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Post election market rally could stall on profit taking, Citi says

Published 2024/11/12, 11:32
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Investing.com -- Near-term profit-taking could limit further upside for the post-election equities rally, according to Citi strategists.

The last week’s US election outcome led to increased investor optimism, sending the markets soaring to close the week at record highs.

With the election uncertainty no longer there, and expectations that a Trump administration might support equity markets and the recent Federal Reserve rate cuts, markets received a major boost.

Bullish positioning has grown across US indexes, indicating sustained investor risk appetite after the election and the rate cut. According to Citi, S&P positioning now sits at its highest level in three years, with similarly elevated levels seen in the Nasdaq and Russell 2000.

Furthermore, long positions across all three indexes are above the 98th percentile, highlighting “an extremely bullish outlook,” Citi strategists led by Chris Montagu said.

Meanwhile, most bearish or short positions have been reduced, except for those in Nasdaq, where remaining shorts are currently unprofitable.

“The market rally has left positioning pressures acute on remaining shorts, in particular for short positioning on Nasdaq,” strategists noted.

Losses for average short positions on Nasdaq are around -5.6%, which may lead to more near-term covering, providing potential support for the index at its present levels.

Moreover, profit levels on long positions in the S&P and Russell are high, which may raise the likelihood of near-term profit-taking, potentially acting as a headwind for further gains.

Elsewhere, positioning in Europe’s Eurostoxx turned bearish last week, with short positions taking the lead in trading activity. However, the overall positioning trends in Europe appear inconsistent, signaling heightened uncertainty.

“Despite the rise in bearish positioning, EuroStoxx profit/loss levels are still small, leaving limited positioning risks,” Citi’s note states.

In Asia, positioning for the China A50 indicates an initially positive reaction from investors to recent stimulus announcements, pushing normalized positioning to +3.1 out of 5.

Meanwhile, the Hang Seng saw a slower rise in positioning. Across other Asian indexes, activity was relatively subdued; the S&P/ASX 200 and Nikkei showed slight bullish sentiment, while bearish positioning gained traction on the KOSPI.

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