JPMorgan Says Quants to Sell $50 Billion of Stocks If Chart Test Fails

(Bloomberg) — After fueling the big Wall Street rebound, trend-following quants now look poised to offload stocks if the S&P 500 falls below a key technical threshold, warns JPMorgan Chase & Co.’s trading desk.

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Should the benchmark gauge slip under its average price from the past 200 days, so-called commodity trading advisors could be forced to unload about $50 billion of equities, the JPMorgan team estimated. The index on Friday came within 1% of the threshold, which sat near 3,940.

Fresh selling would deepen a retreat from global stocks by CTAs that is, according to Nomura Securities International, already at $40 billion in the past two weeks. CTAs were among the quant players that helped spur the equity rally since October only to turn into sellers in 2023, dimming the market’s new-year advance.

Getting a clear picture of the quant world isn’t easy, and models built on subjective assumptions often spit out different numbers on money flows. While far from an exact science, such projections offer a lens into the positioning among fast-money traders, a technical force that Wall Street is increasingly fixated on in a market where fundamental narratives are shifting constantly.

Last year, CTAs piled in on the inflation trade as the Federal Reserve rushed to raise interest rates and tighten financial conditions. The cohort bet on a stronger dollar and wagered against bonds and stocks, at times amplifying asset moves. The current macroeconomic trend is less clear-cut, yet to Nomura’s cross-asset strategist Charlie McElligott, the group’s impact can’t be ignored.

“Now you are looking at this transitory phase where you’re going to have this range trade where dollar softens, risk assets rally, FCI eases too much, data picks back up, the Fed has to talk hawkishly again,” McElligott told Bloomberg TV. “It’s making it a very tactical market. That’s further impacting those flows that can truly push around the market when there’s so little conviction from the fundamental types.”

Stocks rose Monday, with the S&P 500 poised to close above its 200-day average for a 26th straight session, the longest run of buoyancy since January 2022. The bounce followed a bad week, when the index dropped 2.7% for the worst performance of the year.

Equities started the new year with a strong rally amid speculations that the Fed may cut interest rates later this year. After a flurry of stronger-than-expected data on the job market and inflation, traders have adjusted their rate expectations, sparking a decline across assets.

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Quant traders were pushed to unwind their bearish wagers during the January rally, a move that has made their positions now more sensitive to the downside. A continued selloff in a vicinity of 5% would force systemic strategies to dump $55 billion to $60 billion of shares in the following week, according to an estimate from Morgan Stanley’s trading desk. A month ago, a similar market pullback would have driven a stock disposal of $10 billion to $15 billion.

“The systematic bid will continue, but at a much slower pace and with a lower bar to turn into supply,” Morgan Stanley’s team wrote in a note late Friday.

–With assistance from Dani Burger and Alix Steel.