Kolanovic Says $150 Billion Systematic Selling Drove Stock Rout
Comment of the Day

February 28 2020

Commentary by Eoin Treacy

Kolanovic Says $150 Billion Systematic Selling Drove Stock Rout

This article by Lu Wang for Bloomberg may be of interest to subscribers. Here it is in full:

About $150b worth of stock selling from computer-driven traders and options hedgers drove the S&P 500’s worst two-day slump since 2015, according to JPMorgan strategist Marko Kolanovic.

* The unloading is largely over, Kolanovic wrote in a note to clients on Wednesday
* While the spread of the coronavirus sparked risk-off, traders who watch market trends and volatility for trading signals acted as “significant drivers” of the rout as the S&P 500 broke key support levels
* Exacerbating the sell-off was the dwindling liquidity as a measure known as market depth dropped by more than 50% * The selling trend from commodity trading advisers, or CTAs, now seen over, as S&P 500’s 200d (~3045), 6m (2900) and 12m (2800) signals are not likely being breached
** CTA’s equity exposure fell from ~85th percentile last week to ~40th percentile now
** “Selling will likely stop here”
** “A move higher could prompt CTAs to buy back equity exposure, so we think risk from CTAs is skewed to the upside.”
* Volatility targeters, such as variable annuities and risk parity funds, are likely to continue selling over the next few days to account for the pickup in equity price swings that were too large to be offset by bond moves
** Selling pressure expected to ease once their exposure drops to 35th percentile, vs 75th percentile before the sell-off
* Expected inflows from pension funds, which rebalance monthly and will need to buy stocks to return to prior asset allocation levels following the latest decline, are helping support the market
** That demand estimated to equal to 1-2% upside for the market
* “Option hedgers and CTAs are now more likely to buy than sell, and volatility targeters are still selling but at a lower pace, so we think a short term bounce-back is getting likely given month-end flows”

Eoin Treacy's view

This note referenced above was released on Wednesday and since then the market has continued lower. However, the sharper the acceleration the closer we are to a low, even if dip buying has not worked to date, it will inevitably work eventually. Today was the last day of the month and it therefore represents the last opportunity for institutional investors like pensions and insurance companies to commit capital to the market.

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