Citadel Says Risk Is Growing That Flows Driving US Stocks Higher Could Reverse

Citadel Securities says the powerful flows that have pushed US stocks to record highs in recent weeks face a growing risk of reversing.

Bloomberg reported on May 19 that, in a report published a day earlier, Citadel Securities said rising long-term US Treasury yields were starting to compete with the stock market.

Scott Rubner, a strategist at the firm, wrote that fundamentals remain solid but signs of froth are emerging as bond yields rise. Given the near-term backdrop, that calls for a more cautious tactical approach. The flows that drove the rally now appear to be fairly mature, he added.

The S&P 500 has jumped about 16% from its March low, helped by strong corporate earnings, share buybacks and aggressive retail buying. The index has climbed for seven straight weeks, with investors largely shrugging off higher oil prices tied to the war in the Middle East, mounting inflation concerns and the possibility of additional Federal Reserve rate hikes.

Rubner cited several reasons for caution. Institutional money linked to indexes and retail investors have poured into US equities, but the market is far more overheated than it was six weeks ago, he wrote.

The 30-year US Treasury yield has climbed close to 5.16%, near its highest level in almost three years, making US stocks less attractive.

Another issue is that most of the S&P 500's gains have been driven by a small group of large technology stocks. Over the past 30 trading days, only 27% of companies in the index have outperformed the benchmark, according to Rubner.

Rubner also wrote that the market now has fewer tools to hedge downside risk than it did a few weeks ago, leaving it much less protected against a short-term volatility event.

Inflows into passive funds, buybacks, retail participation and leveraged ETF exposure all accelerated alongside the rally. But those flows have left the market vulnerable to a short-term pullback if the advance loses momentum.

Kim Jung-a, Contributing Reporter, Hankyung.com, kja@hankyung.com