To The Moon

Scott Rubner, a global markets managing director at Goldman Sachs specializing in capital flows, noted that over the past month, systematic funds, which buy stocks based on market signals and volatility rather than company fundamentals, have massively sold off US stocks, hitting a four-year high in dollar terms.

But now, the market has calmed down. Goldman Sachs pointed out that the VIX, known as the "fear index", is trading around 15, and economic data shows that the Federal Reserve may be close to achieving a soft landing, and systematic funds are expected to buy U.S. stocks again.

Barclays strategists also wrote in a report to clients on Monday: "If the market stabilizes and the data gets better, funds may increase buying pressure more significantly."

Take volatility control funds, whose positions are opposite to actual volatility, as an example. Barclays said that last week's surge in $Cboe Volatility Index(VIX)$ triggered a massive sell-off in volatility control funds, and its stock allocation ratio dropped from 110% to about 50%. Now, as VIX returns to the level before the big sell-off, volatility control funds are expected to re-establish these positions.

Typically, volatility control funds sell out quickly and take time to rebuild positions, but the recent surge in volatility came and went quickly, so such funds may be able to build positions more quickly than usual.

Anshul Gupta, head of European derivatives and global QIS at Barclays, expects it will take weeks, not months, for such funds’ positioning to return to normal this time around.

Barclays said commodity trading advisors (CTAs) could also add to the buying pressure. Almost all of their long equity positions have been closed due to concerns about economic growth. What matters most to CTAs is the direction of the market and the many signals it sends. They track exponential moving averages and adjust their positions when certain thresholds are reached. The more bullish the price trend, the larger the CTA's position and the stricter the conditions for triggering a sell-off.

“They just want to see asset prices go up,” Gupta said of CTAs. “If the market continues to rally, they are likely to rebuild their long positions more quickly.”

Charlie McElligott, cross-asset strategist at Nomura, said that in the long run, the flow of funds buying is huge.

Nomura estimates that if the S&P fluctuates by 0.5% per day in the next month, it will bring in about $59 billion in fund purchases per month. If the time is extended to three months, the same S&P fluctuation may attract nearly $191 billion.

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