Citi Says U.S. Stock Positioning Looks Healthier After Recent Selloff

Citi believes investor positioning in U.S. equities has improved following last week’s market pullback, although the bank warns that several areas of the market remain vulnerable to further downside risks.

In a note released Tuesday, Citi stated that the recent selloff helped create a cleaner positioning backdrop, particularly from a profit-and-loss perspective. The bank observed that positioning in the S&P 500 has moderated, while profits associated with long Nasdaq positions have declined from previously elevated levels.

Despite the improvement, Citi cautioned that bullish positioning in the Nasdaq remains relatively crowded compared with historical norms.

Nasdaq Positioning Still Presents Risks

According to Citi, investor exposure to technology stocks remains one of the key areas of concern.

Although some investors reduced risk during the recent decline, many Nasdaq long positions continue to remain profitable. This means investors may still be vulnerable to additional selling pressure if upcoming technology-related events fail to meet expectations.

The bank noted that disappointment from major technology catalysts could trigger substantial long-position liquidation, increasing volatility across the broader market.

Market Structure Remains Divided

Citi also highlighted what it described as a bifurcated market environment.

On one side, investors continue building aggressive short positions, while on the other, many existing long positions remain intact. This mixed positioning suggests that market participants remain divided on the near-term outlook for equities.

While recent de-risking has helped improve overall conditions, the bank believes risks remain skewed toward the downside until positioning becomes more balanced.

European Equity Sentiment Improves

Outside the United States, Citi sees signs that European markets are gradually recovering from a period of extreme pessimism.

The bank believes positioning across Europe is moving beyond a capitulation phase, with investors beginning to cover short positions and sentiment improving.

The EuroStoxx index has recovered from deeply bearish positioning levels, while exposure in Germany’s DAX, the UK’s FTSE, and European banking stocks has moved closer to neutral territory.

According to Citi, improving profit-and-loss dynamics have eased pressure on investors and contributed to a more constructive short-term outlook for European equities.

Asia Shows the Most Mixed Risk Profile

Citi identified Asia as the region with the widest divergence in market positioning and risk exposure.

South Korea’s KOSPI index stands out as one of the most heavily bullish markets, leaving it particularly vulnerable to any deterioration in investor enthusiasm surrounding artificial intelligence and technology-related themes.

The bank warned that a negative shift in the AI narrative could have a disproportionately large impact on KOSPI performance.

China and Japan Present Different Opportunities

China’s A50 index also shows relatively elevated positioning, although Citi noted that profit levels are more moderate compared to other markets. As a result, immediate selling pressure appears less intense.

Japan’s Nikkei was viewed more favorably, with the bank describing positioning as constructive and relatively balanced.

Meanwhile, Australia’s S&P/ASX 200 and Hong Kong’s Hang Seng Index continue to lag behind regional peers, with bearish positioning remaining firmly in place.

Outlook Remains Cautiously Constructive

Overall, Citi believes recent market weakness has helped improve equity positioning globally, reducing some of the excess optimism that had built up in previous weeks.

However, the bank stresses that risks have not disappeared. Elevated exposure to technology stocks, particularly in the Nasdaq and AI-related sectors, means markets remain sensitive to disappointing earnings, economic data, or shifts in investor sentiment.

For now, Citi views the backdrop as more constructive than before the selloff, but investors should remain cautious as key market catalysts approach.