Strategists from Citigroup Inc. have issued a warning that any further declines in the US stock market could intensify due to investors liquidating their significant long futures positions.
In a recent analysis, it was highlighted that there exists $52 billion worth of long positions within the S&P 500, with a staggering 88% of these positions currently experiencing losses. Chris Montagu, a strategist at the firm, points out this could pose a considerable risk to the market's stability.
Montagu elaborated that while previous long unwinds in the S&P 500 were predominantly for profit-taking, the current long positions are, on average, showing a 0.8% loss. He cautioned that a negative shift in the market could trigger a swift and pronounced sell-off due to the volume of long positions already in the red.
Over the last two trading days, the US stock benchmark has seen a 2.6% drop, attributed to escalating Middle East tensions, uncertain interest rate paths, and mixed earnings reports.
Montagu also noted that investor flows suggest a trend of de-risking across various markets in anticipation of rising uncertainties. He warned that the existing long positions, which are marginally losing, could exacerbate any adverse reactions in the market.
Furthermore, Montagu mentioned that similar conditions are observed in the Euro Stoxx 50 futures, where remaining long positions are also marginally losing, indicating a critical juncture where further market sell-offs could lead to rapidly increasing losses.
