Investing.com -- Bank of America (NYSE:BAC) (BofA) expects trend-following strategies to remain a headwind for U.S. equities in the near term, as its models show commodity trading advisers (CTAs) could be adding to short positions in both the S&P 500 and Nasdaq 100 next week.
The shift comes after a period of choppy market performance and elevated volatility, with the S&P 500 ending the past week nearly flat.
The bank’s trend model currently shows CTAs holding short positions in both indices, with a -50% trend strength signal for each. Over the next five trading sessions, the signal is projected to remain in negative territory across bearish, median, and bullish price paths.
In the case of the S&P 500, the trend strength is expected to fall as low as -75% under a median scenario, while the Nasdaq-100 could see a similar drop toward -76%.
The positioning shift follows a broader pattern across equity markets. While trend followers had previously built significant long exposure to European equities, recent price action has started to unwind those trades.
BofA notes that the Euro Stoxx 50 long, once in the 91st percentile relative to the past decade, has eased to the 68th percentile “as CTAs may have trimmed exposure on declining spot and increasing volatility in March.”
“Although the Euro Stoxx 50 long is still large, it is likely no longer the most stretched equity position in a trend follower’s portfolio,” the bank added.
Meanwhile, the Russell 2000 short position has become one of the most extended, as the index declined in four of the last five weeks.
“We continue to closely monitor position unwind triggers for both the Russell 2000 and Euro Stoxx 50, as CTA reversals could be market impacting given current positioning,” the analysts led by Chintan Kotecha wrote.
BofA’s models suggest that, barring a significant market reversal, trend-following flows could reinforce downward momentum in U.S. equities at the start of the coming week. “On Monday 24-Mar-2025 CTAs could be sellers of S&P 500,” the note cautioned.