Citigroup warns that the US stock market is sending a signal of a sharp decline, as the long positions in the S&P 500 index have reached the highest level since mid-2023. Analysts point out that although investors' positions are not tight, market risks are rising. The S&P 500 index has risen by nearly 23% this year, with optimism stemming from hopes of an economic soft landing and corporate profit growth. Despite the uncertainty of the US election, analysts believe that the market still has upside potential, especially as short interest positions are in a loss-making state
Citigroup stated that with the increasing exposure of investors to the S&P 500 Index, the stock market is now sending a warning signal of a sharp decline.
These strategists mentioned that long positions in the S&P 500 Index are currently at their highest level since mid-2023. The last time this indicator reached this level, U.S. stocks fell by more than 10% in the following three months.
Strategists led by Chris Montagu stated in a report on Monday: "We are not suggesting that investors should start reducing exposure, but when the market expands like this, positioning risks do indeed rise."
As investors' long positions in the S&P 500 Index rise, the index has risen by nearly 23% this year. Analysts attribute this optimism to hopes for an economic soft landing and positive earnings growth in the third quarter so far.
Citigroup pointed out, "The narrative of a soft landing continues, especially for the broader S&P 500 Index, the continued presence of new longs, and to a lesser extent, the covering of shorts, prove this."
They added, "Despite the uncertainty of the upcoming U.S. election next month, the ongoing 'soft landing' narrative, coupled with (so far) robust earnings season, undoubtedly supports this momentum."
Analysts acknowledge that compared to the high position levels in mid-2023, investors' current positions are not as tense as they were back then, and the risk this time is smaller compared to the last time long positions in the S&P 500 Index rose to such a high level.
They said, "Although there are many longs at present, they are not in a high-risk state, indicating less capital at risk, so if the market corrects, their motivation to close positions or hedge is also lower."
Analysts further noted that despite the rise in long positions in the S&P 500 Index, long positions in the Nasdaq Index remain relatively low. They said:
"The positioning in the S&P 500 Index has become more tense, now exceeding highs of the past 3 years. Investor confidence in the Nasdaq continues to be low, with a neutral net position. A common feature of these two markets is that 100% of short positions are in a loss-making state, and if the market continues to rise, shorts must cover, providing potential upside risk in the short term."