Equity Market Trends and CTAs

Investing.com reports that trend-following funds (CTAs) still have capacity to buy equities despite recent market gains, according to analysts at Bank of America in a Friday report.

“All equity indices followed in this report posted gains this week, but our model CTA’s positioning remains close to flat,” the BofA analysts stated. This indicates potential for further buying from systematic traders in the near term.

The early August market slump has signaled buying opportunities for shorter-term CTAs—funds that systematically follow price trends across various asset classes. These trend followers are likely to increase their bullish positions in stocks, especially in S&P 500, Nasdaq 100 futures, and Euro Stoxx 50, as mentioned by analysts.

“Our model sees the largest trend follower buying in the US (S&P 500 and NASDAQ-100) and Europe (EURO STOXX 50),” the report highlighted.

For the S&P 500, BofA’s model—which equally weighs shorter and longer-term trend signals—indicates that CTAs currently hold a long position with a trend strength of 29%. The bank forecasts this could rise to between 36% and 39% over the next 5 trading sessions under median to bullish scenarios.

For the NASDAQ-100, the model shows CTAs are long with a trend strength of 6%, which may increase to 21% to 22% in the upcoming week with favorable conditions.

These bullish stock positions arise amid expectations regarding Federal Reserve policy changes following Chairman Jerome Powell’s comments indicating a potential interest rate cut in September.

“The time has come for policy to adjust,” Powell stated, emphasizing efforts to maintain labor market strength while addressing inflation towards its 2% target.

Currently, about 70% of traders anticipate the Fed will cut rates in September.