Investors increased short exposure across a range of global equity markets last week as positioning became more defensive, according to Citi, with the bank highlighting the potential for crowded bearish trades to amplify any subsequent rebound.
Strategists led by David Chew said EuroStoxx and U.S. large-cap positioning remained relatively resilient, but broader sentiment deteriorated as investors reduced directional risk.
The increase in short exposure has created “growing asymmetry in positioning outcomes,” according to Citi, particularly in markets including the Nikkei, KOSPI and S&P 500.
The bank’s analysis does not forecast a market rebound. Instead, it identifies circumstances in which the closing of existing short positions could increase buying if markets move higher.
U.S. Small Caps Record Largest Positioning Decline
Citi said the broader deterioration followed changes in monetary policy from the Federal Reserve and Bank of Japan, as well as higher energy prices and geopolitical tensions.
The bank described the period as “one of the most synchronized periods of de-risking observed during the current rate cycle.”
Bearish flows were recorded across the three major U.S. equity indices, with Citi saying investors primarily established new short positions rather than reducing existing long exposure.
The Russell 2000 experienced the largest weekly decline in positioning across the markets covered by Citi globally. According to the bank, all remaining long positions in the index are currently loss-making.
Positioning in the S&P 500 and Nasdaq was more resilient, with the closing of some short positions offsetting part of the increase in bearish exposure.
Citi Highlights S&P 500 Short Positioning
Around 80% of both long and short S&P 500 positions are currently loss-making, according to Citi.
The bank noted that the overall short book is larger, leading its strategists to conclude that “positioning asymmetry is skewed toward the risk of short covering.”
Citi said a modest rise in the index could therefore generate additional buying if short sellers close their positions.
The scenario depends on subsequent market movements and changes in investor positioning and does not indicate that a rebound will necessarily occur.
DAX Moves Into Mildly Bearish Territory
European markets also recorded increased short exposure.
Citi said new short positions in the DAX and European Banks index moved both into mildly bearish territory. EuroStoxx remained more constructively positioned despite experiencing the largest outflows in the region.
According to the strategists, the principal issue in Europe “is shifting from direction to positioning stress.”
Long positions across most European indices are currently loss-making, while Citi said the DAX has the weakest profit-and-loss profile in the region.
Short Exposure Remains Elevated in Asian Markets
Citi identified Asia as the most bearishly positioned region overall.
Although positioning in the Nikkei improved somewhat, it remained the most negatively positioned major equity market. Additional short exposure was also added to the KOSPI, Hang Seng and China A50.
Short books in the Nikkei, KOSPI and Hang Seng are close to historically elevated levels, according to Citi. The bank also estimated that more than 40% of short positions in both the Nikkei and KOSPI are currently loss-making.
Citi said this positioning means “any positive catalyst could trigger a disproportionately large, short-covering rally, particularly in Nikkei.”
The potential outcome depends on the emergence of a positive catalyst and subsequent investor behaviour. Citi’s analysis describes current positioning conditions rather than predicting future index performance.
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