Trend-following investors have been steadily increasing their U.S. equity positions as realized market volatility declines, according to Bank of America.
The bank noted that Commodity Trading Advisors (CTAs) “have been running maximum long positions in S&P 500, Nasdaq 100 and Nikkei 225 futures for some time now,” and the easing of volatility likely encouraged continued buying.
BofA’s model indicates that longs in the S&P 500 have reached their highest level since December 17, 2024, the day before the Federal Reserve’s hawkish rate cut prompted a 3% drop in the index.
While elevated positioning raises the risk of larger unwinds in the event of a reversal, BofA analysts led by Chintan Kotecha said, “for now stop-out levels remain far with equities at all-time highs.”
CTAs are also holding long positions in the Russell 2000, though less extended than in other major U.S. indices. In Europe, positions in the Euro Stoxx 50 were trimmed last week.
In fixed income, trend followers increased longs in U.S. Treasuries while covering shorts in Bunds, Korean government bonds, and Chinese government bonds. Analysts highlighted that CTAs are “most stretched long” in 2-year, 5-year, and 10-year U.S. Treasury note futures, with smaller long positions in ultra contracts. Price trends are expected to continue rising into next week, suggesting further CTA buying in bonds. Outside the U.S., additional short covering is anticipated in Bunds, KTBs, and CGBs.
In commodities, CTAs turned net long aluminum for the first time since March, even though futures prices fell during the week. BofA cautioned about the potential for stop-outs if prices drop. Soybean oil positioning remains mixed, though the model forecasts selling across most paths next week. Gold momentum remains strong, with both faster and slower trend models signaling maximum longs after five consecutive weeks of gains.
In foreign exchange, positions are broadly short the U.S. dollar, except versus the yen. Stop-loss levels for sterling and the Australian dollar now range from 64 to 78 basis points, bringing them closer to potential reversals.
Analysts also pointed out that increasing S&P 500 option gamma has helped reduce realized volatility. The one-month average gamma, now at $7.6 billion, has more than doubled in the last month, and its estimated effect on realized volatility has also doubled to 1.6 points. As of Thursday’s close, SPX gamma stood at $7.1 billion, in the 74th percentile over the past year. The upcoming September quarterly expiry could keep gamma elevated, particularly if the index drifts toward 6500.
This content is for informational purposes only and does not constitute financial, investment, or other professional advice. It should not be considered a recommendation to buy or sell any securities or financial instruments. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.