Fast-money quants were effectively forced to buy an estimated $225 billion of stocks and bonds over just two trading sessions, as one of Wall Street’s hottest strategies in the great 2022 bear market shows signs of cracking.
As cooling consumer price data sparked a cross-asset rally, trend-following traders were compelled to unwind short positions totaling about $150 billion in equities and $75 billion in fixed income on Thursday and Friday, JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimated.
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Given their notable firepower, Wall Street strategists are now touting the potential for further sharp market gains -- if these systematic managers such as Commodity Trading Advisors find themselves under pressure to hike their exposures anew.
CTAs, which take long and short positions in the futures marketplace, may purchase $28 billion worth of stocks this week if benchmarks close largely unchanged, according to an estimate from Scott Rubner, Goldman Sachs Group Inc.’s managing director. Should bonds stand still, that could lead to $40 billion of purchases over the next week -- and potentially $100 billion in the next month, his model tracking various markets suggests.
The projections signal an ongoing allocation shift among the rules-based cohort, who have netted historic gains by riding the inflation trade earlier this year, with bearish bets against shares and Treasuries combined with bullish exposures to the dollar and commodities.
“Most CTA AUM momentum is now positive and demand from this community is going to explode,” Rubner wrote in a note to clients Friday.
Stocks oscillated between gains and losses Monday, with the S&P 500 starting the day in the red before rising as much as 0.4%. The index then dipped again in afternoon trading to close the session 0.9% lower.
Getting a grip on the exact picture of the quant world is far from easy. Models built on subjective assumptions often spit out different numbers. A similar analysis by Nomura Securities International’s cross-asset strategist Charlie McElligott, for instance, showed that the systematic cohort bought a more modest $61.4 billion of stocks and $2 billion of bonds last week.
Still, the analysis helps shed light on the fierce rally, one that many say was an over-reaction to the softer-than-expected reading in October’s consumer price index. At a minimum, the exercise illustrates the importance of tracking technical indicators such as fund positioning at a time when the fundamental picture remains murky.
Up almost 6% last week, the S&P 500 has taken out some key trendlines, including its average prices over past 50 and 100 days. According to Goldman, CTAs likely stepped up purchases when the index recaptured the 3,804 level -- which flashed positive short-term momentum signals -- and 3,966, seen as a threshold of momentum over the medium term.
Read the full article here by Lu Wang, Denitsa Tsekova, Advisor Perspectives.
