn't necessarily tell investors much about earnings durability, economic momentum, or whether risk appetite has genuinely broadened.

More Supportive Than It Appears

CTA buying follows the same cautious logic. These funds move as rule-based trend followers, not as discretionary investors making a new macro call. The rules might differ, but the danger is just as with passive index buying. When money pours in indiscriminately, it risks extending price rallies well beyond what fundamentals alone might justify.

Sethi's note of a $45 billion tailwind is significant precisely because it is mechanical. It can create upside momentum, but it does not automatically create a durable floor if the news flow deteriorates or volatility re-prices higher.

Still, his analysis, drawing on Goldman data, suggests the structure may be more supportive than it first appears.

Dealer gamma (sensitivity of market makers' portfolios to changes in the underlying asset price), which in the first quarter acted as a ceiling, forcing dealers to sell into rallies, has now moved below the market. In effect, the same hedging dynamics that capped upside earlier in the year are now positioned to amplify it.

If stocks move lower, dealer rebalancing can attract buying. If they move higher, dealers may be forced to chase further.

That logic helps explain why the current bid can persist longer than skeptics expect - at least absent a fresh macro shock (which is asking a lot given the current environment).

Looking Toward the Earnings

Here are 3 key observations to keep in mind:

• State Street SPDR S&P 500 ETF (SPY  ): Watch whether the index can hold above the breakout zone created during the ceasefire squeeze.
• Invesco QQQ Trust (QQQ  ): Relative strength matters. If tech lags while the broader market stalls, the rally may be losing quality.
• VIX Short-Term Futures ETF (VIXY  ): A rebound in volatility without a major index breakdown would be an early sign that the positioning tailwind is fading.