Citi says positioning risk is shifting from short squeezes to profit-taking

Citi has advised clients that the risk landscape has shifted from short squeezes to profit-taking. While investor positioning across developed markets remains favorable, the bank identified a change in where vulnerabilities lie. Analysts noted that new risk flows are continuing to bolster equity exposure, with Europe experiencing strong incremental demand and Asia stabilizing through short covering.

Short-squeeze dynamics have become less influential as short exposure has decreased in several major markets. Instead, the bank sees vulnerabilities concentrated in profitable long positions, particularly in the Russell 2000 and some European markets. As positioning becomes more extreme, the primary risk is shifting from forced covering by shorts to potential profit-taking by longs.

In the U.S., positioning strengthened for a third consecutive week, with the Nasdaq benefiting from new risk flows and the Russell 2000 showing bullish levels due to a mix of new longs and short covering. However, weekly flow momentum is moderating. Citi highlighted that stretched long positioning in the Russell 2000 represents the greatest vulnerability, and a decline in growth expectations could lead to downward pressure.

Despite geopolitical and policy challenges, European equities continue to attract new risk flows, driven by long accumulation in the EuroStoxx 50 and DAX. The FTSE was the exception, experiencing modest profit-taking and new short activity.