The Mechanical Selling Has Almost Run Its Course

The Machines Are Running Out of Stock to Sell

• Trend-following CTAs have cut stock exposure to just the 9th percentile of the past year.

• This past Thursday brought a record wave of forced selling.

• UBS's Rebecca Cheong thinks a major low could form at the start of this week.

Last week’s selloff had a fingerprint, and it wasn’t human…

Two Mondays ago, I told you about the sell signal Wall Street's machines were watching. Last Monday, I told you they got it. This week, the story flips. The mechanical selling has almost run its course.

The damage was real. The S&P 500 fell 4.4% to 7,353.73 on Thursday, its worst day since April 4, 2025, just after Liberation Day. The Nasdaq Composite dropped 5.5% and closed below its 200-day moving average for the first time since April 7.

But the selling had a clear fingerprint. It was forced, not fundamental. And the forced sellers are nearly tapped out. My view is that we're close to a major low, and the setup for the next rally is already taking shape.

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

When the market gets this choppy, I look to the people who track the flows underneath it. One of the best is Rebecca Cheong on the U.S. equity derivatives strategy team at UBS. She made great calls near the COVID lows and again around Liberation Day. So when she says the selling is close to done, I listen.

Her team also saw this selloff coming. In late September and early October, they flagged that CTA positioning was elevated across most major indexes. The S&P 500 sat at the 90th percentile, and the Nasdaq-100 was at the 73rd. The Russell 2000 was very stretched at the 95th percentile. Crowded trades like that only have one way out.

That's exactly what happened. As of last Monday, UBS put CTAs' global stock exposure at 12%. In about a month, their positioning went from the 90th percentile in the S&P 500 and the 95th in the Russell 2000 to just the 9th percentile globally over the past year. That's how fast these programs flip from crowded to sparse.

And that reading came before Thursday's drop triggered three more CTA sell signals in S&P 500 futures. Even then, it ranked in the 32nd percentile of the past five years. It's likely lower now...

Thursday's selling came from other rules-based programs. UBS estimated the excess sell flow at $307 billion, the largest on record. The biggest seller was risk-control funds, which cut stock exposure when volatility rises. After a 4% drop, UBS figured they had $245 billion to $330 billion to sell. Roughly a quarter went out Thursday, with the rest spread over Friday and Monday.

And here's where it gets interesting. Friday was expected to bring more than $100 billion of systematic selling. Instead, the S&P 500 rose 0.3% and the Nasdaq gained 1.1%. Retail investors also flipped from selling at a 3-year extreme early Thursday to buying before lunch. That's what capitulation starts to look like.

CTA selling is nearly exhausted. The Nasdaq has no close-based CTA sell triggers left. The S&P 500's next one sits at 7,348, only 0.4% below Friday's close.

So, when's the low? Cheong's call is that it could come Monday morning, before the opening bell. That's what happened in August 2024 and April 2025. Both times, Thursday and Friday selling forced hedge funds to unwind positions overnight, when futures trading is thin.

The charts back her up. The S&P 500 has broken its 50- and 100-day moving averages, and Thursday's close came within half a percent of its 200-day. The Nasdaq took the bigger hit. It's 2.1% below its 200-day and 10.9% below its Oct. 6 record. That's official correction territory...

The Relative Strength Index (RSI) measures how fast and how far prices have moved, on a scale of zero to 100. A reading above 70 is overbought while one below 30 is oversold. On Thursday, the S&P 500's RSI fell to 33.5. The Nasdaq hit 30.1, right on the oversold line.

Each of the major lows of the past five years came with an RSI reading between 21 and 35. Three months later, the S&P 500 was up between 10% and 26%...

That's the selling side. Now look at who's about to start buying. Companies mostly stop buying back stock around earnings, which is why buybacks have been near zero during this selloff. UBS sees just $10 billion this week. Starting the week of November 16, that jumps to $35 billion to $55 billion per week. That's about $385 billion through early January, more than all the risk-control selling UBS estimated after Thursday...

Here's the bottom line. The start of this week could get bumpy. A final flush is how these washouts usually end. But the forced sellers are nearly done, CTAs are light, and the market's biggest and steadiest buyer is about to come back.

History is on our side, too. Based on UBS's chart, CTA exposure has dropped this low seven times since 2017. The S&P 500 was higher a year later in six of them, gaining 15% on average. In other words, washouts like this haven't been a reason to sell.

Two weeks ago, the machines got their sell signal. Now they've run out of stock to sell. Their next big move is buying, and history says the investors who stayed put were glad they did.

Five Stories Moving the Market:

The US military ‌said it is launching a task force to help crack down on Iran's movement of advanced weapons and other sanctioned material over its land borders and through the Caspian Sea; Task Force Iron Gate will focus on halting the flow of ​dual-use technologies used by Iran and stemming what Washington calls illegal revenue streams – Reuters. (Why you should care – the U.S. is adding new ways to pressure Iran, which keeps oil supply risk in play for energy markets)

With the midterms over, President Donald Trump’s advisers and foreign allies have been racing to shape his decision on whether to end the Iran war or reignite it; Vice President J.D. Vance and special envoy Steve Witkoff are pushing for diplomacy, Admiral Brad Cooper and Secretary of Defense Pete Hegseth are endorsing more bombing, while Secretary of State Marco Rubio and Treasury Secretary Scott Bessent are seeking an expanded blockade – WSJ. (Why you should care – foreign ministers from the Middle East are seeking an end to the conflict)

Vice President J.D. Vance has spent the past two weeks personally involved in indirect talks with Iran aimed at reaching a new ceasefire and resuming nuclear negotiations, according to two sources with knowledge of the matter; Vance's heavy involvement shows he's taking it upon himself to extract the U.S. from a conflict he blamed for the GOP's staggering losses in this week's election – AXIOS. (Why you should care – Iranian officials have said a recent letter from Vance has created positive negotiating momentum)

Anthropic is pressing on with its high-stakes public listing even as a brutal tech rout convulses markets, with the Claude maker seeking to raise $80 billion-$100 billion at a valuation of between $1.25 trillion-$1.75 trillion – FT. (Why you should care – a successful Anthropic IPO would help support sentiment toward AI-exposed businesses)

Federal Reserve Bank of San Francisco President Mary Daly said more interest-rate increases are likely to be needed to tame inflation; Daly said when and by how much has yet to be decided – Bloomberg. (Why you should care – Dally’s comments imply a December rate hike may not be a certainty, despite investors’ lofty expectations)

Economic Calendar:

Earnings: BRK.B, CEG, FERG, KKR, NRG, OXY, SKYD, TECH, TTWO

Australia - Building Approvals for September (Sunday)

China - CPI for October (Sunday)China - PPI for October (Sunday)

Germany - Trade Balance for September (2 a.m.)

Eurozone - Eurogroup Meetings (5 a.m.)

Fed's Bowman (Board, Vice Chair for Supervision) Speaks (8:40 a.m.)

U.S. - Conference Board Employment Trends Index for October (10 a.m.)

U.S. - Wholesale Inventories for September (10 a.m.)

Fed's Goolsbee (Chicago, Non-Voter) Speaks (10 a.m.)

U.S. - NY Fed 1-Year Consumer Inflation Expectations for October (11 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.)

Fed's Barkin (Richmond, Non-Voter) Speaks (12:15 p.m.)

BoE's Bailey (Governor) Speaks (12:25 p.m.)

Treasury Auctions $100 Billion in 6-Week Bills (1 p.m.)

Treasury Auctions $58 Billion in 3-Year Notes (1 p.m.)

Australia - Westpac Consumer Sentiment for November (6:30 p.m.)

Japan - Household Spending for September (6:30 p.m.)

Japan - Current Account for September (6:50 p.m.)

BOJ Summary of Opinions (6:50 p.m.)

U.K. - BRC Retail Sales Monitor for October (7:01 p.m.)

Australia - NAB Business Confidence for October (7:30 p.m.)