CTAs Haven’t Been This Short Since the Last 40% Surge

CTAs Haven’t Been This Short Since the Last 40% Surge

• Speculators are the most short the S&P 500 Index since last April.

• CTA short exposure to stocks is around the 95th percentile.

• Any good news out of the Middle East could trigger a buying frenzy.

Momentum hedge funds are all piled into the same short on U.S. equities… which means the stock market is primed for a sharp rally if an Iran peace deal materializes.

One thing you learn quickly on Wall Street is that fundamentals are only half the story. The other half is positioning—who’s leaning where, and how hard. Because when institutional money is all betting on the same outcome, the next major move is often dictated not by the news itself, but by how those positions unwind.

If everyone’s crowded into the same long idea, there’s no one left to buy. Prices stall, then slip, because the only liquidity left is on the sell side. Crowded shorts work the same way, just in reverse. When everyone’s leaning bearish, the next catalyst doesn’t have to be good. It just has to be less bad than feared. And suddenly every fund that sold the market lower is forced to buy it back.

Right now, that’s exactly the setup I’m seeing in U.S. equities. Momentum- and algorithm-driven hedge funds are all pressing the same short. They’re betting the Iran conflict keeps oil elevated, inflation sticky, and forces the Federal Reserve to raise interest rates. The last time we saw a similar setup was last April, just before equities rallied 40%...

However, If that rate‑hike thesis proves wrong, those shorts will have no choice but to cover. And that unwind would fuel a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

The investment strategy we're discussing is most commonly associated with Commodity Trading Advisors ("CTAs"). For those unfamiliar, they’re hedge funds that use algorithms to help them invest. That means everything they rely on is electronically driven, including buy-and-sell triggers. Because a computer model is making the call, CTA funds don't try to discern whether a buy or sell order is the right or wrong idea for the moment – they simply execute.

CTAs manage roughly $360 billion in assets. But, because they're hedge-fund managers, you have to consider that money to be long and short. This means they could have more exposure than what their asset size shows because the short and long sides of their books offset one another.

In addition, CTAs are using leverage to help juice their returns. So, when you consider that leverage could be about four to five times assets, that $360 billion number has an impact of roughly $1.5 trillion to $2 trillion.

The investing strategy was designed to take advantage of gradual moves upward or downward in the markets, and not so much for markets experiencing wild swings. CTA buy-and-sell indicators are based on the markets touching key trigger points. So, for instance, as the market makes new highs on the way up, CTA models tell the funds to buy more. And on the way down, as we make new lows, their models tell them to sell more.

But the recent speculation about rate cut potential and economic pessimism has pushed these funds toward extreme shorts in stocks. We can see this by looking at speculator positioning data from the Commodities Futures Trading Commission. Those numbers focus on professional investors who are making one-way bets on financial futures. In other words, they’re not hedged on the other side. As I noted earlier, speculators haven’t been this short since the lows last April…

According to brokerage firms UBS and Goldman Sachs, the short exposure in stocks is back to extreme levels. UBS noted that the short exposure in...

• the S&P 500 is in the 99th percentile on a 5-year basis

• the Nasdaq Composite Index is in 97th percentile on a 5-year basis

• the Russell 2000 Index is in the 95th percentile on a 5-year basis.

In fact, it noted that the Russell short is near a record high.

So, like I said at the start, when everyone is piled into the same investment idea, we’d better pay attention. And right now, that bet is against U.S. stocks. So, if the start of discussions between the U.S. and Iran leads to a resolution in the not-to-distant future, oil flow out of the Persian Gulf will pick back up, look out! That means global energy prices will start to fall. The shift will imply any inflation rise would be temporary, causing the quants to cover their short bets.

And as that happens, it will underpin a steady S&P 500 rally.

Five Stories Moving the Market:

U.S. President Donald Trump announced that he will pause attacks on Iran's energy plants for 10 days at Tehran's request and said talks with Iran were going "very well" – Reuters. (Why you should care – an Iranian official labeled the ceasefire requests as unfair, signaling discussions are taking place)

Treasury Secretary Scott Bessent said a U.S. insurance program meant to boost shipping through the Strait of Hormuz will begin soon, a move that may help revive flows of much of the world’s oil and gas supplies – Bloomberg. (Why you should care – a resumption of normal shipping traffic will help to bring global oil prices back down)

France said its ​military chief held talks with around 35 countries as it sought partners and ‌proposals for a mission to reopen the Strait of Hormuz once the U.S.-Israeli war on Iran ends; the United States' Western allies have said they will not take part in the ongoing conflict – Reuters. (Why you should care – these nations are worried that Iran may continue to harass shipping traffic in the Strait once the conflict has ended)

Iran has allowed Malaysian vessels trapped in the Persian Gulf to return home through the Strait of Hormuz, according to the Southeast Asian nation’s prime minister; Malaysia imports crude from the Middle East and is heavily dependent on the strait – Bloomberg. (Why you should care – Iran is still letting select traffic pass through the Strait)

The Bank of Canada’s priority is to ensure that higher energy prices stemming from the war in Iran do not morph into an extended period of elevated inflation, according to Deputy Governor Carolyn Rogers; she said it wants to ensure that higher energy prices don’t start to spread to other goods and services – WSJ. (Why you should care – the Bank of Canada is signaling it’s prepared to raise interest rates if necessary)

Economic Calendar:

Earnings: CCL, TMC

China – Industrial Profit YTD for February

U.K. – Retail Sales for February (3 a.m.)

Spain – CPI (Preliminary) for March (4 a.m.)

U.S. – Retail, Wholesale Inventories for February (8:30 a.m.)

U.S. – University of Michigan Consumer Sentiment for March (10 a.m.)

Fed’s Daly (San Francisco, Non‑voter) Speaks (11:30 a.m.)

ECB’s Schnabel (Board Member) Speaks (12 p.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)