Following their role in propelling the recent Wall Street rally, trend-following quants now appear set to sell equities if the S&P 500 falls below a crucial technical threshold, according to JPMorgan Chase & Co.’s trading desk.
If the benchmark index falls below its 200-day moving average, commodity trading advisors may be obliged to sell $50 billion in equities, according to the JPMorgan team.
On Friday, the index was within 1% of the threshold, which was near 3,940.
Further selling would add to CTAs’ retreat from global stocks, which has already reached $40 billion in the last two weeks, according to Nomura Securities International. CTAs were among the quant players who fueled the equity rally since October, only to sell in 2023, dampening the market’s new-year advance.
Quants Behind
It’s difficult to get a clear picture of the quant world, because models based on subjective assumptions frequently produce disparate data on money flows.
While far from perfect, such estimates provide a window into the positioning of fast-money traders, a technical force that Wall Street is increasingly focused on in a market where fundamental narratives are constantly altering.
CTAs poured into the inflation trade last year as the Fed hastened to raise interest rates and tighten financial conditions.
The group bet on a rising dollar and wagered against bonds and stocks, exacerbating asset swings at times.
Although the present macroeconomic trend is less obvious, Nomura’s cross-asset strategist Charlie McElligott believes the group’s significance cannot be overlooked.
“Now you’re looking at a transitory phase where the dollar weakens, risk assets appreciate, FCI eases too much, data goes up, and the Fed has to talk hawkishly again,” McElligott told Bloomberg TV. “It’s turning it into a really tactical market. When there is so little certainty from the fundamental types, this has a further influence on those movements that may genuinely drive around the market.“
Bullish Equities in 2023
Stocks climbed on Monday, with the S&P 500 projected to close above its 200-day moving average for the 26th consecutive session, the longest streak of positivity since January 2022.
The rebound came after a terrible week in which the index fell 2.7%, its lowest performance of the year.
Stocks began the new year with a strong surge, fueled by optimism that the Federal Reserve may slash interest rates later this year. Following a burst of better-than-expected statistics on the labor market and inflation, traders have altered their rate expectations, causing asset prices to fall.
During the January surge, quant traders were compelled to unwind their negative bets, making their positions more vulnerable to the downside.
According to Morgan Stanley’s trading desk, a continuing selloff of 5% would require systemic strategies to sell $55 billion to $60 billion of shares the next week.
A similar market drop a month ago would have resulted in a $10 billion to $15 billion stock sale.
“The systematic bid will continue, albeit at a considerably slower pace and with a lower bar to convert into supply,” Morgan Stanley’s analysts wrote late Friday in a note.
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