After two weeks of adjustment, the positions in major U.S. tech stocks have returned to a "neutral level," or even slightly below earnings growth.

The key to this round of correction in the US stock market is not how much the index has fallen, but the rapid cooling of the most crowded large tech trades.

According to Pursuit Trading Desk, on June 12, Deutsche Bank Securities released a global asset allocation strategy update, tracking investor positions, options, futures, and fund flows around June 11. In the past two weeks, the S&P 500 retreated nearly 5%, but it was not a broad market decline: the Nasdaq 100 fell 7%, the Mag 7 dropped 10%, while the rest of the S&P 500 and small caps soared to record highs.

Strategists Parag Thatte and others wrote in the update: "Just a week ago, positions in large tech still seemed crowded and demanding; but now, after returning to neutral, that's no longer the case."

Position data shows a very direct change. Overall US stock positions dropped from the historical 66th percentile to the 34th, moving from slightly overweight to slightly underweight; almost the entire decline came from large tech, which plunged from the 97th percentile to the 48th. Positions in the non-tech portions of the S&P 500 remain flat at low levels.

Fund flows show another side. Equity funds saw weekly inflows of $31.5 billion, a two-month high; tech sector funds brought in $12.3 billion during the pullback, a record. In other words, the market is not broadly exiting equities, but rather breaking up the previously crowded large tech positions. The path ahead may still be bumpy, with variables concentrated around the June FOMC, concerns about equity issuance, and headline risks related to the Iran conflict.

Nasdaq and Mag 7 bore the main declines, small caps didn’t follow

This round of correction is very narrow in shape.

Over the past two weeks, the S&P 500 fell nearly 5%. This pace is similar to a "mini sell-off" that appears every few months. But there was significant internal divergence: the Nasdaq 100 dropped 7%, Mag 7 fell 10%; the S&P 500 equal-weight index, S&P 600 small caps, and Russell 2000 did not fall in sync, instead reaching record highs.

This shows that pressure was mainly concentrated in large tech and mega-cap growth stocks, not a collapse in overall market risk appetite.

Positions dropped from the 97th percentile to the 48th — crowded trades rapidly loosened

The most core data of this adjustment is the cliff-like drop in large tech positions.

Large tech positions dropped from the 97th historical percentile to the 48th. The 48th percentile is close to the historical median, i.e., near neutral. Meanwhile, overall US stock positions fell from the 66th percentile to the 34th.

Large-cap overall positions fell to the 45th percentile, slightly above neutral; small-cap positions are at the 54th, also only slightly above neutral. The biggest change came from those previously at the top of their historical range — large tech.

The performance of tech stocks relative to other S&P 500 components also moved from the top of the long-term trend channel back to the middle. In other words, tech stocks had run too fast and positions were too full, both of which were corrected in the last two weeks.

Discretionary investors cooled first; options and sentiment turned weaker in tandem

Breaking down by investor type, discretionary funds cooled more obviously.

Discretionary investor positions fell to -0.34 standard deviations, 25th historical percentile, shifting from slight overweight to evident underweight, reaching the lower end of the past 15 months' range. Systematic strategies positions also declined but remain near 0.14 standard deviations, the 46th percentile, close to neutral.

The options market is also cooling off. The 5-day average of call/put volume ratio fell to the 41st percentile; net call volume of single stock, index, and ETF options is all trending downward. The basket of stocks with the highest net call volume last week underperformed this week; high short-interest basket also underperformed, but to a lesser degree.

Investor sentiment turned even faster. AAII bull-bear spread dropped to the 10th historical percentile, most bearish in ten weeks, and has been in the bearish zone for four consecutive weeks. Bearish responses rose to the 93rd percentile, bullish responses fell to the 25th, and neutral responses declined to the 14th.

Altogether, this data shows that the drop in positions happened not just at the index level, but also in options trading, sentiment surveys, and discretionary fund allocations.

Large tech no longer “positions overriding fundamentals”

The reason large tech positions were important is because they were previously too crowded.

Now that positions have reverted to neutral, they match more closely with earnings growth in the "mid-teen percentage." This growth rate is close to the long-term trend of 11%, but clearly lower than Q1’s 44% profit growth. Bottom-up consensus still expects solid Q2 profit growth, but concerns about sustainability will remain.

The key point here is not that profits are risk-free, but that positions no longer require fundamentals to consistently beat expectations. The previous issue was: positions were already high, and profits had to keep delivering strong numbers. Now the pressure is lessened.

The S&P 500 ex-large tech is similar. Non-tech positions are still very low, below levels justified by macro data and earnings growth; both fundamental variables are improving.

Money hasn’t exited equities, tech funds set records for inflows

Fund flows did not match the narrative of "broad retreat."

Over the past week, equity funds saw $31.5 billion inflows, a two-month high. The main destination was US equity funds, with $17.4 billion for the week; global diversified funds brought in $11.9 billion.

Asia ex-Japan equity funds saw $7.9 billion inflows, with South Korea getting $5.9 billion. Emerging market equity funds turned net inflow for the first time in two months, totaling $4.5 billion. However, China equity funds continued to see outflows of $2.1 billion for the 11th consecutive week, though the pace slowed this week. European equity funds saw $3.9 billion outflows, their second month of pressure.

Among sector funds, tech stood out. Tech sector funds brought in $12.3 billion during the drop, a record. Telecom saw $1.1 billion inflows, financial $1 billion, healthcare $700 million, industrials $300 million. Consumer goods saw $1.4 billion outflow, materials $1 billion outflow, energy, utilities, and real estate had small outflows.

Bond funds saw $20.8 billion inflows, still strong but about half last week's record. Gold funds saw $2.6 billion outflows, fourth week in a row. Money market funds had $2.5 billion outflows, first decline in six weeks.

Non-tech positions remain low, basis for rotation still present

Large tech positions returning to neutral does not mean other sectors’ positions have already risen.

Broad tech positions are at -0.15 standard deviations, 37th percentile, slightly underweight; large tech itself is at the 48th percentile, near neutral.

Cyclical sector positions are even lower. Overall cyclicals are at the 11th percentile, cyclical vs. defensive sector gap at the 8th. Financials only at 6th percentile, materials at 1st, cyclical industrials at 15th, cyclical consumer at 30th. Energy reverted from overweight to near neutral, still at the 67th percentile.

Defensive sectors relatively higher. Real estate positions at the 89th percentile, still overweight; utilities at the 58th, slightly above neutral; healthcare at the 49th, near neutral; staples at the 36th, slightly underweight.

This means that if the market continues to rotate from large tech to other sectors, positions are not crowded. The truly low areas are financials, materials, and cyclical industrials.

The premise for slow gains remains, but things will get bumpier

After positions return to neutral, upward resistance is indeed lower, but short-term disturbances are also concentrated.

Next week’s June FOMC might boost rate volatility. The framework notes this meeting is more uncertain than usual, involving changes to the policy framework and a high likelihood of removing forward guidance. Rising rate volatility is usually a short-term headwind for equities.

The second disturbance is equity issuance. The market still worries that a wave of offerings might crowd out capital and drag on broader stocks. Historically, issuance upcycles tend to coincide with robust stock market returns.

The third variable is the Iran conflict. The market currently prices in a relatively mild outcome, so headline risk is tilted to the downside. If the situation is resolved, sectors and regions that lagged in the April-May rebound may see further rotation.

Systematic funds are also not fully loaded. Vol-control fund equity allocation has dropped to the 43rd percentile, no longer full, theoretically some room to add; but they are more sensitive to volatility and declines. Risk parity fund equity allocation is down to the 20th percentile, lowest since Liberation Day. CTA overall equity longs remain in the upper half of historical range, about 57-58th percentile; Europe, US, and emerging markets all overweight, Japan milder.

So, after the position correction the market is no longer as crowded as two weeks ago, but it isn't a straight line either. The most accurate state: large tech’s pressure valve has opened, capital still flows into equities, non-tech positions remain low; meanwhile, rate volatility, geopolitical headlines, and issuance concerns will keep the market choppy.

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