The Sell Signal Wall Street’s Machines Are Watching

• The S&P 500 is on the verge of closing below its 100-day moving average for the first time since early April.

• The index closed below its 50-day moving average on Thursday and Friday.

• A close below the 100-day could trigger CTA selling.

Momentum hedge funds are close to 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. Fund positioning matters too. If we know whether quantitatively managed funds are all betting the same way, for the same outcome, we can tell a lot about near-term direction.

If momentum managers are all piled into the same long idea, who’s the next buyer to push prices higher? Chances are there isn’t one. So, no matter how the event turns out, the asset has only one way to go... lower, because the strategies all want to sell at the same time. The opposite is true with crowded shorts. Every manager who sold has to buy back, so the only way out is... higher.

That’s the setup right now. On Friday, the S&P 500 closed at 7,623.68. That’s just 20 points, or 0.3%, above its 100-day moving average of 7,603.68. The index hasn’t closed below that line since early April...

I bring this up because the 100-day is a key sell trigger for many quant funds. A close below it would tell their models to cut stock exposure more. That could put 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’s 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 makes the call, CTA funds don’t try to decide whether an order is right or wrong for the moment. They simply execute.

CTAs manage roughly $360 billion in assets. But because they’re hedge funds, that money runs both long and short. So, they can carry more exposure than their asset size suggests, since the two sides of their books offset one another. CTAs also use leverage to boost returns. At four to five times assets, that $360 billion has the impact of roughly $1.5 trillion to $2 trillion worth of actively traded assets.

The strategy is built to profit from gradual moves up or down, not wild swings. As the market makes new highs on the way up, CTA models tell the funds to buy more. On the way down, as the market makes new lows, the models tell them to sell more.

That’s what made this year’s rally such a good fit for them. The S&P 500 bottomed at 6,343.72 on March 30, after a 9.1% slide from its late-January peak. From there, it climbed 18.5% in just eight weeks and went on to a record close of 7,818.93 on October 6. A steady advance like that is exactly what trend models are built to buy.

Now the trend is starting to turn. Since that October 6 high, the S&P 500 has slipped 2.5%. That isn’t a big or unusual move in the grand scheme of things, but it has already tripped the first signal. The index closed below its 50-day moving average of 7,699.60 late last week...

If the 100-day gives way next, the 200-day moving average becomes the next downside target for momentum funds...

The 200-day sits at 7,291.31. That’s 4.4% below Friday’s close and 6.7% below the record. Long-term investors watch it closely, and a break there could set off another round of systematic selling. But it’s also where I’d expect more buyers to step up. A pullback of that size is routine. Since 1980, the S&P 500 has averaged about one 5%-plus drop from a record high per year. And we already went through a bigger one this spring.

There’s another indicator that shows the selling may not be done just yet. The S&P 500’s Relative Strength Index (RSI) measures the speed and size of recent price moves on a scale of zero to 100. Readings above 70 signal overbought conditions. Readings below 30 signal oversold.

On Friday, the RSI closed at 42, still above oversold territory. The last time it fell below 30 was March 30, the same day the index posted its 2026 closing low. In fact, oversold readings have shown up at or near most of the major lows of the past five years, including fall 2022, October 2023, and April 2025...

In other words, the market hasn’t washed out yet. Selling tends to burn itself out when sentiment gets stretched to the downside, and we’re not there.

Look, 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. 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.

Five Stories Moving the Market:

American warships in the Middle East are preparing for an escalation in fighting in case President Trump opts for a fresh round of attacks against Iran in the coming weeks, according to U.S. officials -WSJ. (Why you should care – stocks have been under pressure over the lats couple of weeks as Wall Street is increasingly concerned that another bombing campaign could target energy infrastructure)

The U.S. government has put employees on heightened alert across the Middle East and moved to reduce personnel levels at embassies and consulates because of intelligence showing Iran is in the advanced stages of planning attacks against Americans, according to U.S. officials – NY Times. (Why you should care – Iranian operatives are said to have identified potential targets in the U.S. and Europe in addition to the Middel East)

White House economic adviser Kevin Hassett said U.S.-Canada trade negotiations have “picked up” and are “gathering steam,” while also stating he believes the two sides are close to agreeing to a deal - Bloomberg. (Why you should care – Canadian Prime Minister Mark Carney said that he spoke about the trade talks with President Donald Trump last week)

Amazon CEO Andy Jassy said that Amazon Web Services' cloud computing capacity is ​largely sold out through 2027, with ‌significant commitments extending into 2028, on growing demand for AI infrastructure – Reuters. (Why you should care – Jassy said the company can’t keep pace with the “insatiable” demand it’s seeing)

SpaceX’s efforts to finalize a $40 billion off-balance-sheet debt structure for its artificial intelligence buildout have been roiled by recent market turmoil that’s driven up sector-wide borrowing costs and complicated price talks; the transaction under discussion is designed to fund the purchase of Nvidia GPUs through a special purpose vehicle – Bloomberg. (Why you should care – the report is stoking concerns that funding for the buildout of AI infrastructure is becoming increasingly difficult)

Economic Calendar:

Earnings: VZ, WELL, CDNS, NUE, PSA, HIG, CINF, BRO, PFG, ARE

ECB's Elderson (Executive Board Member) Speaks (2 a.m.)

Germany - Ifo Business Climate for October (5 a.m.)

U.S. - Chicago Fed National Activity Index for September (8:30 a.m.)

U.S. - Dallas Fed Manufacturing Index for October (10:30 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.)

Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.)

China - Industrial Profits for September (9:30 p.m.)