Systematic Flows Point Bullish

1.) FLOWS – The CTA or “systematic” community is a big mover of money in markets these days. For clarification, systematic investors like CTAs (Commodity Trading Advisors) function by using computer-driven algorithmic models, which are primarily trend-following strategies. These algorithms automatically generate buy or sell signals across global futures markets based on quantitative rules like price momentum, moving averages, or breakouts. The process removes human emotion, hunting for returns while focusing on portfolio-level risk management. Goldman Sachs recently said that they estimate the systematic community is still short -$37bn of US equities. That puts the CTAs in aggressive buy mode. Over the next week, Goldman suggests that CTAs are modeled to buy $45bn of US equities in a flat market... that's the second-largest buy estimate on record (blue line in the bottom of the chart). You can see in the top portion of the chart below that when CTAs were “over-short” (black line down at -30 to -40), it tended to coincide with market bottoms.

2.) HEDGE FUNDS – I’m not sure anyone really knows why, but when hedge funds get too far offside in one direction – too bullish or too bearish – they tend to be very wrong, and markets move against them. That’s held true for some time, and according to Goldman’s Prime Book data, hedge funds are more bearish now than they were at the peak of the Liberation Day (tariff tantrum) bear market. That helps to confirm what the CAT projections are suggesting as well. April 2025 was the last time they were this bearish… a good time to have been in US equities.

3.) UNEMPLOYMENT – The Fed dislikes rising unemployment. Maximum employment is one of the Fed’s mandates, along with price stability and moderate long-term interest rates. Since 2022, the unemployment rate has risen for most age groups. I’m sure that is something the Fed is quite aware of. Do we have price stability right now? No. But as today’s inflation report shows, inflation isn’t as worrisome as many think. That dovetails into what I wrote yesterday regarding the 2YR yield and how it has been trading. By the way, it’s still below 3.8%. Is the weakening labor market enough to push the Fed toward rate cuts? Probably not, but the fairly tame inflation data isn’t enough to push them to raise rates either...even AFTER the oil spike. That’s okay as it allows markets to focus on earnings.