Market Explosion Sends CTAs Into Short Covering Frenzy: $79BN To Buy

With today’s much cooler than expected CPI out of the way, and with Q3 earnings season mostly over (despite some notable blow ups it was not nearly as bad as some had feared), we are out of major market catalysts until December’s payrolls report – which we can now confidently say will be a disaster as the BLS no longer has to cover Biden’s ass as the midterms are over and tech companies are engaging in mass layoffs – and the December FOMC which is now a lock for 50bps after which there will be less then 2 hikes left according to today’s market pricing of the terminal rate which is now at 4.89%, or less than 4 hikes away.

Which also means that we are once again back to trading technicals and seasonals for at least the next 3 weeks, which really means retail flows, buybacks, and CTAs.

When it comes to the first two, we already know the Pavlovian reflex is so deeply ingrained that retail will keep buying  that once things stabilize, we are looking at roughly $5 billion in buybacks every day until year end (or perhaps even more due to the recent market turmoil which saw buyback desks go dead quiet).

So what about CTAs and other trend-followers? It is here that things get interesting because while the S&P had dropped below the CTA “buy” trigger point in recent days, today’s violent melt up has once again activated buying by US equity CTAs as the S&P crossed back above the short-term trigger level of 3804.

This is key because as the next chart shows, heading into today’s CPI momentum had clearly been with bullish CTAs: as Goldman’s Matt Fleury notes, the rolling 10d buying from CTAs is the highest in the past 5yrs.

And while Fleury’s spin was bearish, to wit:

This flow runs out around now absent a move higher, and provides fuel for a sell off lower if we were to move in that direction. That was notably absent in October

… today’s violent melt up is just the contrary: fuel for an aggressive melt up.

What does that mean in quantifiable terms? According to Goldman’s Michael Nocerino, after CTAs bought $43BN last week and bought $79BN in last month, now that we are back over the short-term trigger, Goldman calculates that there is a whopping $38BN to buy over the next week, and substantially more (green line) in an up big market: as shown in the chart below, the bank expects more than +$79B of Buying over a Month.

There’s more: Goldman also calculates that as of mid-week there was $19B Global Equities still Short (13.6B of that is S&P); shorts which will now be aggressively covered.

And in terms of flow activity, it’s all systems go: According to Nocerino, when looking at Momentum Signals 60% are positive (38 / 63 signals positive) compared to just 2% a month ago.