(Bloomberg) – Quick-winners forced to buy about $225 billion in stocks and bonds in just two trading sessions, as one of Wall Street’s hottest strategies in the great 2022 bear market shows signs rift.
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According to estimates by JPMorgan Chase & Co strategist Nikolaos Panigirtzoglou, when cooling consumer price data triggers an asset cross rally, trend traders are forced to withdraw short positions. totaling about $150 billion in stock and $75 billion in fixed income on Thursdays and Fridays.
Given their remarkable strength, Wall Street strategists are now welcoming the potential for an even bigger bull market – should systematic managers like Commodity Trading Advisors find themselves under pressure must increase exposure again.
According to estimates by Scott Rubner, chief executive officer of Goldman Sachs Group Inc. If bonds stand flat, that could lead to $40 billion in buying next week — and potentially $100 billion next month, his model tracking various markets shows.
The projections signal an attribution shift is underway among the rule-based cohorts, who made historic gains by fueling commercial inflation earlier this year, with bets bearish for stocks and Treasuries combined with the possibility of appreciation for the dollar and commodities.
“Most of the CTA AUM momentum is currently positive and demand from this community will be explosive,” Rubner wrote in a note to clients on Friday.
Stocks fluctuated between gains and losses on Monday, with the S&P 500 index starting the day in the red before gaining 0.4%. After that, the index continued to decline in the afternoon session to close the session 0.9% lower.
Getting an accurate picture of the quantum world is not easy. Models built on subjective assumptions often give different numbers. For example, a similar analysis by cross-asset strategist Charlie McElligott of Nomura Securities International found that the systematic cohort bought $61.4 billion in stocks and $2 billion in bonds last week.
However, the analysis helps shed light on the ferocious rally, one that many see as an overreaction to the softer-than-expected October consumer price index. At a minimum, the exercise illustrates the importance of keeping an eye on technical indicators such as fund positioning at a time when the fundamental picture is still unclear.
Up nearly 6% last week, the S&P 500 has laid out several key trendlines, including its average price over the past 50 and 100 days. According to Goldman, CTAs are likely to ramp up buying when the index regains the level of 3,804 – which generates positive momentum signals in the short term – and 3,966, which is considered a mid-term momentum threshold.
If the sudden uptick persists, it will be a challenge for an industry that has thrived in a year where hot inflation and the Federal Reserve’s campaign to tame it have become the anchoring force. for asset performance.
An index by Societe Generale SA that tracks CTA fell for the sixth straight session through Friday. Long-term down 5.2%, the industry just experienced its worst performance since March 2020.
Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group, said it was too early to end the big inflation trade. The company’s AlphaSimplex Managed Futures Fund (ticker ASFYX), which fell nearly 5% last week, is still up more than 38% this year.
“Short-term relief trading looks to be bucking the trend in the past, but when we look at the long-term outlook, there is evidence based on Fed comments this weekend and the overall level of inflation for see this trend is not going to end anytime soon,” Kaminski said in an interview. “In a word, some key issues remain and rates may need to move higher to achieve more stable inflation.”
Despite binge buying, CTAs are not risky. According to estimates by Deutsche Bank AG, currently, the industry is neutral on stocks and short on bonds.
“It is likely that they are adding to both their stock and bond positions because the exposure to both is quite low,” Parag Thatte, strategist at Deutsche Bank, said in an interview. But it’s “based on their volatility continuing to go down and the market going sideways or up”.
For JPMorgan’s Panigirtzoglou, the risk to the pool is another market reversal.
“Now that their shorts are mostly covered, the bleeding will stop and they can start to profit if the rally continues and start building long positions,” Panigirtzoglou said in a note. an interview. “The worse scenario for them is a reversal, which is starting to build long positions in the coming weeks and then being reversed by the market reversal.”
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