Wall Street Strategist Warns of Risk of Forced Selling in Stock Market Rearrangement

(Bloomberg) - Exposure to stocks is so high right now that any weakness could trigger a bigger plunge once investors start trimming long positions, according to top Wall Street strategists.

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A Bank of America Corp. survey found that investor allocations to stocks are at their highest level in more than two years, while data from Goldman Sachs Group Inc. and Citigroup Inc. show that after this year's record rally, there's little room for funds to keep buying stocks. There's little room for funds to keep buying stocks after this year's record rally, according to Coldman Sachs Group Inc.

The S&P 500 has $52 billion in long positions, of which 88% is in the red, a situation that Citi strategist Chris Montagu sees as a risk to the market.

"If the market turns to negative noodles, the market could move faster and bigger as a result of the large number of long positions that are already in the red," Montagu wrote in a report.

As investors warn of bullish positions, worries about high U.S. interest rates, signs of weakening economic momentum in China and heightened tensions in the Middle East are fueling the global stock market selloff.

Europe's benchmark index is on track for its biggest one-day drop since July after the S&P 500 fell to its lowest in more than a month, down more than 3.5% since its peak in March.

Commodity trading advisors - funds that trade futures contracts using systematic strategies - hold bullish bets on global equity markets worth about $170 billion, according to Goldman Sachs' trading desk.

With the stock market falling this week, these funds will need to sell $29 billion of global equity futures, and if the stock market continues to fall, the sell-off could be as high as $229 billion in the coming month. That figure includes $59 billion in S&P 500 futures.

"We believe that CTAs will be sellers of the S&P 500 under a variety of scenarios over the coming week and month," Goldman Sachs derivatives and liquidity specialist Cullen Morgan wrote in a note to clients on Monday.

In an April 5-11 survey of 224 Koon investors with $638 billion in assets, investors have raised their equity allocation to a net overweight of 34%, the largest since January 2022, according to Bank of America Merrill Lynch.

"Bullish sentiment has yet to reach 'sell with your eyes closed' levels, but risky assets are tactically more susceptible to bad news than good news.

Corporate earnings have added another layer of risk. Analysts lowered their first-quarter profit estimates ahead of the reporting period, lowering the threshold for exceeding expectations.

Even so, market forecasters at JPMorgan Chase Bank and Deutsche Bank don't expect stocks to rise significantly after a sharp rebound in the first quarter.

Read more JPMorgan's Matejka Says Earnings Unlikely to Boost Higher Stocks

-Written with the help of Michael Msika.

(Update: Bank of America survey, Goldman Sachs data on CTA)

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