Quantitative Funds ‘Out of Ammo’ Due to Lack of Buying Power, Warns Goldman Sachs Analyst Scott Rubner

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Goldman Sachs analyst, Scott Rubner, is warning that the stock market may have to prepare for a potential loss of a crucial source of buying power amidst growing concerns about the banking industry.

According to Rubner’s data, systematic money managers have recently invested over $170 billion in global shares, causing the funds’ exposure to surge to its highest level since early 2022.

With the group’s positioning now close to its peak, Rubner believes that they may turn to selling in the upcoming weeks.

Rubner’s two-decade-long study of flow of funds suggests that trigger signals for commodity trading advisers (CTAs) – investors who ride the momentum of asset prices through long and short bets in the futures market – sit at levels including 4,130 on the S&P 500. The index plummeted 65 points to 4,071.63 on Tuesday.

Scott Rubner, Managing Director at Goldman Sachs

“I am tactically bearish,” Rubner wrote in a note to clients Tuesday afternoon.

“The buyers are out of ammo.” 

Goldman Sachs predicts that quantitative funds, which allocate assets based on volatility signals, may have to sell off as much as $276 billion worth of shares if the market experiences a downturn in the next month.

On the other hand, if a significant rally takes hold during the same time frame, these funds would only need to purchase up to $25 billion worth of shares due to their already elevated exposure.

Stock bulls who are enjoying the recent tranquility in the stock market might have to brace for impact as systematic traders, particularly quant funds, are potentially forced to unwind around $276 billion of shares if the market experiences a sell-off in the next month.

This news comes after the S&P 500 had its worst day in over a month due to a report from First Republic Bank that reignited worries about the lending crisis.

The unwinding from quants, if sustained, could add more pressure to the market that’s already cautious due to concerns about a recession and the looming deadline for US government debt ceiling.

Flow analysis has become increasingly popular among investors as they struggle to predict the path of the economy and monetary policy.

In March, while Wall Street strategists were trying to understand the implications of the bank crisis on US stocks, Rubner predicted that stocks would continue to climb in April, citing defensive positioning among investors.

However, it’s important to note that big systemic traders are only one force in the market, albeit a large one.

Predicting their impact on supply and demand dynamics is challenging and imprecise. Before the 1.6% drop on Tuesday, the S&P 500 had not lost more than 1% in April and was on track for a small gain for the month.

Trapped within a 2.5% band since the end of the first quarter, the equity gauge is heading for its smallest monthly move since June 2017.

Quant funds have been a key source of support for the market in the past month, buying up equities as they were lured by the eerie calm that’s been sweeping stocks of late.

However, if they start selling, it could weigh on the market and validate concerns that the recent tranquility is hiding dangers beneath the surface.

Earlier this week, JPMorgan Chase & Co.’s top-ranked strategist, Marko Kolanovic, revealed that the peace was driven by technical forces such as options sellers fueling intraday turnarounds that left the market largely unchanged on most sessions.

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