Trend followers keep buying equities on volatility declines: BofA

Published 22/09/2025, 08:08
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect

Investing.com -- Trend-following investors continued to add to U.S. equity exposure as realized volatility declined, according to Bank of America.

The bank said Commodity Trading Advisors (CTAs) have been running maximum long positions in S&P 500, Nasdaq 100 and Nikkei 225 futures “for some time now,” but buying has likely persisted as volatility eased.

Its model showed S&P 500 longs rising to their largest since December 17, 2024, the day before the Federal Reserve hawkish rate cut sent the index down 3%.

Elevated positioning increases the risk of larger unwinds if a reversal occurs, though “for now stop-out levels remain far with equities at all-time highs,” BofA analysts led by Chintan Kotecha said.

CTAs also maintain long exposure to the Russell 2000, albeit less stretched than other U.S. indices, while positions in Euro Stoxx 50 were trimmed last week.

In bonds, trend followers increased U.S. Treasury longs and covered shorts in Bunds, Korean government bonds and Chinese government bonds.

Analysts noted CTAs are “most stretched long" in 2-year, 5-year, and 10-year U.S. Treasury note futures, with smaller longs in ultra contracts. Price trends are projected to rise into next week, suggesting potential for further CTA bond buying.

Outside the U.S., additional short covering in Bunds, KTBs and CGBs is expected.

In commodities, CTAs turned net long aluminum for the first time since March, despite a weekly decline in futures prices. BofA flagged the risk of stop-outs if prices fall.

In contrast, soybean oil positioning remains mixed, though its model projects selling in most paths next week.

Gold’s upward momentum continues, with both faster and slower trend models showing maximum long signals after five straight weeks of gains.

Foreign exchange positions remain broadly short the U.S. dollar, except against the yen.

Stop-loss levels in sterling and the Australian dollar are now within 64 to 78 basis points, bringing them closer to potential reversals.

Analysts also pointed out that rising S&P 500 option gamma has helped dampen realized volatility. The one-month average gamma level, now at $7.6 billion, has more than doubled in the past month, while its estimated impact 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 of the past year. The upcoming September quarterly expiry could help keep gamma elevated, particularly if spot drifts toward 6500.

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