Citi Warns: Nasdaq Could Face Deeper Losses as 80% of Longs Are Underwater

Key Takeaways

• Citi reports intensifying bearish sentiment in the Nasdaq and S&P 500 as capital shifts toward small-cap equities.
• Nearly 80% of Nasdaq long positions are currently unprofitable, creating conditions for accelerated selling pressure.
• The Nasdaq 100 has declined almost 2% in June, marking its weakest performance for the month since 2022.
• Goldman Sachs data reveals hedge funds dumped U.S. technology stocks last week at the most aggressive rate in over ten years.
• European markets show deteriorating positioning, while the Hang Seng exhibits the world’s most extreme bearish configuration.

Citi issued an analysis Tuesday detailing significant changes in investor positioning throughout major equity benchmarks. The financial institution flagged increasing bearish momentum within both the Nasdaq and S&P 500 indexes.

Simultaneously, capital is flowing toward small-capitalization stocks, creating a notable divergence in how market participants are allocating risk across different segments of the U.S. equity landscape.

Citi noted that while aggregate positioning appears balanced at first glance, this surface-level stability conceals a worrying asymmetry developing within the Nasdaq.

Underwater Longs Create Vulnerability

According to Citi’s assessment, long exposure in the Nasdaq remains elevated despite mounting losses across these positions. Strategist David Chew indicated that approximately 80% of these long holdings are currently trading below their entry points.

Chew emphasized that this concentration of losing trades creates vulnerability to accelerated liquidation if these positions are forced to exit. He noted that bullish positions significantly outweigh bearish ones in the Nasdaq.

This asymmetry carries importance because when numerous market participants maintain identical losing positions, they frequently exit simultaneously. Such coordinated selling can amplify downward pressure on equity valuations.

Conversely, the Russell 2000 small-cap benchmark is experiencing the opposite dynamic. Citi observed that positioning in this index continues expanding through fresh capital deployment and short-covering activity.

Bullish exposure on the Russell 2000 has reached elevated territory. However, Citi pointed out that profit cushions associated with these positions remain modest, which constrains the downside risk from potential unwinding.

International Markets Display Divergent Trends

The decline occurs amid growing doubts surrounding elevated valuations in artificial intelligence-related equities. This questioning has pressured technology shares throughout June.

The Nasdaq 100, which comprises numerous large-capitalization technology firms, has dropped nearly 2% this month. This trajectory positions the benchmark for its poorest June showing since 2022.

Information from Goldman Sachs’ prime brokerage division indicates hedge funds have also retreated from U.S. technology equities. Net selling activity last week reached unprecedented levels spanning more than a decade, measured both in absolute dollars and relative to other sectors.

Beyond U.S. borders, Citi reported deteriorating flows throughout Europe. Short positions are accumulating while long holdings are being liquidated, driving aggregate positioning back toward neutral levels in the EuroStoxx and DAX benchmarks.

Citi characterized this development as evidence of weakening confidence among European market participants. The institution suggested upside potential in these markets remains constrained without more robust capital inflows moving forward.

The FTSE represented a minor outlier, experiencing a modest uptick in long positioning. Nevertheless, profit margins tied to these positions remain constrained.

Throughout Asia, the KOSPI maintains bullish positioning at extended levels despite recent market weakness. Citi suggested this creates vulnerability comparable to the Nasdaq’s current situation.

The Hang Seng displays the polar opposite configuration. Citi identified it as the most bearishly positioned benchmark globally at present, overwhelmed by short positions that are presently generating profits.

This arrangement leaves the Hang Seng susceptible to a short squeeze scenario, where ascending prices compel short sellers to repurchase shares, thereby amplifying upward momentum.

Citi’s comprehensive assessment indicates bearish flows are intensifying across primary U.S. benchmarks while capital rotates toward smaller companies, a dynamic the institution plans to monitor closely in coming weeks.