You have two characters both standing, a bit apart from each other. Ostensibly neutral with no one player having an undue advantage. The neutral game refers to the jockeying for position, use of raw control and threat of damage to force the opponent into playing a certain way and so on. It’s the dance that gets danced from that position, and the bluffs.
Neutral is a relatively new term, at least when it comes to the history of fighting games.
A rather stupid term, imo.
The way its used is very generalized and dumbed down. For example, saying a character has good/bad neutral is already a contradiction. Especially when labeling characters with heavy emphasis on projectile keepaway and long range pokes.
Besides two characters being truly neutral rarely happens. Factor in the reach/tool set of each character, health deficits, time and how difficult different characters have to deal with certain distance and situations, there can rarely be a true neutral.