There’s a limit to how long CTAs can hold stretched longs if dip buyers falter

Investing.com -- Large-cap U.S. tech volatility returned in force last week, putting systematic equity positioning back under scrutiny.

The Nasdaq-100 saw two separate 2% swings, the first time that level of turbulence has appeared since April. A sharp early-week rally initially cushioned trend-followers, but Thursday’s drop pushed markets back toward key unwind thresholds, according to Bank of America. 

Price action ahead of Friday’s open pointed to “accelerated CTA unwinds,” BofA analysts said, though heavy dip buying helped keep exposures intact. They warn, however, that “there’s a limit to how long CTAs can hold stretched longs if dip buyers falter.”

"A failure of equities to stabilize could force larger systematic unwinds, potentially helping drive a deeper decline in the Nasdaq," analysts led by Chintan Kotecha wrote in a recent note. 

"Ironically, such selling could invite an even more aggressive wave of dip buying, absent a major macro shock, leaving CTAs with crystallized losses despite renewed equity support," they added. 

BofA highlights uneven positioning across regions. Some faster-moving CTAs likely trimmed Russell 2000 exposure during the week’s turbulence, while allocations to Europe and Japan remain near peak longs. 

"A synchronized downturn across global equities would put all regions at risk of significant unwinds," analysts said. 

Outside of equities, fixed income saw similar trend deterioration. Rising U.S. yields pushed both short- and medium-term Treasury futures trends closer to sell triggers, increasing the likelihood of incremental CTA selling even without explicit stop-outs.

BofA’s team also expects potential selling in Bunds and Korean Treasury Bonds, alongside buying interest in Chinese government bonds.

In FX, CTAs are stretched long the Mexican peso and short the yen and Canadian dollar (CAD) versus the U.S. dollar, with next week likely to bring British pound (GBP) selling and CAD buying.

In commodities, trend-followers have begun rebuilding long gold positions after being stopped out in recent weeks, while also covering oil shorts. Aluminum longs remain elevated, and models indicate possible buying in soybean meal.

Dealer positioning continues to offer limited volatility suppression. S&P 500 (SPX) gamma remains small and positive, averaging just under $3 billion over the past week, suggesting choppy trading is likely to persist barring a major flow catalyst, BofA analysts said.