Quantitative trend-following funds (CTAs) are re-entering the U.S. stock market at a historically rapid pace, acting as a primary driver of the recent equity rally.
According to the latest analysis from Goldman Sachs strategist Brian Garrett, CTAs purchased a staggering $86 billion in U.S. stocks over the past five trading sessions, ranking among the top five weekly buying sprees in history and constituting one of the "largest buying episodes on record."
More notably, models from Goldman Sachs' futures strategists indicate that even if the market remains flat, this group is poised to purchase an additional approximately $70 billion over the next five trading days. Concurrently, the skew for S&P 500 call options has risen sharply, signaling that institutional capital is accelerating its participation.
Historical back-testing data reveals that in similar scenarios of accelerating CTA demand, the S&P 500 has often experienced short-term consolidation but demonstrated strong medium-term performance—averaging a return of approximately +2.19% over one month and +8.18% over three months. Garrett notes that while the "Stock Trader's Almanac" suggests potential short-term digestion pressure, the medium-term trend is historically bullish.
**Short Covering Ignites Buying Wave** The catalyst for this massive CTA buying spree was a trend reversal in risk assets in early April. As previously reported, CTAs had accumulated significant short positions around the market low on March 29th, only to be caught in a historic short squeeze, forcing them to cover their positions extensively.
Goldman's Brian Garrett pointed out that since risk assets bottomed and rebounded in early April, the demand dynamics from CTAs and systematic strategies have been well-documented. Across various market scenarios, this group has maintained a "buy" status. This implies that model-driven buy orders will continue to be executed regardless of market fluctuations.
The speed of global equity purchases in the past week ranks among the top five historically. The $86 billion weekly purchase volume not only reflects the scale of short covering but also indicates the concentrated entry of systematic funds following a flip in trend signals.
**Next Five Days: $70 Billion in "Passive" Buying Awaits** Models from Goldman Sachs' futures strategists forecast that under a baseline scenario of "flat market movement," the CTA cohort will purchase another roughly $70 billion over the next five trading days. This figure is particularly significant—it means that even in the absence of new positive catalysts, systematic buying will continue to provide underlying support for the market.
Garrett specifically highlighted that CTAs typically execute purchases using Volume-Weighted Average Price (VWAP) strategies. This characteristic has been visibly apparent in recent market action: on days lacking major news, the S&P 500 has exhibited a persistent, steady, and gradual upward trend, a classic imprint of mechanical CTA buying.
This systematic feature of being a "buyer in both up and down markets" implies a degree of buffering against near-term downside risk. However, it also warrants caution regarding potential reverse shocks if trend signals were to flip negative again.
**Historical Precedent: Short-Term Choppiness, Medium-Term Strength** Goldman Sachs reviewed three historical episodes of accelerating CTA demand to assess the market outlook under current conditions.
On September 16, 2019, the S&P 500 fell 0.71% and 0.28% over the subsequent two weeks and one month, respectively, but rose 6.46% after three months. On November 17, 2023, the index gained 1.79%, 4.54%, and 10.89% over the next two weeks, one month, and three months. On August 26, 2024, the index fell 2.60% over two weeks but subsequently rose 2.29% and 7.21% after one and three months.
Averaging these three cases results in a mean return of approximately +2.19% over one month and +8.18% over three months. Based on this, Garrett concludes that following an acceleration in CTA demand, markets historically face short-term digestion pressure but exhibit robust performance over the medium term.
Beyond CTAs, broader institutional capital is also beginning to participate. Goldman Sachs data shows that the skew for S&P 500 call options has risen significantly in tandem with the rebound in risk assets, indicating that market participants are actively positioning for upside exposure. This suggests the current rally is not solely driven by retail investors or systematic strategies.
A strengthening call option skew is typically interpreted as a signal of institutional investors' optimistic expectations for the future market and indicates a shift in sentiment from defensive to offensive. This change resonates with the massive CTA purchases, further reinforcing the momentum behind the recent U.S. stock rally.