Citi strategists see higher equities after 'orderly' sell-off

The “orderly” pullback in US stocks last week has reduced the risk of a chaotic selloff and set the stage for further gains in the S&P 500, Citigroup Inc. strategists say.

Bullish positions in S&P 500 futures fell to $70 billion from $77 billion last week, while short positions remained largely unchanged at $2.5 billion, according to a note from the bank dated Aug. 7. 

“This orderly position trimming has reduced some of the short-term positioning risk that has been a worry for investors in recent weeks,” strategist Chris Montagu said. “This puts markets in a good set-up to make new gains or weather negative news/shocks in the coming weeks.”

US stocks suffered their biggest decline since March last week as bond yields rose following a downgrade of US government debt by Fitch Ratings. They bounced back slightly on Monday, although investors remain cautious ahead of key inflation data, which is due Thursday and is likely to provide clues on the Federal Reserve’s policy outlook.

Some of Wall Street’s most bearish voices — such as JPMorgan Chase & Co.’s Marko Kolanovic and Morgan Stanley’s Michael Wilson — have continued to warn that stocks could come under pressure from a slowdown in economic growth, even as economists have broadly pared back projections of a US recession.