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Earlier this week we noted that according to Charlie McElligott's quant model, we were just days away from a critical CTA "sell trigger", which as we followed up was triggered in the Russell 2000 the very next day, sending small caps sharply lower. It now appears that after being marginal buyers for the past month, CTAs selling has spread to the broader market as well.
Having failed for the past 3 weeks to break decisively above the "quad top" level of 2,800, US equity markets have declined significantly, losing much of their upward "goldilocks rally" momentum. Nomura believes the current correction in the US stock market is due to either: 1) Technical-based trend followers rapidly cutting their “loss-making” long positions on major US equity futures market, or 2) Some major positive factors that have supported financial market conditions on the fundamentals side, eg hopes of a US-China trade agreement and major central banks’ dovish shift have continued, and because some medium and long-term investors are looking for opportunities to buy-on-dips in the US equity market.
Market - Nomura - Team - Masanari - Takada
Looking at the market, Nomura's "other" quant team, headed by Masanari Takada, believes the former factor is dominating trends, in other words CTAs have started selling.
Elaborating on that point, Takada writes that the S&P500 has finally breached the "trigger level" of the CTA's cost breakeven ~2,750 level such that CTAs are liquidating their existing long positions, accelerating stock selling and cutting their “loss-making” positions. CTAs have behaved similarly on the NASDAQ-100 futures market as the NASDAQ-composite index has slipped below the ~7,460 level, which was the CTAs’ breakeven...
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