Investors are increasingly adding new risk flows to both the S&P and Nasdaq, with bullish momentum strong for futures and exchange-traded funds (ETFs), Citi strategists said Monday.
The positive sentiment comes as markets anticipate a higher likelihood of rate cuts following last week’s weaker-than-expected CPI data. Additionally, dovish commentary from the Federal Reserve regarding the cooling labor market has further supported market sentiment, suggesting an impending rate cut.
While the recent rally has become broader, Nasdaq positioning remains particularly extended.
"Notional levels are at 3-year highs and almost exclusively one-sided, whereas S&P positioning is extended but more modest,” Citi strategists wrote.
Further, Profit/Loss levels are extended, heightening the risk of profit-taking. While average long position profits for the Nasdaq are currently over 2.5%, top quartile profits are at 3.7%, with maximum positioning profits reaching 7%. ETF flows mirror futures, with both Nasdaq and S&P showing similarly extended levels of bullish positioning.
"This aligns with Citi’s US strategists’ view that AI-driven exposure has led to elevated levels of sentiment on the back of lofty fundamental growth expectations,” strategists continued.
In Europe, the recent bullish trend has stabilized, with index positioning now mildly bearish and consistent across regional markets. Positioning activity has been mixed, with no clear directional shifts in any index. The bearish trend, along with recent de-grossing, points to a weaker outlook reflected across positioning ranks.
Similarly, ETF flows were less indicative, with levels remaining nearly unchanged from the previous week.
Meanwhile, Asia’s bullish positioning continues to grow, with notional levels extended for both KOSPI and Nikkei, Citi notes.
Investors have added further new risk flows to the Nikkei, while the bullish extension for KOSPI has been driven by short covering, resulting in both markets being one-sided long. Still, near-term profit-taking risks are greater for KOSPI, with normalized profit levels extended.