Momentum traders to buy equities even if market drops: Goldman

Momentum traders are modeled to buy equities over the next week regardless of market direction, according to Goldman Sachs Group Inc.’s trading desk.

Commodity trading advisers — funds that use systematic strategies to trade futures contracts — are exposed to about $106 billion in long positions after the drawdown in April, Cullen Morgan, an equity derivatives and flows specialist at the bank, wrote in a note. That’s set to support a bounce in global equities after a rough month. 

“We now have CTAs as buyers of global equities and the S&P 500 in every scenario over the next week,” he said.

Morgan expects CTAs to buy about $29 billion in global stock futures — including $8.5 billion in S&P 500 contracts — if equities were to rally over the next week. CTAs would still buy as much as $1.5 billion if stocks sold off again, he said.

Global equities have had a volatile April on worries that the US Federal Reserve will hold interest rates higher for longer amid sticky inflation. Elevated bond yields have also taken the shine off an upbeat US corporate earnings season, and focus this week is on the Fed’s policy meeting for clues on the rates outlook.

 The MSCI All-Country World Index is down about 2% this month after recovering half of its declines last week. 

Citigroup Inc. strategists, though, said the rebound was fragile as it was driven by investors booking profits on short bets rather than the return of bullish flows. “The bounce cannot continue on de-risking flows alone and must be supported by new bullish inflows for the rally to continue,” Citigroup strategist Chris Montagu wrote in a note.