Citi's Montagu: Surge in short profits may fuel near-term volatility

Investing.com -- A sharp reversal in global equity flows has left investor positioning deeply bearish, with Citi strategists warning that a surge in short profits could fuel near-term volatility.

U.S. equities last week experienced "the largest weekly decline in positioning levels since Feb 2020," led by outsized moves in small caps and a broader unwind across indexes, strategists led by Chris Montagu said in a note.

Flows were heavily one-sided following the announcement of tariffs, resulting in new short positions being built across U.S. benchmarks.

"Long positioning is completely out of the money, and shorts are deeply in profit: a combination that could trigger near-term volatility amidst continued downside pressure," Montagu wrote.

The note highlights that positioning across the S&P and Nasdaq is bearish but not yet extended. However, losses on existing long positions are mounting quickly after the market's sharp sell-off, and small-cap positioning stands out as firmly bearish at -2.2.

“Positioning flows turned strongly bearish since ‘Liberation Day’ and remained so at the end of the week,” Montagu highlighted.

Despite a strong U.S. non-farm payroll report, selling persisted into Friday, amplified by news of retaliatory tariffs from China. The overall market reaction suggests a broad de-risking, particularly away from cyclical and growth-oriented names.

In the S&P, elevated short positions were offset by long holdings, while in the Nasdaq, both long and short positions were significantly reduced, leading to a drop in overall exposure.

“It is worth noting, that U.S. equity positioning had already been easing prior to Wednesday and was net neutral across U.S. large caps coming into the week,” Montagu said.

European markets mirrored the U.S. move, with FTSE 100 flows leading to a neutral stance and downside risks emerging across other major indexes. EuroStoxx positioning remains elevated in the 84th percentile, leaving long investors exposed to further losses.

In Asia, net positioning levels also fell, with China A50 showing the region’s largest weekly drop as longs were unwound. Bearish sentiment increased in Japan’s Nikkei, though not yet at extreme levels.