Is the rebound in US stocks a trap for longs? Citigroup warns: the risk of a decline is not cleared, the longs are still crowded, and the shorts are actively building positions.

Citibank strategist David Chew's team's latest report pointed out that after the Nasdaq 100 index plummeted nearly 5% last Friday, the largest single-day drop in 14 months, the risks in the US stock market have not completely cleared. Traders are actively building short positions against US stocks, while bullish bets on the technology sector remain high, and the market still faces downside risks. The Citibank team further warned that the global stock market is nearing peak levels of bubble-like conditions since the 2008 financial crisis, overall risks are steadily rising, and if risk signals continue to increase, the market may face more severe adjustments. Citibank Deep Warning: Risks are far from being cleared, long positions are causing hidden dangers On the "Black Friday" of local time June 5th, the US stock market's four major indexes all suffered defeat. The S&P 500 index fell sharply by 2.64%, marking the largest single-day decline since October 2025; the Nasdaq Composite Index plummeted by 4.18%, the largest single-day percentage drop in 14 months. The Philadelphia Semiconductor Index fared even worse, tumbling more than 10% in a single day, marking the largest single-day decline since March 2020 and the fourth largest single-day decline on record for the index since 1994. Multiple negative factors ignited this crash. At the macro level, the May non-farm payroll data added 172,000 jobs, nearly double the market's expected 85,000 jobs, shattering market hopes for a Fed rate cut this year, and traders have begun pricing in rate hike risks. At the micro level, chip giant Broadcom's earnings guidance fell short of expectations, interpreted by the market as a signal of over-exuberance in the "AI frenzy", triggering a "stampede-like" sell-off in the semiconductor sector. The market generally views this crash as a "necessary pullback" to relieve overheating and excessive leverage in the technology sector, believing that the downturn may have already absorbed some negative news phase. On Monday, semiconductor stocks erased part of their previous day's losses. The Nasdaq rose by 220.23 points, an increase of 0.86%, to 25,929.66; the S&P 500 rose by 21.99 points, an increase of 0.3%, to 7405.73. However, in a report released on June 9th, Citibank's David Chew team issued a warning against this optimistic assessment. Chew wrote in the report, "Capital flows show that the market is polarized - recent short positions are being actively built, and existing long positions continue to exist. The long position in the Nasdaq index is still too high, while the overall situation has improved, there are still downside risks." The Citibank strategist team had previously warned multiple times that the long positions in US tech stocks were in an "extremely overcrowded" state, and the Nasdaq 100 index faced high profit-taking and long liquidation risks. Chew further pointed out that most long positions are still profitable, which means that the downside risks are still significant. "Although the risks have decreased, the bullish positions in the Nasdaq are still too high, and most long positions remain profitable. Downside risks are biased towards the catalysts for technology stocks, especially as upcoming tech stock earnings may disappoint and trigger massive long liquidation, as profitability is still high and long positions are very concentrated." Citibank believes that despite some risk reduction in the market, the high levels of long positions imply that when negative catalysts appear, the likelihood of profit-taking and long liquidation by investors will significantly increase, putting significant downward pressure on tech stocks. European markets relatively stable, Citibank holds optimistic outlook In contrast to the warning issued for the US market, Citibank holds a more optimistic view for the European market. The Chew team pointed out that the short positions in the EuroStoxx 50 index have been closed out, and the Germany DAX index, UK FTSE 100 index, and Eurozone Stoxx bank index are returning to neutral levels. Chew stated, "Position improvements have been strengthened by a better profit-loss dynamic, reducing pressure on existing positions and creating a more constructive backdrop for the short-term market." However, the interconnection of global macro risks may still impact the European market. Fitch has adjusted its global sovereign credit rating outlook to "deteriorating" due to the impact of the Iran war, noting that rising energy prices are weakening growth and inflation prospects in developed markets. Risk accumulation: CPI nearing 4% + Powell's first rate decision + Super IPO frenzy The Citibank team sees mid to late June as a critical risk window for the US stock market. The report explicitly states, "In the coming weeks, the US stock market will face several major risk events." The first and foremost is the US May CPI data scheduled to be released this Wednesday. Market expectations are for a year-on-year increase of 4.2% to 4.3%, further climbing from the previous month's 3.8% to reach the highest level since 2023. If the CPI exceeds expectations, concerns about uncontrollable inflation in the market will intensify. Even more conspicuously, the Federal Reserve's interest rate meeting on June 16th and 17th is drawing significant market attention. This will be the first time new chairman Kevin Powell leads the FOMC meeting, and its outcome will set the tone for his entire tenure. However, Powell is facing a tough decision amid a three-way tug-of-war: On the inflation front, the US May CPI is expected to increase by 4.2%, far exceeding the Fed's 2% policy target. Energy prices have risen significantly due to the Iran conflict lasting over 100 days, with oil prices up about 60% year-to-date, reshaping the policy balance of the Federal Reserve. On the political front, Trump publicly called for Powell to cut rates during an NBC program on June 7th, saying "There is absolutely no reason to raise rates." He stated, "Kevin is very good, I hope he acts according to his judgment," but then added, "There should not be an immediate rate hike to punish a well-developed country." Furthermore, the bond market has moved ahead of the Fed. The 2-year Treasury bond yield approached 4.15% on Monday, significantly higher than the Fed's current policy rate ceiling of 3.75%; the 10-year bond yield is close to 4.55%, and the 30-year bond yield has returned to above the 5% mark. Interest rate swaps data shows that traders have fully priced in one rate hike by 2026. The 2-year Treasury bond yield has been consistently higher than the Fed's policy rate ceiling since March this year, with a premium of about 40 to 50 basis points. This indicates that the market is signaling that policies are no longer restrictive, and may even be too loose. The deviation between short-term US bond yields and policy rates serves as a reminder that Fed policies often lag behind market trends. The previous rate hike cycle from the end of 2021 to early 2022 showed similar characteristics of leading the market. Chief US economist at Morgan Stanley, Michael Gapen, stated, "One of the key results will be the degree of alignment between Powell and hawkish views." The market will pay close attention to whether the policy statement removes the "dovish bias" wording, whether rate hike expectations appear in the dot plot, and whether the risk distribution chart leans towards an upside bias. Analysts believe that if Powell fails to clearly respond to market signals about rate hikes and White House desires, there will be a greater gap between market expectations and the Fed's actual stance, potentially further amplifying volatility in the US stock market. Another variable repeatedly discussed by the market is an unprecedented wave of super tech giant IPOs coming up. SpaceX, Anthropic, and OpenAI, three major AI giants, will all debut on the Nasdaq. SpaceX is set to be listed on June 12th, raising $750 billion, breaking the global IPO record with an estimated valuation of about $1.8 trillion. Anthropic secretly submitted an IPO application on June 1st, with an estimated valuation of about $965 billion and expected IPO in September. OpenAI filed a confidential S-1 registration statement on June 8th, with a possible valuation of $1 trillion upon listing. These three companies are expected to raise a total of around $200 billion. However, these super IPOs face serious valuation questioning. Taking SpaceX as an example, its revenue in 2025 is estimated at around $19 billion, with losses of nearly $5 billion, resulting in a market-to-sales ratio of over 90 times. Michael Burry, the prototype of "The Big Short," bluntly said, "Nothing in the prospectus can support its $1 trillion valuation." Citibank strategist Chew also explicitly stated that these super IPOs will "test the market's greater interest in the AI theme" - if IPO subscription enthusiasm is lower than expected, it may have negative spillovers on the sentiment of the tech sector. What is more worrisome for the market is liquidity shock. In order to quickly incorporate these giants into the indices, Nasdaq has significantly shortened the waiting period for super-large IPO companies to be included in the index to 15 trading days, and FTSE Russell has reduced the waiting time to 5 days. This means that passive funds will be forced to "buy" a large amount of these high-priced IPO stocks, regardless of whether individual investors approve of their valuations. The concentration of multi-billion-dollar super IPOs, combined with index rule changes that lead to "forced buying" by passive funds, may distort pricing mechanisms, making the market more fragile at a technical level.