Bank of America warns: Despite recent market gains, CTA liquidation risk remains high

Investing.com - Bank of America states that although recent stock market gains have supported trend-following funds, the risk of forced liquidations by commodity trading advisors (CTAs) remains high due to still overly concentrated holdings.

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The bank’s analysts say that because trend followers are still “significantly long global equities,” last week’s strong market performance may have advanced systematic strategies.

However, they warn that the market remains fragile after earlier volatile price movements increased the risk of US stock liquidations. Although new all-time highs were not reached, Bank of America states that the recent rally “has indeed added some buffer to CTA stop-loss thresholds.”

Even so, “price trends could still decline from current levels, especially for fast-moving trend followers, but gradual de-risking during a downtrend generally has a much smaller market impact than the more urgent sell-offs we might see when risk management frameworks are triggered,” the analysts said.

Currently, analysts point out that the Nasdaq trend “may be the fastest to decline.”

According to Bank of America estimates, if the market falls in the next week, systematic strategies could sell up to $132 billion, while in flat or rising scenarios, they would only moderately buy. The analysts also note that risks remain asymmetric, with CTAs potentially selling as much as $95 billion in negative scenarios.

Outside the US, regardless of model speed, trend followers are still heavily long Euro Stoxx 50 and Nikkei futures, indicating crowded global positions.

In other areas of macro markets, CTAs generally remain short the US dollar against most currencies, except the yen. Despite recent dollar rebounds, they may reduce long positions in euros, pounds, and Canadian dollars in the coming days. The analysts say that stop-loss levels for these dollar-short positions are less than 60 basis points from recent levels.

In commodities, trend followers continue to increase long positions in soybeans and remain long gold and copper futures, both of which helped drive the index’s positive returns over the past week.

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