S&P 500 Exposure Reaches Critical Levels That Likely to Trigger 10% Slump, Citi Warns

Exposure to the S&P 500 has reached levels that historically preceded a 10% slump, according to Citigroup strategists.

Long positions on futures linked to the benchmark index are at their highest since mid-2023 and are looking "particularly extended," the team led by Chris Montagu wrote in a note.

"We're not suggesting investors should start to reduce exposure, but the positioning risks do rise when markets get extended like this," they said.

The S&P 500 had fallen 10% from August through October last year due to concerns that the Federal Reserve would maintain higher interest rates to combat elevated inflation. Technology heavyweights bore the brunt of the losses, exacerbating declines for the broader market.

Investors are more optimistic about the macro outlook this time around as the Fed has already started cutting rates while economic growth remains resilient. The S&P 500 is back near record highs.

Additionally, the market has been buoyed by a strong start to Q3 earnings season. Strong earnings from TSMC and Netflix ignited risk sentiment last week, with both stocks jumping over 5% on a weekly basis. However, the index now faces critical tests as Tesla will post results on Wednesday post-market, with other Magnificent 7 companies following up next week.

Citi's Montagu also noted that profitable positions are less stretched compared to 2023, "suggesting less capital at risk and therefore less motivation to cover if markets pull back."