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Citi Warns U.S. Stock Positioning Unwind May Not Be Over After Tech Selloff
Summary
A recent technology-led selloff has triggered a broad deterioration in equity positioning, with strategists at Citi noting that the de-risking in U.S. stocks may not have run its course.
A recent technology-driven selloff has caused a broad deterioration in equity positioning across major markets, with strategists at Citi warning that the de-risking in U.S. stocks "may not be over." The firm noted that flows were "overwhelmingly bearish across large caps" as investors reacted to weakness in the technology sector.
U.S. Positioning Deteriorates Sharply
The most significant adjustment occurred in the tech-heavy Nasdaq, where positioning has fallen to a one-month low, according to a note from Citi strategist David Chew. This was driven by an "aggressive combination of long liquidation and new short flows." Chew highlighted that Nasdaq positioning "remains vulnerable given all longs are currently in loss."
In contrast, positioning in the broader S&P 500 eased primarily through the unwinding of long positions. Overall, the widespread de-risking reflects growing investor concerns surrounding technology and semiconductor exposure.
Global Market Sentiment
The trend of weakening investor sentiment extends beyond the U.S., though with some regional variations:
Ad- Europe: Bearish positioning is reportedly building faster than prices are falling. This has pushed Germany's DAX index into "outright bearish territory," while bullish levels for the EuroStoxx have also declined. The UK's FTSE was a notable exception, with positioning improving on short covering.
- Asia: Bearish flows were widespread across the region. Citi identified South Korea's KOSPI as "the market most exposed to further deleveraging" due to its elevated positioning despite a recent index decline.
Short Squeeze Risk and Earnings Ahead
Despite the bearish tilt, Chew cautioned that the increasingly crowded short base in the market "creates asymmetric squeeze risks should sentiment stabilise or macro data surprise positively." A short squeeze can occur when a heavily shorted asset's price rises, forcing short sellers to buy back shares to cover their positions, which in turn drives the price even higher.
Citi concluded that the upcoming corporate earnings season will be a key determinant for the market's next move. The results will be critical in establishing whether investor positioning stabilizes or if the current unwinding trend continues.
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