Analysts at Bank of America said they have identified a risk of Commodity Trading Advisor (CTA) stop-loss triggers impacting S&P 500 and NASDAQ-100 long positions if the recent downward trend continues.
Both market indices reversed Monday's gains and continued to decline, resulting in the S&P 500's first 2% drop since February 23. According to BofA, this suggests that CTAs may be reducing their long positions in these indices to manage losses.
Still, risk management strategies can vary among CTAs, and the positive price trends for the S&P 500 and NASDAQ-100 mean some trend-following positions "could remain intact as evidenced by the benchmark CTA index’s continued decline on Thursday and gain on Friday,” analysts noted.
"Trend followers who remain long the NASDAQ-100 could be gradual sellers in the week ahead, however, as its price trend is coming off sharply," they added.
Meanwhile, the Russell 2000 index rose another 3% this week as the shift towards small caps persisted.
Analysts' model indicates that CTAs still have room to increase their long positions in the small-cap index. On the other hand, outside the US, they expect trend followers to reduce their long positions in the Nikkei 225 and EURO STOXX 50.
In the foreign exchange market, while the model remains neutral on EUR and is waiting for a local high to enter, actual CTAs might have already started accumulating long positions.
Regarding other currencies, the model recently unwound its AUD long and suggests that CTAs might continue covering MXN shorts and adding to already stretched GBP longs.
"In commodities, we expect trend followers to reduce long Oil positions and rapidly add to Aluminum shorts," the analysts added.