Citi says stretched positioning set to fuel US stock pullback

The US stock market is at risk of a potential pullback due to stretched positioning, according to Citigroup's strategists. Investors have been pouring billions of dollars into US stock futures, leading to a "very extended" positioning. This trend, coupled with the potential risks of a weaker jobs report, raises concerns. Other global markets, including Europe and Japan, also show signs of profit-taking risks. It is important for investors to closely monitor economic indicators for any shifts in sentiment.

The financial markets have witnessed a significant surge in bullish sentiment over the past few weeks, with investors pouring billions of dollars into US stock futures. However, this stretched positioning, as highlighted by Citigroup's strategists, may fuel a potential pullback in the US stock market [1].

According to Citi's research, new long positions worth approximately $7.1 billion were added to the S&P 500 futures last week, leaving investors with substantial profits. This trend, coupled with the moderate-to-large profits existing investors are sitting on, has led to a "very extended" positioning in the US stock market [2].

This development is not an isolated occurrence. In recent months, investors have displayed a strong appetite for risk, leading to an increase in net long positions in US stocks and inflows into equity ETFs. This risk-on sentiment has resulted in a net positioning that is not overly stretched, but it leaves room for further flows to support the ongoing rally [3].

However, the potential risks of a pullback should not be overlooked. The Citigroup strategists caution that if the upcoming Labor Department jobs report falls short of expectations or if the unemployment rate increases, it may cause a pause in the current flows momentum [3].

Moreover, stretched positioning is not unique to the US stock market. According to Citi, bullish positioning in US technology stocks is at a three-year high, and other global markets, such as Europe and Japan, are also displaying signs of significant profit-taking risks [4].

In summary, while the US stock market has shown resilience in the face of recent challenges, the stretched positioning observed in the market raises concerns about a potential pullback. Investors should closely monitor the upcoming jobs report and other economic indicators for signs of any shifts in sentiment.

[1] MarketWatch. (2023, July 4). Tech stocks are vulnerable to sharp selloff due to stretched positioning, Citi warns. https://www.marketwatch.com/livecoverage/stock-market-today-s-p-500-futures-inch-higher-as-ai-frenzy-continues/card/tech-stocks-are-vulnerable-to-sharp-selloff-due-to-stretched-positioning-citi-warns-Hl3i4dxp1nkvYK3KCjUK?mod=mw_quote_news

[2] Bloomberg. (2023, July 4). US Stock Positioning Shows Pullback Risk, Citi's Montagu Says. https://www.bloomberg.com/news/articles/2023-07-04/citi-s-montagu-says-us-stock-positioning-shows-pullback-risk

[3] Yahoo Finance. (2023, July 4). Citi explains why US stocks have plenty of room to rally further after shrugging off their pullback. https://ca.finance.yahoo.com/news/citi-explains-why-us-stocks-223453526.html

[4] Bloomberg. (2024, March 5). Citi Says Bullish Bets on US Tech Stocks Are at Three-Year High. https://www.bloomberg.com/news/articles/2024-03-05/citi-says-bullish-bets-on-us-tech-stocks-are-at-three-year-high