After the Dow had six consecutive losses and the S&P 500 index recorded its biggest two-day decline since the Silicon Valley Bank crisis, US stock bulls seem to have reached a “cliff edge” — the two major Wall Street investment banks Goldman Sachs and Bank of America are currently extremely worried. CTA (Commodity Trading Advisors), which have always followed the trend, may sell stocks in a big way over the next period of time according to their model and the stop-loss level they set.
CTA strategy, which first started with commodity derivatives trading, generally refers to an investment strategy that uses exchange futures and options contracts as the trading target to carry out cross-product, cross-contract trends and arbitrage transactions to obtain absolute returns.
Goldman Sachs said in a recent report that if the stock market continues to fall, these trend-following hedge funds could sell $20 billion to $42 billion in US stocks next month. CTAs usually involve rapid transactions in a systematic manner to capture major trends in the market.
Goldman Sachs said that if the S&P 500 index falls below 5135 points, it will “shift the short-term trend of these hedge funds from more positive to negative,” thus triggering a stock sell-off.
Goldman Sachs said in the report published last Friday that if the S&P 500 index falls 3.2% within the next month, it will force CTA to sell about $20 billion of S&P 500 index constituent stocks and more than 200 billion US dollars of global stocks.
And if the S&P 500 index falls further, Goldman Sachs believes that the sell-off scale of the index's constituent stocks may reach 42 billion US dollars.
Since the close of trading last Thursday, the S&P 500 index has accumulated a cumulative decline of about 2.6% because US CPI and retail data both exceeded expectations, causing the Fed to cut interest rates. Furthermore, geopolitical concerns are being further ignited. It is worth mentioning that this is also the biggest two-day decline in the S&P 500 index since the beginning of March 2023 (Silicon Valley Bank crisis).
Goldman Sachs said that overall, hedge funds had net sales of US stocks for the second consecutive week last week. The bank also pointed out in another report that hedge funds have been buying Chinese stocks net for the third week in a row and net selling US energy stocks.
Bank of America: CTA stop loss level is being triggered
Coincidentally, in its recent report, Bank of America also emphasized the possibility that CTA triggers a sell-off signal and set the CTA stop-loss trigger point for the S&P 500 index at 5079 points. As the S&P 500 fell 1.2% overnight — closing at 5061.82 points, it has in fact fallen below this stop loss level.
Bank of America said that the CTA trend tracking stop-loss level is very close to the current stock price. If stock prices continue to fall, CTA will be forced to sell more stocks and stop losses, which will further exacerbate market fears and create a vicious cycle.
Bank of America believes that the sharp decline in the S&P 500 index since last Friday should have been due to the sell-off of fluctuation control strategies, and has quickly formed a self-reinforcing downward spiral, like a snowball effect.
According to this strategy, hedge funds focus on market volatility to adjust stock exposure to control portfolio risk. When the stock market falls and volatility rises, this type of strategy will reduce positions accordingly, causing additional market selling pressure.
In terms of downward support, Bank of America said that as systemic selling pressure increases, gamma buying of some options may act as a buffer around 5,000 points.
Editor/Jeffrey