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Investing.com -- Commodity trading advisors (CTAs) have rebuilt long positions in the S&P 500 and Nasdaq after a period of forced selling, but the next leg of systematic buying now hinges on volatility (vol) easing, according to Bank of America (BofA).
Both indices logged five straight positive sessions, the type of pattern that typically drives CTA re-risking. But models show managers “didn’t add exposure immediately,” suggesting many “missed the first leg higher from the bottom after last Thursday’s stop-outs," BofA analysts led by Chintan Kotecha said.
"When we run our model assuming CTAs never hit stops, positioning looks stronger but doesn’t align well with actual price action; incorporating stops gives a better fit because it reflects the missed upside early in the rally," analysts wrote in a note.
"This highlights how whipsaw dynamics can materially impact CTA performance," they added.
Trend signals have since stabilized across both benchmarks. S&P 500 and Nasdaq futures are long across all trend windows, with medium- and long-term signals pinned at 100%, but the hurdle for additional buying has shifted to volatility.
"Realized volatility remains high, and its trajectory will matter," the analysts noted. A decline into year-end, possibly on lighter volumes, could reopen systematic inflows, while persistently elevated swings would cap further additions.
"For now, trend signals have stabilized, but the next leg depends on volatility cooling enough to unlock further buying," the team said.
Outside equities, CTAs have been increasing long positions in U.S. 10-year and 30-year Treasury futures as yields fell for a second week. Long-term trends remain firmer than short-term signals after this month’s rate moves.
In commodities, gold longs are growing again as volatility retreats, though positioning remains below early October peaks. Copper could see incremental buying next week, supported by improving trend strength.
Option-market dynamics offer limited offset to volatility. SPX gamma, a measure of how much dealers must adjust hedges when the S&P 500 moves, sits modestly positive, but BofA estimates that over the last month “the reduction in S&P realized vol attributable to SPX gamma is likely at most 1 vol point."