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The recent impressive performance of the S&P 500, marking its best week in a year, may not be indicative of sustainable gains, as investors have primarily been locking in profits on bearish bets, Citigroup Inc. strategists suggest. During the past week, the predominant activity in contracts tracking the benchmark index has been short covering, where traders buy shares to close out open short positions. Citigroup’s strategist, Chris Montagu, notes that the overall market positioning remains “moderately bearish.”
Montagu highlights that “profit taking has led to cleaner, less skewed positioning,” reducing the overall risks associated with the market’s posture. He notes that market gains resulting from further short covering are less likely in the near term.
The recent rally in the S&P 500, which followed a 10% drop from its July peak, was influenced by a retreat in bond yields, driven by expectations that interest rates may have reached their peak. However, prominent Wall Street strategists, including those at Morgan Stanley and JPMorgan Chase & Co., have expressed skepticism about the rally’s sustainability due to persistent high rates and slowing growth.
Contracts monitoring the S&P 500 indicated a 0.2% decrease in early trading on Tuesday, potentially putting an end to the index’s six-day winning streak.
On a more positive note, Citigroup’s Montagu points out a shift in sentiment for the technology-heavy Nasdaq 100 index. Last week, approximately $3 billion in new “risk flows” were directed toward Nasdaq futures. As a result, positioning on a normalized basis has now become only marginally bearish, signifying a substantial change from the previous week.
