Goldman Sachs' trading desk is warning that trend-following programs, particularly commodity trading advisers, may become a headwind for equities in the immediate term. Models run by the desk show CTAs positioned to sell stocks in every scenario over the coming week, a reversal from recent weeks when those strategies provided steady demand.
According to the bank's traders, who named Gail Hafif among contributors, CTA buying had served as a reliable source of support for the market in recent weeks, giving participants a predictable layer of demand that allowed investors to chase the rally. That cushion, Goldman says, has now dissipated.
The firm points to the S&P 500's current placement relative to internal thresholds as a key trigger. The index sits 3.8% above its short-term threshold and 4.8% above its medium-term threshold. Goldman estimates that moving to flatten exposure at those levels could produce up to $50 billion of selling pressure.
This prospective selling follows an especially rapid repositioning earlier in the month, when systematic funds shifted from net short to net long U.S. equities in near-record time. Goldman quantified that one-month change as the second-largest re-leveraging in its dataset going back to 2016.
Over the past month, systematic strategies have purchased nearly $80 billion of U.S. equities, the bank notes, leaving CTAs with a current net long position of $44 billion in U.S. stocks. Goldman also highlighted that the broader cohort of systematic managers experienced large positioning moves earlier in April, and that the quick reversal from short to long raises the prospect of selling pressure ahead as those positions are adjusted.
In sum, the desk's models suggest a shift in a formerly reliable source of market demand: trend-following funds that had been buyers may now act as sellers, creating an additional headwind for equities in the near term.
Clear summary
Goldman Sachs models project that CTAs will sell U.S. equities across scenarios next week after recent CTA buying - which had supported the market - dries up. The S&P 500 sits 3.8% and 4.8% above short- and medium-term thresholds respectively, levels that Goldman says could prompt up to $50 billion of selling as funds flatten exposure. Systematic funds have purchased nearly $80 billion of U.S. equities over the past month, leaving CTAs net long $44 billion.
Key points
- Goldman Sachs' models show CTAs positioned to sell stocks across scenarios in the coming week, removing a recent source of market demand.
- The S&P 500 is 3.8% above its short-term threshold and 4.8% above its medium-term threshold, potentially triggering up to $50 billion in selling as funds reduce exposure.
- Systematic funds bought nearly $80 billion of U.S. equities over the past month, leaving CTAs currently long $44 billion, after an unusually rapid shift from short to long positions.
Risks and uncertainties
- Potential for forced selling - If funds move to flatten exposure at the cited threshold levels, as Goldman suggests, that could translate into sizeable selling pressure on equities.
- Rapid repositioning effects - The near-record speed of the one-month switch from short to long among systematic managers introduces uncertainty about the stability of those positions and the potential for a swift unwind.
- Model sensitivity - The outlook is driven by Goldman Sachs' models of trend-following activity; outcomes depend on how those strategies actually trade in the coming week and may change if positioning or thresholds shift.