Bank of America (BofA) strategists caution that a fresh downside leg in risk assets could set off an additional round of selling from trend-following funds, increasing market vulnerability across equities, currencies and commodities.
Geopolitical developments pushed global stocks lower last Tuesday, producing single-session losses north of 2% in both the S&P 500 and the Nasdaq. Despite that abrupt pullback, systematic investors did not dramatically reduce their exposure.
“Trend followers largely maintained long equity exposure through the selloff,” analysts led by Chintan Kotecha observed. They noted that while quicker-reacting models may have trimmed some U.S. equity longs, medium- and long-term systems continued to carry substantial net long positions.
That persistence in trend-following allocations, the analysts argue, leaves markets susceptible if prices move lower from here. BofA's internal models show stop-loss thresholds have tightened, meaning the distance to forced de-risking is reduced should equity prices slide further.
Looking at the coming week, BofA warned that “a further bearish move could trigger more material CTA selling, with the bulk of potential de-risking occurring roughly 3-5% below current levels.” In other words, an additional decline in equities within that range could prompt meaningful liquidation by managed futures and similar trend-driven strategies.
Currency positioning is another area of concern, according to the bank. Recent strength in the Japanese yen has left systematic funds with substantial short JPY exposures, putting these strategies close to their stop-loss limits and enhancing the possibility of rapid short covering if the yen's rally continues.
On a median path of prices, BofA's note suggests that faster-moving CTA models may begin to cover short JPY positions imminently, and a stronger extension of the yen move could force broader covering within the week. The analysts specifically flag their model for USD/JPY, noting: "For USD/JPY, our model flags CTA selling in the 155.1-153.3 region."
Commodities are already reflecting active flows from trend strategies. In crude oil futures, several consecutive weeks of gains - a fifth straight weekly rise - have encouraged continued short covering, and some faster systems may already have flipped from short to long exposure.
Natural gas experienced the most dramatic swing. February futures surged 71% in a single week amid a period of severe cold in the United States. BofA said that surge likely forced CTAs out of their remaining short positions in the contract, given the speed and size of the move.
The convergence of concentrated long exposures in equities, tight stop-loss placements, stretched short positioning in the yen and recent commodity rallies means trend-following behaviours could amplify moves across several market segments if the initial directional momentum persists.
Bottom line: According to BofA's models and the analysts' read of systematic positioning, trend-following funds remain broadly long equities and have been forced into covering in some commodity markets. Those combined dynamics increase the risk that a further negative price impulse - within roughly 3-5% for equities or into the 155.1-153.3 zone for USD/JPY - could trigger more substantial CTA-driven selling and rapid position adjustments.