Gold prices climb, set for fourth straight month of gains on rate cut cheer
Investing.com -- Stocks have recently come under pressure after a sharp, futures-led sell-off, but UBS argues the pullback still looks more like a correction than the start of a broader reversal.
“We see the recent pull-back as healthy, and remain supportive equities in the medium term,” strategists led by Nicolas Le Roux said in a note, even as short-term headwinds persist.
“End of the earnings season, profit-taking, systematic strategies deleveraging from multiyear high exposures, it is hard to pin-point the main driver of the recent weakness in equities,” they wrote.
“Based on the discussion with our trading desk, last week’ sell-off seemed to have been futures/derivatives led, especially on Thursday, before it broadened to cash instruments,” they added.
Get more stock picks by Wall Street analysts — including insights on market pullbacks, positioning flows, and volatility signals — by upgrading to InvestingPro - get 55% off today
UBS highlights that Commodity Trading Advisors (CTAs) have already crossed key trigger levels and are likely to keep selling.
The strategists see CTAs halving their current exposure over the next two weeks, amounting to another 50 billion dollars of global equity outflows. That pace could quicken if the S&P 500 drops below 6500, with a move toward 6200 potentially doubling the selling, the team warned.
Risk-control funds may also add to the pressure. The VIX volatility index jumped from 18 to 27.5 in less than ten days, widening the gap with realized volatility.
Going forward, UBS sees two paths: either volatility remains too high, or realized volatility catches up. In the latter case, where realized volatility trends toward 25%, the bank estimates these funds could de-lever by another 20%.
Meanwhile, retail investors remain an area of resilience. Exchange-traded fund (ETF) flow proxies show retail buying persisted throughout the downturn, UBS noted, adding 2.1% of assets under management (AUM) over the past four weeks, with 0.8% in the most recent week alone. The flows have been broad-based across both small and large caps, it added.
Strategists also argue that sentiment has swung too negative in volatility markets. They believe that “elevated levels of volatility risk premia are unlikely to be sustained,” with implied-realized correlation spreads already easing from their peak.
UBS expects implied volatilities to come down rapidly, helped by retails’ continued willingness to buy dips.
On technicals, the S&P 500 is not yet oversold, with a 14-day relative strength index (RSI) of 37.2. The index has also not reached its first Fibonacci retracement level at 6445, leaving room for more downside before technical support strengthens.
Strategists said that early resistance levels sit lower and that “short-term headwinds have not been fully cleared,” including expected additional risk-reduction from CTAs and risk-control funds.
“The first resistance levels are lower, and we are not in oversold territory yet. But the near-term weakness is likely to remain short-lived, and should be seen as a correction rather than a reversal,” they added.
Signs of an eventual stabilization are emerging. The VIX term structure is nearing a level that UBS says would “prompt a buy signal,” with the VIX3M-to-VIX ratio, the ratio between the 3-month and 1-month implied volatilities, sitting at 1.02.
Options data also shows positioning evenly spread between 6000 and 7000, with more calls relative to puts than usual, pricing less downside risk than usual, strategists said.