Citi has indicated that the market is sending warning signals that a stock market crash may be imminent as exposure to the S&P 500 index increases. Strategists have noted that the bullish positions in the S&P 500 index are currently at their highest levels since mid-2023. At that time, the benchmark index fell by more than 10% over the following three months.
Led by strategist Chris Montagu, the team stated in a report on Monday, "We are not advising investors to start reducing exposure, but when the market stretches like this, position risk does indeed rise."
Amid the S&P 500 index's nearly 23% rise this year, positions in the index have increased. Analysts attribute this optimism to hopes for a soft economic landing and positive growth in third-quarter earnings thus far.
The bullish momentum in the U.S. market continues, particularly for the S&P 500 index. The emergence of new long positions, along with a smaller degree of short covering, attests to this.
They added, "The ongoing 'soft landing' narrative plus (thus far) solid earnings season undoubtedly supports this momentum."
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Analysts acknowledge that current investor position levels are not as stretched as they were during the high exposure levels in mid-2023, and the risks are lower compared to the last time the S&P 500 index exposure rose to such levels.
They stated, "The current profit and loss statement is positive but by no means stretched, indicating a reduction in risk capital, and thus a diminished motive to cover positions if the market corrects."
Analysts added that as positions in the S&P 500 index increase, positions in the Nasdaq remain relatively low."S&P's positions have become more strained, currently breaking through a 3-year high. Investors' confidence in the Nasdaq remains low, with a net position that is neutral. A common feature of these two markets is that none of the 100% short positions are funded; if the market continues to rise, short sellers will have to cover, bringing potential short-term upside risks."
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