Bank of America pointed out that CTAs sold off the S&P 500 and Nasdaq heavily last week

Investing.com — According to data from Bank of America Global Research, Commodity Trading Advisors (CTAs) sold large amounts of stocks last week, especially in the S&P 500 and Nasdaq, as systematic funds quickly reduced risk exposure following recent market volatility.

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Bank of America states that CTAs held approximately $180 billion in global equity long positions at the start of this cycle, but as trend-following models triggered stop-loss levels, a wave of systematic de-risking significantly reduced these positions.

The bank notes that early sell-offs focused on European and emerging market stocks, later spreading to the U.S. markets, with current models showing large-scale unwinding in the S&P 500 and Nasdaq.

Bank of America says, “Overall holdings have significantly flattened,” adding that only a small long position remains in these two U.S. indices, mainly held by slower, longer-term trend-following strategies.

Short-term CTA models react more quickly to price changes and may have already shifted to short positions last week, although these strategies account for a smaller share of assets under management.

Despite the large reduction in holdings, Bank of America states that systemic fund flows are approaching a potential turning point, with risks becoming “two-sided.”

The bank indicates that if the stock market rebounds, CTAs could rapidly rebuild long positions, as the overall long-term trend signals remain positive. However, if the market continues to decline, further selling may be forced, as slower models will unwind remaining long positions.

Looking ahead, Bank of America estimates that if the market falls, systematic strategies could sell about $62 billion worth of stocks; if the market stays flat, about $14 billion; and if the market rises in the next week, they might buy approximately $87 billion.

Additionally, the report states that strong gains in commodities helped offset some losses in trend-following funds. Crude oil futures surged significantly, bringing CTAs close to their largest crude oil long positions in the past year, with additional buying possible in the coming days.

Bank of America also notes that rising U.S. Treasury yields and a strengthening dollar have forced CTAs to unwind some Treasury futures longs and currency positions, including longs in the Mexican peso and British pound.

The bank further warns that options holdings could amplify market volatility. As the S&P 500 options gamma turns increasingly negative, further declines in the stock market could trigger additional selling pressure through hedge fund flows.

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