Investors' enthusiasm for stocks has raised concerns among Citigroup strategists, as net long positions in S&P 500 index futures have reached the highest level since July 2023, potentially leading to a repeat of last August's sell-off. The strategist pointed out that although investors' balance sheets are relatively loose at the moment, short positions are in a loss-making state, which may further drive the stock market higher. The rise in U.S. Treasury yields has also sparked concerns in the market about a repeat of the sell-off
The unrestrained enthusiasm of traders for stocks has made a team of strategists at Citigroup nervous.
The team led by Chris Montagu, head of Citigroup's Quantitative Research Global, stated that net long positions in S&P 500 index futures have reached the highest level since July 2023. At that time, such a severe skew towards bullish positions led to a punitive sell-off of the S&P 500 index for three months, during which the index fell by 10%.
Montagu is concerned that investors may inadvertently repeat the same mistakes.
In a report shared with MarketWatch on Tuesday, his team stated, "The last time market positions were so crowded, the S&P 500 index fell by more than 10% in the following 2-3 months. We are not suggesting that investors should start reducing exposure, but when the market shows such extreme trends, position risks do increase."
The tension in Nasdaq 100 index futures positions is much less compared to the bubble periods of July 2023 and July 2024. The Citigroup team mentioned that short covering activities in S&P 500 index futures may further drive the market higher recently. The strategists analyzed the latest fund flows in the U.S. futures market in the chart below.
Montagu pointed out that a key difference between now and the summer of 2023 is that investors' balance sheets are far less stressed today. This means they may be less willing to sell stocks to protect their profits.
Meanwhile, both short positions in S&P 500 index and Nasdaq 100 index futures have recently been in a loss position, which could help boost the stock market if more traders are forced to cover their short positions.
Data from FactSet shows that despite the S&P 500 index hitting its first consecutive single-day decline since September 6 on Tuesday, it is still on an upward trend in October.
The rise in U.S. Treasury yields seemed to spook the market on Monday, once again sparking rumors of a repeat of the sell-off in 2023. That sell-off caused the S&P 500 index to fall 10% from August until the end of October. On Tuesday, the 10-year U.S. Treasury yield rose by 2.5 basis points to 4.204%, the highest level since July last year.
Despite a strong start to the U.S. earnings season, the surge in U.S. bond yields has dampened market sentiment. Both the Dow and S&P 500 indices closed lower on Monday. The market continues to focus on the prospect of Fed rate cuts and the approaching U.S. election