Wall Street Strategists: Stock Market Pullback May Trigger Investor Selling

Top Wall Street strategists recently warned that the current risk exposure in the stock market is so high that any weakness could trigger an even bigger plunge once investors begin to reduce their long positions.

A Bank of America survey found that investor allocations to stocks have reached their highest level in more than two years. Data from Goldman Sachs (396.86, -4.02, -1.00%) and Citigroup show that after this year’s record rebound, funds have little room to continue buying stocks.

Currently, long positions in the S&P 500 are $52 billion, 88% of which are at a loss. Citigroup strategist Chris Montagu believes that this situation is a risk for the market.

"If the market turns negative, investors are likely to move faster and in larger volumes as a large number of long positions are already at a loss," Montagu said in a note.

The warning about investors' bullish positions comes amid worries about U.S. interest rate hikes, waning economic growth momentum in some countries and tensions in the Middle East, adding to a global stock market selloff.

Based on current market performance, Europe's benchmark stock index is likely to post its largest single-day decline since July. Prior to this, the S&P 500 index had fallen to its lowest point in more than a month, and has fallen more than 3.5% since its peak in March.

Commodity trading advisers — funds that use systematic strategies to trade futures contracts — have about $170 billion worth of bullish bets on global equities, according to data from Goldman Sachs’ trading unit.

The funds will need to sell $29 billion in global stock futures in this week's falling markets. If stocks continue to fall, as much as $229 billion in shares would need to be sold next month. This figure includes $59 billion worth of S&P 500 futures.

A Bank of America survey showed that investors have increased their stock allocation to a net increase of 34%, the highest level since January 2022.

"The bullish sentiment is not quite at 'close your eyes and sell' levels, but tactically, risk assets are more susceptible to bad news," Bank of America strategist Michael Hartnett said in a note.