Bank of America: Tech Stock Declines Drive CTA Position Cuts as Systematic Selling Pressure Persists in Global Equities

How Do Tech Stock Declines Trigger CTA Position Cuts?

BofA’s model shows that in the week through 30 October, weakening equity trends, rising realized volatility and the breaching of some stop-loss thresholds prompted trend-following CTAs to sell equities. Friday’s tech-led decline may have further driven position cuts in S&P 500 and Nasdaq 100 futures.
BofA believes its S&P 500 model has not yet triggered a full stop-loss exit, but changes in trend and volatility may already have significantly reduced positions. CTAs may still hold some long positions and remain net sellers overall next week; if the index falls another 2%, all remaining longs would be closed, and the selling itself could accelerate the decline.
Strategies operating at different speeds respond differently: fast models may already be short Russell 2000 and Euro Stoxx 50 futures, while BofA believes slower models, which account for most assets under management, need more time to register trend deterioration. The more varied actual strategy rules are, the more likely trades are to occur at different prices and times.

Based on BofA’s global equity model as of 30 October, CTAs, risk parity and volatility-control strategies could sell a combined 63 billion dollars over the coming week if markets weaken; they could sell 15 billion dollars if markets are flat and buy 37 billion dollars if markets rise.
In a falling-market scenario, selling by volatility-control strategies could add to CTA position closures; in a rising-market scenario, CTAs could increase equity holdings again. These scenarios use price paths for the next five trading days constructed from historical data, and model trigger prices also vary with strategy design.
The estimates assume CTA assets under management of 300 billion dollars and 200 billion dollars each for risk parity and volatility-control strategies. Under those assumptions, global equity positions across all three strategy types remain above their median levels over the past five years.

BofA estimates that the Gamma of S&P 500 options hedgers rose to 7.1 billion dollars at the close on 29 October, placing it at the 73th percentile of the past year. The S&P 500 fell 1.82% during trading on 30 October; if the spot market continues to fall, Gamma could decline or even turn negative, changing the impact of hedging trades on market volatility.
To maintain their daily target multiples, leveraged and inverse ETFs generally need to buy when markets rise and sell when they fall. BofA estimates that for every 1% move in the S&P 500 and Nasdaq 100, respectively, related US-listed ETFs need to trade approximately 1.1 billion and 2.5 billion dollars, equivalent to about 3% and 21% of the respective instruments’ average notional trading volume in the final five minutes before the close over the past month.
The theoretical trading amounts required for each 1% move in those ETFs decreased this week as the indices fell. The estimates use the previous day’s asset values and cannot account for same-day share creations and redemptions.

The US 10-year Treasury yield fell for a fourth consecutive week. The trend in US Treasury futures has begun to move away from its most negative level, but BofA believes CTA models across speeds remain far from establishing long positions. Some short positions in two- and five-year Treasury futures may remain, while shorts in 10-year and longer maturities have been stopped out; Chinese 10-year government bond futures remain firmly long.
The US dollar strengthened slightly this week, and CTAs remain generally long the dollar. Short euro positions are the most crowded currency position in the model; sterling’s recent strength has brought some models close to stop-loss levels for their shorts.
Commodity positions have diverged: gold shorts are approaching their most crowded level since August, while crude oil longs remain crowded but are more than 11% away from the sell trigger. Aluminium shorts are also at historically high levels, with the first short-covering trigger approximately 1% above the current price.