Citigroup strategists are growing cautious about the stock market’s current enthusiasm, although they aren’t advising investors to reduce their positions just yet.
According to Citi’s team, led by Chris Montagu, global head of quantitative research, net-long positioning in S&P 500 futures has reached its highest point since July 2023. Back then, this overly bullish positioning was followed by a sharp three-month selloff, with the S&P 500 dropping by 10%. Montagu warns that the market could see a similar pullback if trader aren’t cautious.
“The last time market positioning was this stretched, the S&P 500 fell by more than 10% over the next two to three months. While we’re not suggesting investors reduce their exposure, the risks do increase when the market gets this extended,” the team noted in a report shared with MarketWatch.
Meanwhile, positioning in Nasdaq-100 futures is much less extreme, staying well below the frothy levels seen in both July 2023 and July 2024. Citi strategists also pointed out that short-covering in S&P 500 futures could be pushing the market higher.
One key difference compared to mid-2023 is that investors’ profit-and-loss positions are less stretched, making them potentially less likely to sell stocks to protect gains, according to Montagu.
At the same time, all short positions in both S&P 500 and Nasdaq-100 futures are currently underwater, which may drive further stock gains if more trader are forced to cover their shorts.
While markets have continued to climb in October, Tuesday marked the S&P 500’s first consecutive daily losses since early September, following a rise in Treasury yields. Some investors are concerned about a repeat of the 2023 selloff, which saw the S&P 500 drop 10% between August and October.
On Tuesday, the yield on the 10-year Treasury note rose 2.5 basis points to 4.204%, its highest since July. The S&P 500 dipped 2.78 points (0.1%) to close at 5,851.20, while the Dow Jones Industrial Average fell 6.71 points, and the Nasdaq Composite shed 33.12 points (0.2%).
