Positioning suggests 'limited' investor conviction behind recent rally - Citi

December 6, 2022 6:39 AM EST
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Citi’s Chris Montagu believes the recent rally in equities was fueled by extremely bearish positioning. While some analysts suggested that the market bottom is in, Montagu says that weak positioning flows recorded last week show “only limited investor conviction behind the recent rally.”

Overall, the futures positioning in the S&P 500 “remains neutral” while Nasdaq is still bearish. The recent relief rally in the market means the legacy short positions are in loss, which points towards a continued risk of a short squeeze, Montagu added.

“The recent rally has increased the losses on S&P and Nasdaq shorts. All short positions in both markets are currently in loss, with average short losses greater for the S&P (-6.5%), increasing the potential risk of a squeeze,” Montagu said in a note.

As far as European equities are concerned, Montagu notes little changed positioning relative to the prior week.

On China, Montagu highlighted “the largest change in net futures positioning with positive flows in both futures indices and net notional turning positive across both markets.”

The strategist also discussed the recent value outperformance, which he doesn't expect to continue going into 2023.

"Rolling recessions and continuing negative sentiment on inflation will create increasing headwinds for the Value vs Growth trade so we recommend a general defensive style tilt."

The S&P 500 closed 1.8% lower yesterday.

By Senad Karaahmetovic

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