Source: Wall Street News

Will today be “Black Monday” for US stocks due to multiple factors such as CTA stop-loss, fluctuation-controlled leverage settlement, and ETF liquidation?

The team led by Bank of America analyst Benjamin Bowler issued a warning in their latest “Systematic Capital Flow Monitoring” report. According to the monitoring model, US stocks are currently very close to the CTA (Commodity Trading Advisor) stop-loss trigger point. If stock prices continue to fall, CTA will be forced to sell stocks and stop losses, which will further exacerbate market fears and create a vicious cycle.

Not only the US stock market, but the European Stock 50 Index also closed near the Bank of America's stop-loss level last Friday. This also means that European stock market bulls may be closing large numbers of positions, further increasing market pressure, and European stock market bulls may be closing large numbers of positions.

US stocks are under tremendous selling pressure

Bank of America discovered that even if it doesn't hit the CTA stop loss level on Monday, the fluctuation control strategy may continue to sell. The stock market has been falling for several days in a row and the intensity of the trend weakens, and the CTA model will gradually reduce positions and start selling. “Last Friday$S&P 500 Index (.SPX.US)$The sharp decline should have been due to the sell-off of the fluctuation control strategy”.

The so-called “fluctuation control” strategy adjusts stock exposure based on market volatility to control portfolio risk. When the market falls and volatility rises, this type of strategy will reduce positions accordingly, and also bring additional selling pressure.

According to Bank of America, the S&P 500 index is only 90 basis points away from the CTA strategy's stop loss level. “We may see a scenario where CTA stop-loss triggers, volatility control strategies drastically reduce stock holdings, and leveraged ETFs and reverse ETFs sharply adjust positions before closing to further release selling pressure.”

Are the “saviors” gone too?

What's worse is that, traditionally, stock market bulls can expect companies to launch a wave of buybacks when stock prices fall, but with the beginning of the earnings season, Goldman Sachs calculations indicate that more than 95% of companies in the S&P 500 index will enter a buyback ban this week, and the ban will end on April 26. This also means that during this period, companies will not be able to support stock prices by repurchasing shares, which will further increase the selling pressure on the market.

Deutsche Bank also pointed out earlier that over 80% of companies in the S&P 500 index were banned from stock buybacks last week. In comparison, this ratio was less than 5% a month ago. Stable demand brought about by buybacks provided key support for US stocks in 2024, but this support will disappear before most US companies exit the sales ban period in early May.

Bank of Montreal Wealth Management (BMO Wealth Management) Chief Investment Officer Yung-Yu Ma pointed out that the buyback ban period may increase the volatility of the stock market within the next month because there is no key stable source of buying from companies.

Analysts believe that the current market is also pinning hopes on people buying on dips, but according to Bank of America data, although market participants who bought on dips last week mitigated the market decline to a certain extent, the sharp drop last Friday may have left these new positions in a state of loss. If the stock price does not reach a new high, buyers on dips may lose confidence, and the wave of sell-offs will become more intense.

Under the double impact of US inflation concerns and geopolitical risks, this earnings season's performance will be critical to the market's rebound.

The three major US stock indices all fell last week. The Dow had a cumulative decline of 2.37%, the S&P 500 index fell 1.56%, and the NASDAQ fell 0.45%, closing for the second week in a row, the worst weekly performance since October last year. The first batch of bank stock earnings reports last week showed that while overall fundamentals remained healthy, several of America's largest financial institutions such as J.P. Morgan Chase, Wells Fargo, and Citigroup all reported a decline in net interest income.

And this week there will be$Goldman Sachs (GS.US)$,$Morgan Stanley (MS.US)$,$Bank of America (BAC.US)$,$ASML Holding (ASML.US)$,$Taiwan Semiconductor (TSM.US)$und$Netflix (NFLX.US)$When the giants announced their results one after another, the company's profitability was tested again.

Editor/jayden