CTAs keep buying Treasuries, gold longs face stop-loss risk: BofA
Investing.com – JPMorgan quant strategists say the worst of the forced selling triggered by sweeping U.S. tariffs may have passed, with hedge funds already slashing risk and retail investors continuing to buy into the market correction.
However, they caution that poor liquidity and policy uncertainty mean volatility is likely to remain elevated.
The sharp equity selloff following President Donald Trump’s “Liberation Day” tariffs on April 2 was initially driven by “momentum traders and equity future selling,” the bank said in its latest Flows & Liquidity report.
That liquidation phase now appears to have peaked. “Positioning reset and mean reversion are taking over,” JPMorgan strategists wrote.
Market depth, however, has collapsed. Liquidity in both S&P 500 Futures and U.S. Treasuries has fallen back to “Covid-crisis lows,” the bank noted, warning that “liquidity dislocations are amplifying volatility.”
According to JPMorgan, Equity Long/Short hedge funds have already de-risked heavily. “Beta is now near-zero for many funds, leaving little room for further unwinds,” the note said.
Retail investors, in contrast, have remained active buyers. JPMorgan said there has been “continued inflow into U.S. equity ETFs and leveraged ETFs,” suggesting individual investors still view the selloff as a buying opportunity.
Valuations now look more appealing, according to the bank’s models.
“The S&P 500 is currently trading 6% below fair value,” JPMorgan wrote, adding that even the Mag7 and equal-weighted S&P 500 price-to-earnings ratios are historically low.
JPMorgan also sees supply and demand dynamics turning supportive.
“Net equity supply is on pace to contract by $290bn annualized,” while demand is projected to reach $505bn—leaving the market “structurally tilted to the upside,” assuming retail interest holds.
In a stabilizing environment, the bank estimates up to $400bn in equity demand could return from CTAs and hedge funds through mean reversion. Still, the path forward is uncertain.
“Volatility will remain elevated,” the strategists wrote, given “binary” outcomes around U.S. trade policy and its broader economic impact.