At the beginning of the year, CTAs were buying stocks aggressively, precisely because the market had developed a recovery. However, now he fears inflation again and the trend has turned bearish again. And what will the CTAs do? They will sell because what they do is precisely follow trends. In other words, these types of funds put steroids on each market movement.
Something noteworthy is that, in the current situation, if the S&P500 is placed below 4000 points, sales orders of the CTAs of Short and Medium Term strategies will be activated.
In this case, and according to estimates of Goldman Sachs, CTAs could sell up to $222B worth of shares (via the futures market) over the next month, if the market continues to fall. To take into account, right?
In this context, CTAs can have a significant impact, as your shift from buying to selling can be a factor in accelerating the decline. Because? Simply because they will be forced to sell at certain levels to implement their trending strategies.
As we mentioned before, the 4,000 point zone of the S&P500 is vital:
For the entire past week, the S&P500 has moved very close to that level. But the trigger was on Friday, when the personal consumption expenditures (PCE) price index was released. It’s the Fed’s favorite piece of data on how fast prices are rising in the economy. And it increased 5.4% year-on-year in January, when the market expected 5%.
This generated a further rise in interest rates and a sharp fall in shares. Therefore, on Friday the market accelerated downward and the S&P500 broke the 4,000 point zone, closing at 3,970.
The CTAs have already taken note and began to switch to the selling side. They are not retail investors, but handle huge amounts of money and account for 10-30% of the total daily trading volume in the futures markets. It is inevitable to analyze what they do to understand what can happen.
There are many arguments to think that the fall in Wall Street to be continue. The interest rate is not loosening, inflation is nowhere close to being fixed, and companies are making less money. Recession just around the corner? To top it off, the CTAs began to sell shares. Better not play against them.
In addition, the PCE price index for services increased by 5.6%, the worst record since 1984. December, November and October were revised sharply upwards. This is where inflation is skyrocketing and services account for nearly two-thirds of consumer spending. It will be difficult to lower it. If you don’t believe me, take a look at the graph below:
You have to be careful because there are many risks.
Finally, I invite you to download a report that I prepared with “7 Investment Ideas for 2023”, an extremely challenging year. Download it here: https://informes.cartafinanciera.com/
Note: The material contained in this note should in no way be construed as investment advice or a recommendation to buy or sell any particular asset. This content is for educational purposes only and represents the author’s opinion only. In all cases, an advisor is recommended
CEO of Financial Charter
Source: Ambito
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