(Bloomberg) -- Some previously steadfast bears are showing signs of giving in after a seven-month advance put the S&P 500 on the edge of a key chart line. 

Hedge funds that make both bullish and bearish equity wagers have snapped up US shares for two straight weeks, with total purchases reaching the fastest pace since October, data compiled by Goldman Sachs Group Inc.’s prime brokerage unit show. The binge followed persistent selling in the previous five weeks.

At Morgan Stanley, clients last week boosted their net leverage — a measure of risk appetite that takes into account long versus short positions — to the highest level in 2023.

Resolve among bears is weakening after a $3 trillion equity rally this year defied everything from banking turmoil to falling profits and now a potential US default. A growing fear of missing out on gains may be leading to a reconsideration of defensive positioning that some have argued set the stage for the bounce that has lifted equities since October.

 “Risk managers at big institutional firms are saying, ‘Look, the markets are going up, and you can’t sit around and do nothing, you have to participate,’” said Quincy Krosby, chief global strategist at LPL Financial. “The cost of missing out may be just too high. There’s this optimism that the Fed is either finished or almost done with its rate-hiking cycle, then there’s the notion that the recession could be pushed out.”

There are signs the retreat by bears isn’t just an American phenomenon as Japan’s Topix Index has surged to levels unseen since 1990 and the Stoxx Europe 600 Index hovers near a 15-month high. Among global long/short hedge funds, net leverage has increased to the strongest level since August, according to data from JPMorgan Chase & Co. 

The latest bout of demand helped propel the S&P 500 out of a six-week, 140-point range — one of its tightest trading bands in years. Yet it has not overcome a widely watched level — 4,200. For two straight sessions through Friday, the benchmark gauge surpassed the threshold and failed to hold above it. The index again fluctuated around that mark on Monday.

Tony Pasquariello, Goldman Sachs’ head of hedge-fund coverage, is telling clients to take some profits after witnessing a sudden rush among traders to chase “right tail protection” — a strategy that typically refers to buying bullish options in case the market goes up significantly. 

“This is when you’re supposed to be fading strength,” he wrote in a note. “I think the US market will remain a see-saw and resist escape velocity,” he added. “If I’m wrong and the market keeps melting up, I suspect it’s because the trading community is still offsides and has more length to add.”  

Deutsche Bank AG’s data on investor positioning shows a shift as well. Discretionary investors, which have shunned stocks for a better part of the last 12 months, began to scoop up equities last week, pushing equity exposure off of a one-year low, the bank’s data show. Between them and systematic investors, the aggregate equity exposure rose to a neutral level.

Investors came into 2023 largely anticipating stocks to hit fresh lows amid a deterioration in the economy and corporate profits. As consumers and earnings held up better than feared, that has led to a wave of unwinding in bearish positions. Now with the broad exposure becoming more balanced, that likely makes the market vulnerable to negative shocks. 

With systematic equity leverage sitting at a one-year high, a 2% down day would wipe out demand from that cohort of investors, and a daily drop of 3% could spark selling to the tune of $15 billion to $20 billion in the subsequent week, estimates from Morgan Stanley’s trading team show. 

The rise in equity exposure “means increased fragility,” the team wrote in a note. “With further demand, there is further room for supply if equities were to fall and/or volatility were to rise.”

--With assistance from Melissa Karsh.

©2023 Bloomberg L.P.