The Machines Just Got Their Sell Signal

• The S&P 500 closed below its 100-day moving average Friday for the first time since early April.

• Trend-following CTA funds are still long and their models are skewed to sell.

• The selling could get worse near term, but a washout would set up the next leg of the rally.

Last Monday, I told you about the sell signal Wall Street's machines were watching. At the end of last week, they got it…

The S&P 500 tried to rally last week on a heavy slate of earnings. It climbed back above its 50-day moving average Tuesday and held there through Thursday. Then Friday hit. The index fell 1.8% to 7,580.07, slicing back through the 50-day and closing below its 100-day moving average of 7,614.99. That's the first close below that line since early April.

That matters because the 100-day is a key trigger for trend-following Commodity Trading Advisors (“CTAs”). The latest positioning data indicates those funds are still long equities. A break below that key support level last week is likely to signal to their algorithms that they should start selling more stock. That could mean more near-term downside for the stock market.

Now, this isn’t the first time we’ve experienced such an event. In the last couple of years, investors experienced rapid swings around liberation day and the start of the Iran conflict. Both of those events triggered heavy CTA selling and not long afterward, rapid rebounds. My current view is the selling we’ve experienced of late isn't done yet. But the same forced selling that's pressuring stocks now is what clears the way for the next leg higher. That should underpin 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...

As a quick refresher, CTAs are hedge funds that trade off computer models. When prices trend higher, the models buy. When prices trend lower, they sell. Nobody second-guesses the call. The models just execute.

Here's the problem. Even after a month of choppy trading, CTAs are still crowded on the long side. Brokerage firm Goldman Sachs estimates they hold about $38.5 billion in S&P 500 futures. That's in the 91st percentile historically and makes up nearly 80% of their net long exposure across the 21 markets the brokerage firm tracks. Wells Fargo’s model puts CTAs' total U.S. stock exposure at about $36 billion, barely down from $38 billion a week earlier.

In other words, the machines haven't really started to de-risk. The selling so far has come mostly from human managers. Goldman noted that traders dumped about $20 billion of tech, media, and telecom stocks over two weeks, close to the $23 billion unwind we saw in July. Fundamental hedge funds have cut their net exposure to a one-year low. The risk now is that the baton passes from people to programs.

And here's where it gets interesting. The flow math is lopsided. Heading into last week, Goldman estimated CTAs would sell about $11.6 billion of S&P 500 futures even if the market went nowhere. Even a strong rally would have left them net sellers. Looking out a month, a sharper decline could push that selling to $65 billion. Their best-case buying? Just $9 billion.

Wells Fargo’s model tells the same story. For this week, with volatility where it is today, it sees CTAs selling about $15 billion of U.S. stocks if the S&P 500 falls below 7,450. That's just 1.7% below Friday's close. If volatility picks up, the selling rises to $20 billion... and the models sell even if the market rallies.

That's the key point. CTAs size their bets based on how much the market is moving. When daily swings get bigger, the models can cut exposure even if prices hold steady. And options traders were already paying up for protection the week before Friday's drop. Goldman noted it's panic gauge hit its highest level since late July.

So, where do the machines step in? As of last week, CTAs' more important medium-term trigger is estimated to sit roughly 7,525, just 0.7% below Friday's close. Wells Fargo’s model flags 7,450. If those levels give way, the 200-day moving average becomes the next target...

The 200-day sits at 7,309.76. That's 3.6% below Friday's close and 6.5% below the October 6 closing high of 7,818.93. A test of that line would be a routine pullback. It's also where I'd expect long-term buyers to show up.

The Relative Strength Index (RSI) points the same way. It measures the speed and size of recent price moves on a scale of zero to 100. Readings below 30 signal oversold conditions. AT the end of last week, the RSI fell to 40, down from 53 on Wednesday. It hasn't been below 30 since March 30, the day the S&P 500 posted its 2026 closing low...

Oversold readings have shown up at or near most major lows of the past five years, including October 2022, October 2023, and April 2025. We're not there yet. That tells me the market hasn't fully washed out.

Here's the bottom line. CTA selling could put more pressure on stocks in the near term, and a test of the 200-day is a real possibility. But that's how washouts work. Once the models have sold, their positioning gets light again. There's no one left to sell, and the same machines that sold the drop become buyers once the trend turns back up.

We saw it this spring. The S&P 500 bottomed on March 30 with an oversold RSI, then rallied 18.5% in eight weeks. I'm not any less optimistic about the economy or the market. I still think we're in the middle of a longer-term bull run. This is just a bump along the way, and it should leave the market on firmer footing once the machines are done selling.

Five Stories Moving the Market:

President Donald Trump has said the United States will not launch ​new attacks on Iran before the November 3rd elections and that talks with Tehran have been ​productive, though he has not ruled out further military action afterwards – Reuters. (Why you should care – Secretary of State Marco Rubio noted that the White House would prefer a diplomatic resolution to the conflict)

Iranian Foreign Minister Abbas Araghchi said an Iranian delegation remains in Qatar for talks with mediators there; he noted that Iran suggested accelerating the implementation of its previous 7-day proposal for reopening the Strait of Hormuz to two days – Bloomberg. (Why you should care – a faster reopening of the Strait of Hormuz could free up more oil supply, which would pull crude prices lower and ease the inflation pressure that’s been pushing bond yields up and weighing on stocks)

U.S. President Donald Trump said on ​Sunday that his ‌administration has the "concept" of a new trade ​deal with Canada, ​but declined to offer ⁠details; Trump, speaking to ​reporters after deplaning in ​Dubuque, Iowa, said that he had spoken with ​Canadian Prime Minister ​Mark Carney on trade in ‌recent ⁠days – Reuters. (Why you should care - a trade deal with Canada, one of America’s largest trading partners, would ease tariff uncertainty for automakers, industrials and energy companies with cross-border supply chains, which should help their costs and earnings outlooks)

South Korea’s semiconductor-driven export growth accelerated at a stronger-than-expected pace in October, bringing the country closer to its unprecedented $1 trillion annual export target; the country, home to the world’s two largest memory-chip makers Samsung Electronics and SK Hynix, continues to benefit from the artificial-intelligence boom – WSJ. (Why you should care – the record $115.3 billion in shipments abroad speaks to the strength in demand for AI infrastructure goods)

Seven members of the OPEC+ group of oil producers agreed to keep output quotas unchanged in December, after unwinding the last of their voluntary cuts in September – Bloomberg. (Why you should care – with OPEC+ keeping output steady, a U.S.-Iran deal that reopens the Strait of Hormuz could quickly add supply to the market, which would push oil prices lower and ease inflation pressure)

Economic Calendar:

Earnings: MAR, ETR, IDXX, EL, PEG, FOXA, L, AAPL, PLTR, VRTX, WMB, FANG, O, ON, SBAC, DOC, UDR, CLX

Eurozone - HCOB Manufacturing PMI for October (4 a.m.)

U.K. - S&P Global Manufacturing PMI for October (4:30 a.m.)

ECB's Vujcic (Vice President) Speaks (4:45 a.m.)

U.S. - S&P Global Manufacturing PMI for October (9:45 a.m.)

U.S. - ISM Manufacturing PMI for October (10 a.m.)

U.S. - Construction Spending for September (10 a.m.)

Fed's Goolsbee (Chicago, Non-Voter) Speaks (11:15 a.m.)

Treasury Auctions $95 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $82 Billion in 26-Week Bills (11:30 a.m.)

U.S. - Fed's Senior Loan Officer Opinion Survey (2 p.m.)

U.S. - Treasury Quarterly Refunding Financing Estimates (3 p.m.)

RBA - Monetary Policy Announcement (10:30 p.m.)

RBA - Press Conference (11:30 p.m.)