U.S. stocks could be in for some more pain following Friday’s rout as trend-following quants unload their holdings.
The selling may be particularly painful for U.S. small caps as commodity trading advisers, or CTAs, are set to “flip short” on the Russell 2000 Index by the end of the day, according to Charlie McElligott, a cross-asset strategist at Nomura Securities. As it stands, money managers that follow quantitative strategies are still 50 percent long entering Monday’s trading session, but that should vanish by the day’s end, his models show.
While Monday’s losses were modest in early trading, the quant flip could potentially add fire to the stock sell-off that began Friday, after a closely watched portion of the yield curve inverted and global growth concerns mounted. The S&P 500 Index had its worst day since early January, and the Russell 2000 fell more than 3.5 percent -- sending the small-cap gauge toward its worst month of underperformance since 2002.
McElligott has warned previously that his CTA models show that this year’s equity rally could be derailed some time in the second half of March as quants -- managers who use formulas to automate the investment process -- pivot to bearish from bullish.
In addition to small caps, the sell “trigger” isn’t too far off for the S&P 500 either, his data show. Should the S&P 500 fall about 0.8 percent from Friday’s close to 2,777.31, CTAs are set to unload their current long positions, he says.
This article was provided by Bloomberg News.