US quantitative funds have just completed a rare massive position cleanup.
CTA (trend-following quantitative funds) aggregate positioning plummeted from extreme overweight at the end of August to slightly bearish, with a swing exceeding 3 standard deviations within a month 鈥?a precedent rarely seen in recent years. Selling pressure has been released, and potential buying space has opened up significantly.
Meanwhile, US companies have authorized a record $1.3 trillion in buybacks this year, with execution windows set to reopen progressively starting October 15.
Position cleanup, buyback ammunition in place, and strong seasonality in the fourth quarter of a midterm election year 鈥?the conditions for a short squeeze are taking shape.
Positions cleared, ammunition ready
According to research by strategist Rubner, the Z-value of CTA positioning (a measure of how far positioning deviates from the norm) plunged from +2.35 at the end of August to -0.80, falling from extremely bullish to below neutral. After selling pressure was released, the direction of fund flows has already reversed.
Corporate firepower is considerable. Of the $1.3 trillion in authorized buybacks, a large portion of the quota is waiting to be executed after the Q3 earnings quiet period ends. Buyback windows will open progressively starting October 15, and historically corporate buyback intensity typically accelerates further in November.
Seasonality also stands on the bulls' side. According to Rubner's data, since 1930, the S&P 500 has risen an average of 5.6% in the fourth quarter of midterm election years, nearly double the 2.9% average for the fourth quarter of all years. October and November have historically been the strongest months in midterm election years.
Tech stocks refuse to fall
Under the impact of interest rates, the tech sector has shown rare resilience. Nasdaq 100 index futures are approaching the key resistance level of 31,200 points, with the 50-day moving average turning upward again; the Philadelphia Semiconductor Index has broken through short-term resistance and is nearing record-high territory.
The key is AI capital expenditure's low sensitivity to interest rates. According to Goldman Sachs, bond issuance by hyperscale cloud providers (Google, Amazon, etc.) is expected to reach $420 billion by 2027, but interest expenses still account for a very small share of their profits. According to Morgan Stanley, these providers have a net leverage of only 0.4 times, with cash equivalent to 132% of debt 鈥?AI infrastructure has not encountered balance sheet bottlenecks.
There is an asymmetry here: AI spending itself does not depend on low interest rates, but if rates eventually fall, tech stock valuations will benefit directly 鈥?spending does not slow at high rates, and valuations have elasticity when rates are low.
Expectation resets in the semiconductor space provide additional fuel for a short squeeze. According to Goldman Sachs, pricing expectations for traditional memory and HBM (high bandwidth memory) had previously been significantly revised downward and are now beginning to recover, with more and more investors looking for upside pricing potential. JPMorgan noted that semiconductor hardware earnings prospects are solid, TSMC's AI accelerator demand is strong, and advanced process utilization exceeds 100%.
Expectation resets, fundamental improvement, technical breakouts 鈥?the classic recipe for a short squeeze.
The biggest macro variable in the fourth quarter remains crude oil. According to Goldman Sachs, although global crude oil inventories are above the minimum operating level, the buffer has significantly thinned, and $100 oil prices are not inconsistent with the current supply-demand balance. The crude oil volatility index (OVX) is currently flat with when oil prices were below $80, and tail risk may be underpriced.