Momentum Funds and the Anatomy of a Selloff

• The S&P 500 closed below the 100-day moving average for the first time since May.

• The gauge also closed below the 50-day on Monday.

• These technical swings could trigger near-term CTA selling.

Momentum hedge funds are all getting the same sell trigger in stocks… which means the current drop may have to get worse before we see a steady rally.

One thing you learn quickly on Wall Street is that business and economic fundamentals aren’t the only pieces of the stock-market puzzle. Another key part is fund positioning. By understanding whether quantitatively managed funds are all betting the same way, for the same outcome, we can tell a lot about near-term direction.

You see, if momentum fund managers are all piled into the same long idea, who will be the next buyer to drive the asset price even higher? Chances are there isn’t one. The implication is that no matter the event outcome, the underlying asset is only headed in one direction… lower. Because the strategies are all looking to sell at the same time.

The opposite is true with crowded shorts. In that case, no matter what the event outcome, there’s only one direction for the asset to move… higher. Because all those money managers who sold the stock must buy it back.

Yesterday, the S&P 500 Index closed below its 100-day moving average for the first time since late February…

I bring this up because that price happens to be a key sell trigger for a number of quant funds. The change will tell their strategies to reduce exposure to the stock market. That could place added near-term pressure on the S&P 500 until those managers are done.

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

The investment strategy we’re discussing is most associated with Commodity Trading Advisors ("CTAs"). For those unfamiliar, they’re hedge funds that use algorithms to guide their trades. 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 decide whether a buy or sell order is right or wrong for the moment—they simply execute.

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

In addition, CTAs use leverage to increase their returns. 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 strategy was designed to take advantage of gradual moves upward or downward in the markets, not wild swings. CTA buy-and-sell indicators are based on markets touching key trigger points. 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.

At the lows this past April, CTA strategies were maximum short. Their models had told them to lever up beyond a normal position, betting on a stock decline. That meant their activity could only move in one direction: buying back their shorts and going long once more.

When the White House’s tariff plans dramatically changed and the market started rallying, CTAs were caught off guard. They began to cover. As the rally continued, they kept covering and started going long again. But unlike the maximum short position reached in the spring, those strategies didn’t get back to maximum long during the current rally.

In the last 10 trading days, the S&P 500 has lost 4.3%. While that isn’t a massive or uncommon swing in the grand scheme of things, it has triggered two sell signals for quant funds. Monday’s close was below the 50-day moving average for the first time since late April. And yesterday, as I mentioned above, saw the first close below the 100-day moving average since late February.

According to brokerage firm UBS, yesterday’s closing price could trigger $20 billion to $30 billion worth of S&P 500 selling pressure. That could increase near-term downside pressure as those quant strategies rebalance their positioning. The S&P 500’s 200-day moving average is the next big level to watch…

Currently, the 200-day moving average sits at 6,160. It’s a level worth watching, as it could trigger more selling. A move to that level would mark a 10% decline from the market’s top. Those types of drops typically happen every one to two years. That’s a point where I would expect more buyers stepping up.

Look, I’m not any less optimistic about the economy or the market environment. I still think we’re in the midst of a bull run, and the advancement of artificial intelligence will be a game changer for business efficiency, weighing on inflation and boosting economic growth. But that doesn’t mean this rally will move in a straight line. There will be bumps along the way—and right now we’re dealing with one now.

Five Stories Moving the Market:

Oracle is quickly emerging as the credit market’s barometer for AI risk; the once stodgy database giant has borrowed tens of billions and tethered its fortunes to the artificial intelligence boom – Bloomberg. (Why you should care – fund managers are purchasing Oracle’s Credit Default Swaps as a hedge against broader technology risk, causing its shares to fall, as they realize additional borrowing may come at higher rates)

Chicago Federal Reserve President Austan Goolsbee said he is uneasy about cutting interest rates in the face of too-high inflation that's steady at best and by some measures getting worse – Reuters. (Why you should care – Goolsbee said he’s not hawkish but the lack of official inflation data prior to the December monetary policy meeting makes him uneasy lowering rates more) 

Federal Reserve Governor Michael Barr said the U.S. central bank needs to proceed with caution in considering additional interest-rate cuts; Barr said he’s concerned that inflation growth remains above the central bank’s 2% target – Bloomberg. (Why you should care – Barr suggested he’s leaning in the direction of a December pause but didn’t say outright that he opposed another cut)

Federal Reserve Governor Lisa Cook called out a range of risks to the financial system, including fast-growing private credit markets, hedge fund trading in the Treasury securities market, and the adoption of generative artificial intelligence into machine-based trading; Cook said she would not be surprised if there were an increased likelihood of outsized asset price declines – Reuters. (Why you should care – While Cook didn’t make any comments about monetary policy, her statements suggest she’s not inclined to lower interest rates at the December FOMC meeting)

Federal Reserve Bank of Cleveland President Beth Hammack said lowering interest rates to support the labor market could extend the period of above-target inflation and increase financial stability risks; she said Recent stock market gains and easy credit conditions add to the danger by encouraging investors to take more risk – Bloomberg. (Why you should care – Hammack, a voter in 2026, has been an outspoken policy hawk since taking over the role as head of the Cleveland Fed)

Economic Calendar:

Eurozone – European Union Economic Forecasts (5:00 a.m.)

Eurozone – GDP for Q3 (5:00 a.m.)

Eurozone – Exports, Imports for September (5:00 a.m.)

Canada – Manufacturing Sales for September (8:30 a.m.)

Canada – Wholesale Sales for September (8:30 a.m.)

Fed’s Bostic (Atlanta, Non-voter) Speaks (9:20 a.m.)

ECB's Lane (Chief Economist) Speaks (10:00 a.m.)

Fed’s Schmid (Kansas City, Voter) Speaks (10:05 a.m.)

U.S. – Natural Gas Storage (10:30 a.m.)

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

Fed’s Logan (Dallas, Non-voter) Speaks (2:30 p.m.)

Fed’s Bostic (Atlanta, Non-voter) Speaks (3:20 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.)