Trigger Breached: CTAs Have Started Liquidating Long Positions

Earlier this week we noted that according to Charlie McElligott’s quant model, we were just days away from a critical CTA “sell trigger“, which as we followed up was triggered in the Russell 2000 the very next day, sending small caps sharply lower. It now appears that after being marginal buyers for the past month, CTAs selling has spread to the broader market as well.

Having failed for the past 3 weeks to break decisively above the “quad top” level of 2,800, US equity markets have declined significantly, losing much of their upward “goldilocks rally” momentum. Nomura believes the current correction in the US stock market is due to either: 1) Technical-based trend followers rapidly cutting their “loss-making” long positions on major US equity futures market, or 2) Some major positive factors that have supported financial market conditions on the fundamentals side, eg hopes of a US-China trade agreement and major central banks’ dovish shift have continued, and because some medium and long-term investors are looking for opportunities to buy-on-dips in the US equity market.

Looking at the market, Nomura’s “other” quant team, headed by Masanari Takada, believes the former factor is dominating trends, in other words CTAs have started selling.

Elaborating on that point, Takada writes that the S&P500 has finally breached the “trigger level” of the CTA’s cost breakeven ~2,750 level such that CTAs are liquidating their existing long positions, accelerating stock selling and cutting their “loss-making” positions. CTAs have behaved similarly on the NASDAQ-100 futures market as the NASDAQ-composite index has slipped below the ~7,460 level, which was the CTAs’ breakeven cost.

What happens next? Confirming what McElligott said previously, Takada says that going forward, systematic trend-followers will be forced to clear most of their long positions, so mechanical stock-selling pressure is likely to increase. However, and as McElligott also noted yesterday, as the current pace of CTAs unwinding their long positions is faster than past average patterns, this is likely to encourage some other “contrarian” type fast-money to buy in the falling market, as such systematic selling pressure generally softens around late March.

For now, however, investors that have maintained a bullish stance on US and global equity markets based on fundamentals, are likely to have a reality-check as a result of “cooling” equity market sentiment. During this period, Nomura warns that “there is a risk that Street expectations will become more pessimistic as a backlash from the risk market rally of the past two months.”

Meanwhile, even as CTAs start selling, the most concerning development for equity bulls according to Nomura is that global equity sentiment has fallen into negative territory again. The current market adjustment is also considered a “cooling-down period” from its elated period, so it has desirable aspects too. However, if more negative factors and headlines such as US-China trade talks break down, the yield curve inverts further, and there is an increasing likelihood of President Trump being impeached, investors will be less willing to take on equity market risk.

In fact, global macro HFs focusing more on fundamentals seem to have strengthened their cautious stances while accumulating short positions on US equities and long positions on long-term UST bonds for now.

Trigger Breached: CTAs Have Started Liquidating Long Positions <body> <h1> Array ( [0] => rrigger breached: ctas have started liquidating long positions [1] => frigger breached: ctas have started liquidating long positions [2] => grigger breached: ctas have started liquidating long positions [3] => yrigger breached: ctas have started liquidating long positions [4] => 6rigger breached: ctas have started liquidating long positions [5] => 5rigger breached: ctas have started liquidating long positions [6] => teigger breached: ctas have started liquidating long positions [7] => tdigger breached: ctas have started liquidating long positions [8] => tfigger breached: ctas have started liquidating long positions [9] => ttigger breached: ctas have started liquidating long positions [10] => t5igger breached: ctas have started liquidating long positions [11] => t4igger breached: ctas have started liquidating long positions [12] => trugger breached: ctas have started liquidating long positions [13] => trjgger breached: ctas have started liquidating long positions [14] => trkgger breached: ctas have started liquidating long positions [15] => trogger breached: ctas have started liquidating long positions [16] => tr9gger breached: ctas have started liquidating long positions [17] => tr8gger breached: ctas have started liquidating long positions [18] => trifger breached: ctas have started liquidating long positions [19] => trivger breached: ctas have started liquidating long positions [20] => tribger breached: ctas have started liquidating long positions [21] => trihger breached: ctas have started liquidating long positions [22] => triyger breached: ctas have started liquidating long positions [23] => tritger breached: ctas have started liquidating long positions [24] => trigfer breached: ctas have started liquidating long positions [25] => trigver breached: ctas have started liquidating long positions [26] => trigber breached: ctas have started liquidating long positions [27] => 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[208] => trigger breached: ctas have started liquidatong long positions [209] => trigger breached: ctas have started liquidat9ng long positions [210] => trigger breached: ctas have started liquidat8ng long positions [211] => trigger breached: ctas have started liquidatibg long positions [212] => trigger breached: ctas have started liquidatimg long positions [213] => trigger breached: ctas have started liquidatijg long positions [214] => trigger breached: ctas have started liquidatihg long positions [215] => trigger breached: ctas have started liquidatinf long positions [216] => trigger breached: ctas have started liquidatinv long positions [217] => trigger breached: ctas have started liquidatinb long positions [218] => trigger breached: ctas have started liquidatinh long positions [219] => trigger breached: ctas have started liquidatiny long positions [220] => trigger breached: ctas have started liquidatint long positions [221] => trigger breached: ctas have started liquidating kong positions [222] => trigger breached: ctas have started liquidating pong positions [223] => trigger breached: ctas have started liquidating oong positions [224] => trigger breached: ctas have started liquidating ling positions [225] => trigger breached: ctas have started liquidating lkng positions [226] => trigger breached: ctas have started liquidating llng positions [227] => trigger breached: ctas have started liquidating lpng positions [228] => trigger breached: ctas have started liquidating l0ng positions [229] => trigger breached: ctas have started liquidating l9ng positions [230] => trigger breached: ctas have started liquidating lobg positions [231] => trigger breached: ctas have started liquidating lomg positions [232] => trigger breached: ctas have started liquidating lojg positions [233] => trigger breached: ctas have started liquidating lohg positions [234] => trigger breached: ctas have started liquidating lonf positions [235] => trigger breached: ctas have started 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started liquidating long p9sitions [250] => trigger breached: ctas have started liquidating long poaitions [251] => trigger breached: ctas have started liquidating long pozitions [252] => trigger breached: ctas have started liquidating long poxitions [253] => trigger breached: ctas have started liquidating long poditions [254] => trigger breached: ctas have started liquidating long poeitions [255] => trigger breached: ctas have started liquidating long powitions [256] => trigger breached: ctas have started liquidating long posutions [257] => trigger breached: ctas have started liquidating long posjtions [258] => trigger breached: ctas have started liquidating long posktions [259] => trigger breached: ctas have started liquidating long posotions [260] => trigger breached: ctas have started liquidating long pos9tions [261] => trigger breached: ctas have started liquidating long pos8tions [262] => trigger breached: ctas have started liquidating long posirions [263] => trigger breached: ctas have started liquidating long posifions [264] => trigger breached: ctas have started liquidating long posigions [265] => trigger breached: ctas have started liquidating long posiyions [266] => trigger breached: ctas have started liquidating long posi6ions [267] => trigger breached: ctas have started liquidating long posi5ions [268] => trigger breached: ctas have started liquidating long posituons [269] => trigger breached: ctas have started liquidating long positjons [270] => trigger breached: ctas have started liquidating long positkons [271] => trigger breached: ctas have started liquidating long positoons [272] => trigger breached: ctas have started liquidating long posit9ons [273] => trigger breached: ctas have started liquidating long posit8ons [274] => trigger breached: ctas have started liquidating long positiins [275] => trigger breached: ctas have started liquidating long positikns [276] => trigger breached: ctas have started liquidating long positilns [277] => trigger breached: ctas have started liquidating long positipns [278] => trigger breached: ctas have started liquidating long positi0ns [279] => trigger breached: ctas have started liquidating long positi9ns [280] => trigger breached: ctas have started liquidating long positiobs [281] => trigger breached: ctas have started liquidating long positioms [282] => trigger breached: ctas have started liquidating long positiojs [283] => trigger breached: ctas have started liquidating long positiohs [284] => trigger breached: ctas have started liquidating long positiona [285] => trigger breached: ctas have started liquidating long positionz [286] => trigger breached: ctas have started liquidating long positionx [287] => trigger breached: ctas have started liquidating long positiond [288] => trigger breached: ctas have started liquidating long positione [289] => trigger breached: ctas have started liquidating long positionw ) </h1> </body>