U.S. stocks have recovered to record levels following a sharp selloff in March and April. But Bank of America warned on Friday that a significant element of the market bid - buying from commodity trading advisers, or CTAs - appears to be fading, removing an important layer of support for the advance.
Analysts at Bank of America, led by Chintan Kotecha, said that roughly $200 billion of systematic equity long positions had been rebuilt since the early-April lows, a level the team described as “a substantial re-risking already behind us.” That rebuild, the bank argues, means much of the CTA-driven re-risking is already in place.
In its most recent analysis the brokerage flagged what it called “an important shift” in CTA model signals. Whereas CTAs had been skewed toward buying in flat and rising markets in recent weeks, the models now indicate limited additional long accumulation even if equities continue to move higher. As the analysts put it: “After several weeks of CTAs skewed toward buying in flat and up markets, our models now show limited incremental long accumulation even if equities continue higher.”
With that change, downside risks have re-emerged in BofA’s framework. The bank estimated that CTA strategies could deliver up to $50 billion of selling in a market pullback. More broadly, its models suggested systematic strategies might sell as much as $77 billion in a down market over the next week, compared with only $400 million of buying in flat markets.
Bank of America also noted that longer-term trend-following models remain cautious. Those models are influenced by elevated realized volatility and by disruptions to price trends caused by the March selloff, factors that continue to temper trend-followers’ outlook.
Separately, the bank observed positioning dynamics in other markets. CTA short positions in U.S. Treasury futures were approaching capacity in shorter-dated contracts, while trend followers remained long oil futures despite a sharp decline in crude prices during the week.
Implications
- Equity markets: Record highs are in place but a key systematic buyer cohort shows limited appetite to add further exposure, which could leave stocks more sensitive to shocks.
- Fixed income: CTA short positions in short-dated U.S. Treasury futures approaching capacity may influence Treasury market dynamics if stress increases.
- Commodities: Trend-followers remain long oil futures even after a recent sharp decline in crude, indicating mixed positioning in energy markets.