Investor appetite for small caps increases after Fed rate cut, says Citi By Investing.com

Investing.com — Investors added to their long positions on last week’s first interest rate cut by the Federal Reserve in years, Citi said in a new weekly report.

Remaining short positions in the small-cap index face an average loss of 5.7 percent, and “a short squeeze could support further upside in the near term,” Citi strategists said.

It shows similar overextension, while investors appear largely ambivalent about , where net positioning remains near neutral.

“Last week was also volatile due to Triple Witching, which created significant run-on activity alongside the FOMC rate decision,” Citi strategists said.

Market volatility rose following the FOMC’s 50 basis point rate cut, but US futures markets soon began to recover overnight. This recovery was supported by exchange-traded fund (ETF) inflows and new long positions in US markets. However, a visible split in investors’ risk appetite for US stocks persisted, as reflected in last week’s flows.

Outside the US, Europe’s positioning remained neutral with mixed flows in recent weeks. Although ETF inflows have been steady, they remain modest and there has been no clear positive or negative trend in Eurostoxx flows over this period.

In Asia, relative position changes in Europe, Australasia and Far East (EAFE) and emerging market (EM) futures were unusually large, even considering it was a busy week. That led EM futures to move from neutral to the third most extended long position, while EAFE futures moved from slightly bullish to the second most extended short position, according to Citi.

For futures, net positioning remains strongly bearish (-2.2 normalized), but a bullish trend emerged last week as investors began adding new long positions to balance out profitable shorts.

In contrast, most short positions have already been rolled out, leaving the market mostly long, with average longs posting a 4.2% return.