A recent trend of risk aversion was reversed when over $16 billion poured into the S&P 500, changing the mood of investors. According to analysts at Citi, this surge has driven S&P 500 positioning to excessive levels. This newfound optimism among investors seems to have been supported by positive economic statistics.

Early in August, investors worked out a cautious and de-risking environment, which resulted in muted equity positions. But the macroeconomic data from last week—especially from the US—sparked a dramatic turnabout.

A more hopeful economic picture has resulted from these developments since they have eased concerns about a prolonged period of inflation and have given the Federal Reserve greater leeway in managing interest rates.

The S&P 500 rallied in response to these encouraging data indicators, recovering losses from the early August sell-off. In addition to reflecting better market sentiment, this recovery indicated that investors were once again committed to the equities market, especially in the S&P 500, which absorbed most of the fresh risk flows.

All US indices saw an increase in net positioning, with the S&P experiencing notably bigger and more steady fresh risk flows throughout the week. According to Citi analysts, notional positioning increased by about $18 billion, of which the great bulk ($16 billion+) came from new longs.

Since the rally forced all short positions into the loss area, there has been a noticeable decrease in short positions in tandem with this capital inflow. However, Citi points out that because these investments are comparatively lower in size, the risks connected with them are lessened.

Losses from long positions had been pressing the Nasdaq in particular, but they have now much decreased, relieving investor pressure and enhancing the index's overall profit setup.

Bullish flows did not just return to the U.S. markets. There was also an increase in investor activity in the European and Asian markets. Indexes in Europe, such the FTSE and DAX, had a net positive turn due to the unwinding of short positions and the initiation of new long ones.

As the index with the greatest positive flows in Asia, the Nikkei reached levels that Citi sees as increasingly stretched. In addition, the KOSPI increased its net long positions, getting close to three-year highs.

The China A50 index, on the other hand, continues to be the most bearish, with little positioning risk because of its undeveloped short profit levels.

(Sources: investing.com, reuters.com)