- If certain signals keep flashing in the realms of automated trading, stock market bears may soon be licking more than just wounds, but nursing some serious losses.
- As equity positioning has been cut to a bare minimum, even the slightest good news, such as a slowing pace of inflation, has the ability to trigger a sharp rebound.
Contrary to popular belief, the vast majority of equity trades on the likes of Wall Street aren’t executed by French-cuff-wearing Gordon Gecko types but rather, row after rows of silently whirring high-performance computers, commandeered by sophisticated software programs with literally millions of lines of code.
And if certain signals keep flashing in the realms of automated trading, stock market bears may soon be licking more than just wounds, but nursing some serious losses.
An estimate by JPMorgan Chase suggests that volatility target funds and similar strategies such as risk parity are currently buying anywhere between US$2 billion and US$4 billion of stocks per day.
Trend-following funds have also added fuel to the recent rally in equities, while benchmark indices such as the S&P 500 have shot past key trendlines like the 100-day moving average.
Combined, these automated trading strategies that are based on price and volume action, could conspire to knockout even the most fervent bear.
Hedge funds and mutual funds have slashed their equity exposure to the lowest levels since the 2008 Financial Crisis, and sentiment remains sour on concern that the U.S. Federal Reserve’s aggressive rate hikes will thrust the economy into recession.
As equity positioning has been cut to a bare minimum, even the slightest good news, such as a slowing pace of inflation, has the ability to trigger a sharp rebound.
