PremiumCTAs Forced Sellers Of $70BN In Global Equities Over The Next Week
With market fundamentals in a state of constant, panicked flux, swinging from one extreme to the other on headline after flashing red headline, as everything - from input costs, to Fed monetary policy, to gas prices and personal consumption, and even Trump's poll numbers - depends on the price of oil and thus when Iran will remove the Strait of Hormuz blockade, this leaves traders with technicals. Here, things aren't pretty.
As Goldman's Prime Brokerage desk writes in its latest must read Weekly Rundown note (available to pro subs), Gross and Net Leverage fell modestly, but there is still plenty of room to fall: Fundamental L/S Gross leverage -5.1 pts – the largest weekly decline since Oct ‘24 – to 218.1% (87th percentile 1-year) which was likely driven by long book unwinds because as we reported previously, shorts saw the 2nd biggest one day increase on record, and Net leverage +0.3 pts to 55.7% (66th percentile 1-year).
That was the week when global equities saw the largest net selling since early April ‘25/Liberation Day and were net sold for a fourth consecutive week (6 of the last 7, -1.5 SDs 1-year), as gross trading activity continued to increase driven almost entirely by short sales, according to Goldman PB.
Meanwhile, as we reported over the weekend the selling/hedging panic is raging: last week, recorded selling of S&P Futures among asset managers (i.e., non-speculative institutional traders) hit a record -36.2 billion of SPX futures … marking a 10+ year record in notional terms, with liquidations (-$30.7bn) the main driver behind the move.
Turning to programmatic/systematic traders, Goldman notes that CTAs have been large sellers and it will continue to do so: according to the bank's models, systematic strategies have sold roughly $80bn of global equities over the last month, with CTA/trend followers driving the heaviest selling in the last week.
Overall length has gone from above an 8 out of 10 earlier this year to closer to a 6.5 now, and is projected to go nearer to a 4.5-5 all else equal after the upcoming baseline sales .
That said, Goldman's baseline still points to another ~$70Bbn of selling over the next week and ~$100bn over the next month, with US markets expected to account for an outsized share (~$36bn) given increasingly negative trend signals.
Here is the latest CTA conditional flow snapshot, courtesy of Goldman:
Over the next 1 week:
- Flat tape: Sellers $66.18B ($34.73B out of the US)
- Up tape: Sellers $33.01B ($17.54B out of the US)
- Down tape: Sellers $74.73B ($34.56B out of the US)
Over the next 1 month…
- Flat tape: Sellers $91.2B ($55.27B out of the US)
- Up tape: Buyers $93.27B ($42.03B into the US)
- Down tape: Sellers $131.16B ($48.26B out of the US)
Key pivot levels for SPX:
- Short term: 6860
- Med term: 6761
- Long term: 6370
Here is the conditional scenario for global flows...
... and just for the US:
As of this moment, the S&P is about 50pts below the all important medium term pivot level, indicating that absent a thrust higher, selling is about to engage.
Put differently, a meaningful portion of the mechanical de-risking has already occurred... but substantial selling pressure still lies ahead.
Turning to derivatives, the market skew plummeted last week, with S&P suddenly tumbling, or as Goldman's Brian Garrett puts it, "to hedge a short book you need to buy calls."
How about VIX positioning? Ahead of this week's quad witching, Goldman notes that asset manager VIX positioning has reversed sharply higher over the past week, with the move now screening alongside prior major volatility episodes:
- Volmageddon (Feb 2018): +$70mm vega
- Initial Covid shock (Feb 2020): +$62mm vega
- US-China trade escalation (Aug 2019): +$48mm vega
- US-China trade deterioration (May 2019): +$35mm vega
This past week: +$35mm vega
To Goldman's Lee Coppersmith, "this suggests that a community that spent much of the past year structurally short volatility has now pivoted aggressively toward protection — meaning a meaningful portion of the volatility positioning reset has already occurred beneath the surface."
Which is bullish as it means that much (but certainly not all) of the negative news is already priced in, and hedged.
One thing that is far less bullish is that while buybacks are no longer a key driver of flows, now that Mag7s have rerouted the capital flows into capex instead of buybacks so much so they are mostly turning free cash flow negative, it's about to get even dryer for everyone else as the next blackout window begins this week, March 18, with ~45% of the S&P 500 to be in blackout by that point, assuming entry 6 weeks prior to earnings.
What should traders do? Excerpting from Goldman's trade reco, the bank writes that those who believe stagflation concerns will continue to rise, should add the bank's Stagflation pair basket (GSPUSTAG Index). The Long basket (GSXUSTGL) consists of commodity equities and defensive compounders that historically perform well in stagflationary environments. The Short basket (GSXUSTGS) includes low-quality consumer discretionary, semis/hardware, consumer finance/regional banks, high-beta oil-input cyclicals, and high-flier tech names that historically struggle during stagflationary regimes.
Much more in the full Goldman notes (here, here and here) available to pro subs.
