Nasdaq Nears Key Level That Could Trigger Systematic Selloff, Citi Warns

The Nasdaq index is nearing a critical level that could trigger a wave of selling from systematic, trend-following investors, Citigroup strategists said in a recent note. The warning comes after a week of weakness in global equities, led by declines in the tech-heavy Nasdaq and Japan's Nikkei index.

Key Triggers for Systematic Selling

According to Citi's models, equity positions held by Commodity Trading Advisors (CTAs) are now much closer to their stop-loss triggers. The bank highlighted that a continued unwind in the semiconductor sector, a key catalyst last week, could lead to more significant equity outflows from these funds.

Citi outlined the following potential trigger points for intensified selling:

• Nasdaq: The closest to its trigger, with selling expected to intensify on a roughly 1% decline and potentially continue down to a -5% drop.
• S&P 500, EURO STOXX 50, and Nikkei: These indices could see similar selling pressure on declines closer to 2%.

Current CTA Positioning

Ad

Despite the recent pullback, Citi noted that estimated positioning among CTAs remains broadly long across global equities, as most market trends are still positive. However, the bank's faster-moving models are beginning to register deteriorating trends, particularly in the S&P 500 and Nasdaq.

The selloff in Japanese equities was reportedly severe enough to trigger stop-outs for some of the more risk-averse trend followers, signaling that some deleveraging has already begun.

Moves in Other Markets

Beyond equities, Citi observed that trend followers maintained their short positions in U.S. Treasury futures, even as yields fell on softer-than-expected inflation data. These short positions remain most elevated at the front end of the yield curve.

In foreign exchange markets, CTAs reportedly covered short positions in the Canadian dollar following a recent CPI release. The strategists noted that funds remain significantly short the Euro and Japanese Yen, and could potentially be buyers of the British Pound this week.