Source: Jin10 Data
After the sell-off frenzy, the calm market created opportunities, and buying pressure on the US stock market increased significantly, especially from long-term buyers.
The largest closure of the US stock market since the COVID-19 pandemic has ended, and now quantitative funds that follow the trend are preparing to come back to the stock market.
Scott Rubner, Managing Director and Global Market Department Director of Goldman Sachs, has said that over the past month, the so-called systematic funds that buy stocks based on market signals and volatility trends rather than company fundamentals have sold the highest amount of stocks in four years. But now that the market has settled down, Cboe volatility index (VIX) is trading around 15, and economic data also suggests that the Fed may be close to a soft landing, it is expected that these systematic funds will buy stocks again.
Barclays strategist wrote in a note to clients on Monday that 'if markets stabilize and data become more benign, funds could amplify buy pressure.'
For example, regarding the volatility-controlled fund, according to Barclays' data, the sharp increase in the VIX index last week triggered a large-scale sale of the volatility-controlled fund, and its stock allocation ratio decreased from 110% to about 50%. Now that the VIX index has returned to the level before the sale, it is expected that the volatility-controlled fund will re-establish these positions.
These funds usually sell positions quickly, but they will come back at a slower pace. However, recent volatility has come and gone quickly, so the speed of increasing positions may be faster.
Anshul Gupta, head of European derivatives and global QIS, said in an interview: 'We believe that this normalization process will be faster, a matter of weeks rather than months.'
Barclays data shows that commodity trading advisors (CTAs) may also increase buying pressure, as they have almost completely unwound their long positions in stocks due to concerns about economic growth.
For CTAs, the most important factors are market direction and the numerous signals that are sent out. They track index moving averages and adjust positions when they reach certain critical values. The more bullish the price trend, the larger their position and the tighter their selling triggers. 'They only want to see asset appreciation,' Gupta said. 'If the market continues to rebound, they may rebuild their long positions even faster.'
Finally, there are risk parity funds that typically require low volatility and correlation with specific asset classes. With rising volatility and stock market decline last week, they have significantly reduced their stock position while maintaining stable bond positions. As the market stabilizes, they are expected to start buying stocks.
The S&P 500 index has risen 6.8% since August 5, rising for six consecutive trading days, wiping out the decline since August 1. As speculation about the Fed's interest rate cuts at the September meeting heats up and earnings growth outside the largest US tech companies, the S&P 500 index also rises.
Of course, the gradual pace of index gains and systematic fund flows may mean that it will take some time for buying pressure to show up in market averages.
Nomura Securities International's data shows that if the S&P 500 index has a daily volatility of 0.5% in the next month, these funds will buy about $59 billion of stocks every month. But in the long run, these numbers will start to accumulate. For example, if the S&P 500 index has a daily volatility of 0.5% for three months, it will bring nearly $191 billion of inflows.
Charlie McElligott, a cross-asset strategist at Nomura, said, 'There is a huge flow of long-term buying.'
Editor / jayden