As evidence of how hard it is to get a handle on markets right now, consider the diverging postures of human and computer-guided investors, by one definition the widest in four years.
(Bloomberg) — As evidence of how hard it is to get a handle on markets right now, consider the diverging postures of human and computer-guided investors, by one definition the widest in four years.
Quant traders — those allocating assets based on momentum and volatility signals — have been forced into a buying spree, thanks to muted price swings and resilience in equities. For the first time since December 2021, their stock exposure rose above neutral readings, according to data compiled by Deutsche Bank AG.
By contrast, discretionary investors who use economic and earnings trends to guide their decisions have kept bailing in the face of a multi-month advance, with positioning hovering near a one-year low.
Not since 2019 have quants been this bullish relative to stock pickers, according to Parag Thatte, a Deutsche Bank strategist.
The data highlight mounting tensions in a market where the S&P 500 has been stuck near the midpoint of 2022’s drawdown for weeks. From corporate profits to monetary policy, convincing arguments exist on both the bullish and bearish sides of the debate.
Earnings are falling, but first-quarter results have come in better than feared. And while bond and equity bulls are embracing the prospect of interest rate cuts, skeptics say such hopes are at odds with the Federal Reserve’s own forecast.
“The market will remain stuck in the mud — with severe dispersion below the surface — balancing a base case of durable US growth against legitimate, if growing, tail risks,” Tony Pasquariello, Goldman Sachs Group Inc.’s head of hedge-fund coverage, wrote in a note over the weekend.
Stocks swung between gains and losses on Monday as investors await key inflation data due Wednesday while assessing the health of the financial industry after the collapse in multiple regional banks.
In a sign of trader indecision, the S&P 500 has closed within 50 points of the 4,155 level for five straight weeks. That’s a threshold that shows the market recouping half of its losses from last year’s bruising selloff.
Both rules-based traders and stock pickers ended 2022 with defensive positioning after a year of market turbulence amid fears of a recession. Then, once economic data came in better than expected and stocks staged a powerful bounce in the new year, systemic money managers were forced to unwind their short positions.
Meanwhile, their discretionary counterparts have clung to their cautious stance. Take hedge funds, for instance. The industry’s long/short ratio tracked by Goldman last week dropped to the lowest level in more than a decade.
The last time positioning between quants and human traders diverged like this was in mid-2019, when stock pickers had to spend the following months stepping up exposure and chasing gains, according to Thatte at Deutsche Bank.
With equities falling last week and volatility rising, systematic macro strategies are expected to be sellers in coming days. According to an estimate from Morgan Stanley’s trading desk, the cohort is likely to offload $5 billion to $10 billion of stocks this week, compared with a pace of buying of as much as $20 billion two weeks ago.
“Systematic and discretionary usually are highly correlated,” Thatte said. “Systematic strategies typically follow market cues on trend and volatility. So it’s hard for them to independently keep leading the market unless discretionary also steps in.”
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