US Stock Market Bullish: The largest scale of selling since the epidemic has ended, quantitative funds are preparing to return to the market

Good news for the U.S. stock market bulls: The most severe sell-off in the U.S. stock market since the outbreak of the COVID-19 pandemic has come to an end. Now, quantitative funds that track trends are preparing to re-enter the U.S. stock market.

Scott Rubner, Managing Director of Global Markets at Goldman Sachs, who studies fund flows, pointed out that in the past month, so-called systematic funds, which buy stocks based on market signals and volatility trends rather than company fundamentals, have been selling U.S. stocks in large quantities. In dollar terms, the scale of their selling of U.S. stocks has reached a four-year high.

But now, the market has calmed down. Comments indicate that the so-called "fear index," the Chicago Board Options Exchange's volatility index VIX, is trading around 15, and economic data suggests that the Federal Reserve may be close to achieving a soft landing. Systematic funds are expected to buy U.S. stocks again.

Barclays strategists wrote in a report to clients on Monday, "If the market stabilizes, data improves, funds may significantly increase buying pressure." Taking volatility control funds as an example, Barclays stated that the surge in VIX last week led to a large-scale sell-off of volatility control funds, with their stock allocation ratio dropping from 110% to about 50%. Now, with VIX returning to levels before the major sell-off, volatility control funds are expected to rebuild these positions.

Usually, volatility control funds sell off quickly, but it takes some time to rebuild positions. With recent rapid spikes in volatility, these funds may rebuild positions more quickly than before. Anshul Gupta, Head of European Derivatives and Global QIS at Barclays, expects that these funds will return to normal positions in just a few weeks, rather than months.

Barclays also stated that Commodity Trading Advisors (CTAs) may also increase buying pressure. Previously concerned about economic growth, they have almost closed all their long positions. For CTAs, the most important thing is the market direction and the many signals it sends. They track index moving averages and adjust positions when specific thresholds are reached. The more bullish the price trend, the larger the CTA's position, and the stricter the conditions for triggering sales.

Gupta evaluated CTAs, saying, "They only want to see asset prices rise. If the market continues to rebound, they may rebuild long positions faster."

During the period of increased volatility and stock market decline last week, risk parity funds significantly reduced their stock allocation size, while their bond allocation size may stabilize, as these funds often need to minimize volatility and correlation with specific asset classes. As the market stabilizes, these funds should also start buying U.S. stocks.

U.S. retail sales for July, released on Thursday, exceeded expectations with a month-on-month growth of 1%. Last week, initial jobless claims in the U.S. unexpectedly fell for the second consecutive week to a new low in over a month, easing investors' concerns about the U.S. falling into an economic recession. On Thursday, the U.S. stock market continued to rise, with the S&P 500 index rising 6.6% over the past six trading days, marking the largest six-day gain since November 2022, and erasing all declines this month, including last week's "Black Monday," reaching a new high since July 23 Comments believe that the gradual rise in stock indices and the gradual inflow of systematic funds may mean that the buying pressure in the US stock market will take some time to reflect on the moving average. However, Nomura's cross-asset strategist Charlie McElligott stated that in the long run, the fund inflows from purchases are significant. Nomura predicts that if the S&P 500 fluctuates by an average of 0.5% daily in the next month, it will bring in approximately $59 billion in fund inflows for that month. If the timeframe extends to three months, a similar S&P fluctuation could attract nearly $191 billion in funds