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Algorithmic Funds Spark Renewed Stock Market Sell-Off
9 Feb
Summary
- Algorithmic funds expected to trigger billions in stock outflows this week.
- Investor sentiment nears "max fear" despite recent S&P 500 rebound.
- Thin liquidity and short gamma positioning to keep markets choppy.
US stocks are bracing for further selling pressure this week, driven by algorithmic funds following trend-following strategies. Goldman Sachs anticipates these systematic strategies will remain net sellers, potentially leading to significant outflows from the market. The S&P 500 has already crossed a threshold that has prompted Commodity Trading Advisers (CTAs) to sell, with estimates suggesting billions in selling could occur this week.
Investor sentiment remains elevated, with market fear levels approaching "max fear" despite a recent rebound in the S&P 500. This volatility is further exacerbated by deteriorating top-of-book liquidity, which has fallen significantly. Dealers' option positioning has also shifted, potentially magnifying market moves.
Looking ahead, other systematic strategies like risk-parity and volatility-control funds also have room to de-risk if volatility remains elevated. Seasonality trends suggest February is historically a weaker and choppier month for major indices, with fading supportive flows from January. Retail investors are also showing signs of fatigue, with less willingness to "buy all dips."
