Long positions in Nasdaq, S&P 500 and especially the Russell 2000 have increased over the past three weeks

U.S. markets have been on the receiving end of inflows from investors for the past three weeks.

Throughout August, investors have been increasing their exposure to U.S. equities. But the momentum behind weekly inflows has begun to moderate. With that positioning slightly more stretched, and investors sitting on profits, any deterioration in the growth outlook could trigger a selloff.

This assessment of investors' exposure was highlighted in a note on positioning from Citi analyst David Chew published Monday. He describes how new risk-asset flows have driven the recent uptick in the Nasdaq-100 NDX while a combination of short covering and fresh longs have driven the Russell 2000 RUT higher.

Flows continue to support U.S. positioning, even as momentum eases across large caps.

The reduction in short positions makes a squeeze less likely now, however, and it's the small-cap Russell 2000, where "meaningful profits" have been created and positioning is more extended, that concerns Chew. Long notional exposure on the Russell 2000 is at a three-year high, and Chew points out that the average long position has an unrealized gain of 2.5% at present.

The inflows were prompted by a relatively strong earnings backdrop, by AI-earnings-driven expansion and by the relatively benign inflation data released recently that strengthened the case for Fed resistance to tightening. The positioning risk, however, would increase should U.S. growth or consumer expectations worsen markedly, amplifying downward pressure through the unwind of profitable long positions.

-Jules Rimmer