It all made sense in the depths of the downdraft. Steel your portfolio against calamity, load up on defensive positions and find a safe port to ride out the storm. Four weeks into Wall Street's epic turnaround, some of those decisions are starting to look rash.

Trades that got crowded in April's tumult have suddenly become vulnerable, among them shorting the US dollar, betting against equities and wagering on higher market volatility. Behind the backfiring wagers has been Donald Trump's concessionary tone on tariffs and a string of positive economic reports - and the ensuing rebound in sentiment.

Pain in wrong-footed bets is showing up across asset classes. The dollar has nudged upward over the last three weeks, in defiance of bears who raised their short positions to a seven-month high. The S&P 500 has climbed in 11 of the last 14 sessions, erasing its losses from the tariff tantrum.

Junk bonds are back to scoring gains, with the iShares iBoxx $ High Yield Corporate Bond ETF surging nearly 4% in the past month, shortly after investors turned sour on risky credit.

The Cboe Volatility Index, or VIX, slipped every week since early April, a blow to stubborn vol buyers, whose long positions hit a six-year high in March and have largely held near those levels. In Treasuries, an exchange-traded fund tracking long-dated notes suffered its first back-to-back weekly losses of the year as bond traders were again forced to pare their expectations on interest-rate cuts.

In short order, anxiety has given way to relief as Trump walked back his aggressive stance on trade. Add a slew of data showing resilient employment and docile inflation — as well as Fed Chair Jerome Powell’s assurances that the economy remains sound — and it’s a recipe for an unwinding of the recessionary trades.

It’s possible extreme positioning in April has exacerbated market moves. Take stocks, for instance. One measure kept by Deutsche Bank AG shows that stock exposure last month tumbled to near the lowest level since 2020. As the S&P 500 started to recover, those investors were forced to keep up, adding fuel to the rally.

Now, broadly, institutional investors are holding a neutral stance on key currencies and US stocks, according to data compiled by State Street Global Markets.

Lingering defensiveness among investors isn’t necessarily a bad thing for risky assets, according to Marija Veitmane, a senior multi-asset strategist at State Street. A “combination of position adjustment and weak expectations make me slightly positive on the outlook for stocks,” she says.

As has been the case since Election Day, getting a handle on the outlook for markets and the economy amid Trump’s back-and-forth trade posturing has proved next to impossible. Investors came into the year betting the president’s economy-friendly policies such as tax cuts would herald a new era of US exceptionalism, only to see the Trump trade turn into “sell America.”

Whether to chase the rally or hide out may depend on what comes next in the trade drama, as investors await US-China talks scheduled to kick off this weekend. And the range of outcomes remains wide, according to Ilan Benhamou, in JPMorgan Chase & Co.’s equity derivatives sales team. The most likely scenario, he says, is both sides agree to continue talking, a status quo that he says could send the S&P 500 down 1.5%.

In the event tariffs are paused or taken down substantially to less than 50% — a scenario Benhamou says has a 15% chance of occurring — the index could rally 3%. Several rounds of retaliation have raised the US tariffs on imports from China to 145%, while the Chinese have put in place a 125% duty on US goods.

To Priya Misra, portfolio manager at JP Morgan Asset Management, trade deals take time to pan out and higher effective tariff rates — even lower than those Trump originally proposed — are poised to hurt consumer and corporate spending.

“Uncertainty and tariffs are both a tax on the economy,” she said. “Once we see this in the economic data, risk assets will get a reality check and struggle.”

There are signs investors are reluctant to chase risk. Selling US stocks is still in vogue despite the rebound. About $24.8 billion was redeemed from funds focused on American equities in the past four weeks, the most in two years, according to data compiled by Bank of America Corp. and EPFR Global. In the currency market, speculators pushed their long positions in the Japanese yen, widely viewed as a haven bet, to a record high.

“These trades are crowded now,” said Charlie McElligott, managing director of cross-asset strategy at Nomura Securities International Inc. “What has then happened over the past three weeks is we’ve cut the worst case scenario,” he added. “What is playing out right now is a lot less bad than we once feared.”