A tech-stock-triggered selloff in US equities is setting off a chain reaction of deleveraging across systematic strategy funds, with the sheer scale and speed of the selling pressure making it difficult for the market to shake off its strain in the near term.
According to a report published on November 5 by JPMorgan's equity derivatives strategy team, US stocks suffered their worst single-day performance since "Tariff Day," with the S&P 500 tumbling 4.4% and the Nasdaq 100 plunging 6.4%. Quantitative strategy funds played a key accelerating role in this decline — CTA trend-following strategies and leveraged ETFs collectively sold more than $70 billion in equity exposure on the day.
More alarmingly, the selling pressure has not yet been fully flushed out. JPMorgan's models estimate that volatility targeting funds still have roughly $50 billion in equity exposure left to sell over the coming days, in order to compress their target leverage ratio from around the 67th percentile down to the 30th percentile. This means that if the market continues to decline, mechanical position reductions will constitute persistent downward pressure.
CTAs Flip to Net Short, Selling $11 Billion in the First 90 Minutes
The direct trigger for this selloff was the mass breach of momentum signals in CTA trend-following strategies. JPMorgan's report noted that the decline broke multiple key momentum signals across major US stock indices during early trading hours, triggering programmatic CTA selling and further accelerating the market downturn.
Specifically, within roughly 1.5 hours of the cash market open, net selling in S&P 500 futures had already reached approximately $11 billion. From a momentum signal perspective, CTA positioning in the S&P 500, Nasdaq 100 and Russell 2000 has all flipped to net short.
JPMorgan's CTA momentum signal tracking table shows that with the S&P 500 currently at around 7,383 points, the 1-month momentum signal is negative, and the CTA signal has turned to "short"; the Nasdaq 100 is in the same situation. Although the 12-month momentum remains positive across major US equity indices, and the S&P 500 price is hovering near its 200-day moving average — meaning further deleveraging depends on whether the market continues to break lower — the report also noted that since most signals have already turned bearish, flow risk is currently skewed to the upside.
Leveraged ETFs Deleverage Sharply for the Second Time in a Week, Tech Accounts for 90%
Leveraged ETFs were another major force behind this selloff. JPMorgan estimates that leveraged ETFs sold more than $60 billion in equity exposure before the close, with roughly 90% concentrated in tech-related products, including semiconductors (Semis), Nasdaq 100 (NDX) and technology sector ETFs (XLK).
This marks the second sharp deleveraging by leveraged ETFs within a single week, reflecting the market characteristic of tech stocks persistently leading the decline in recent sessions. However, the report also noted that dip-buying inflows from investors during past major selloffs may have partially offset ETF rebalancing selling pressure.
After this round of deleveraging, the implied short gamma exposure of leveraged ETFs has fallen from roughly $7.5 billion per 1% move to about $6.5 billion, meaning the scale of passive selling triggered by subsequent rebalancing will narrow somewhat.
$50 Billion Hanging Overhead, Volatility Targeting Funds Become the Next Focus
The largest potential source of selling pressure currently facing the market is volatility targeting funds. JPMorgan's models show that as market volatility surges sharply, these funds need to cut roughly $50 billion in equity exposure over the coming days to compress their target leverage ratio from around the 67th percentile to the 30th percentile.
The operating logic of volatility targeting strategies is as follows: when market volatility rises, they mechanically reduce exposure to risk assets to keep portfolio volatility stable. This mechanism often creates a negative feedback effect of "selling more as prices fall further" during periods of violent market swings.
JPMorgan had already warned in its Monday report that macro systematic strategies face two-way flow risk, with significant deleveraging potential in scenarios involving sharp declines and surging volatility. The day's market action confirmed that judgment, and the adjustment process could last for several days. For investors, until this $50 billion in passive selling is fully released, the market's pressured environment will be difficult to fundamentally change in the near term.
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