Short positions in US stocks are approaching historical highs, and the market's risk appetite has clearly declined.

According to data from S3 Partners, short positions in the Russell 3000 constituents account for nearly 6% of the float, and the S&P 500 has also risen to about 3.5%, with both figures near historical highs.

Many people see the increasing short positions in US stocks and immediately think the market is going to drop, but I believe it is not that simple.

An increase in shorts only indicates that more and more capital does not believe US stocks can continue to rise, and it also suggests that many funds have already prepared for a market downturn. However, opening short positions does not mean the market will definitely decline; it ultimately depends on the macroeconomic trends and monetary policy of the United States.

If future economic data continues to weaken, corporate earnings begin to be revised down, and the Federal Reserve has no room to relax, then indeed the pressure on US stocks will increase. But if the data does not continue to deteriorate, and US stocks cannot keep falling, then more shorts could actually become the driving force for an upward surge.

Especially now that we are in earnings season, starting today, there will be a continuous release of earnings reports from major stocks. If the earnings data is very good, AI-related business revenue continues to grow, cloud computing demand is strong, and management's guidance for the future does not weaken, then the market's concerns about corporate earnings will temporarily decline.

At this point, the US stock market does not even need a significant positive development; as long as the market continues to hold steady, shorts will start to consider closing their positions.

Because closing shorts is essentially buying. Short sellers need to buy back stocks to close their positions, so the higher the short positions, the greater the potential for buybacks. Once stock prices rise and some shorts trigger stop-losses, short covering will continue to push prices higher, potentially resulting in a noticeable short squeeze.

Conversely, if the earnings reports of major stocks do not meet expectations, or if AI investments continue to increase but the pace at which related revenues and profits are realized does not keep up, then these shorts may have bet correctly on the direction, and the decline in US stocks could further accelerate due to earnings season.

Therefore, this earnings season will not only determine whether corporate earnings can support current valuations but may also decide whether these shorts near historical highs will continue to make profits or be forced to become fuel for an upward movement in US stocks.

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