Strategists report that long positions in the S&P 500 have reached their highest levels since mid-2023, a period that preceded a decline of over 10% in the following three months. In a Monday note, analysts led by Chris Montagu highlighted that while they are not advising investors to reduce their exposure, the risks associated with current positioning increase as the market becomes more extended.
The rise in S&P 500 long positions coincides with the index’s impressive gain of nearly 23% year-to-date. Analysts attribute this bullish sentiment to expectations for a soft landing of the economy and a wave of favorable third-quarter earnings reports.
“Bullish momentum remains strong for U.S. markets, particularly for the broader S&P 500, as evidenced by the ongoing increase in long positions and, to a lesser extent, the covering of short positions,” the analysts noted. They emphasized that the prevailing ‘soft landing’ narrative, combined with a solid earnings season so far, has bolstered this momentum despite the uncertainties surrounding the upcoming U.S. election.
While acknowledging that current positioning levels are high compared to those in mid-2023, analysts pointed out that investors are not as overly stretched now, suggesting a reduced level of risk compared to that earlier period. “Current profits and losses, while positive, are not excessively inflated, indicating less capital at risk and subsequently lower motivation to cover positions in the event of a market pullback,” they added.
Interestingly, as S&P 500 positioning rises, the positioning within the Nasdaq remains relatively low. “S&P positioning has become even more stretched, now reaching three-year highs, whereas investor confidence in the Nasdaq remains muted, with net positioning sitting at neutral. A common characteristic of both markets is that 100% of short positions are currently out of the money, creating potential short-term upside risk if the markets continue to trend upward and short sellers are compelled to cover,” the analysts concluded.
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