CTAs have more room to buy stocks amid Fed pivot, says BofA By Investing.com

Investing.com — Trend-following funds, or CTAs, still have room to buy stocks despite recent market gains amid expectations that the Federal Reserve will move toward cutting interest rates, analysts at Bank of America in a report on Friday.

“All stock indices tracked in this report posted gains this week, but our CTA model positioning remains nearly flat,” BofA analysts said. This suggests the potential for further buying from systematic traders in the short term.

The market’s early August crash signaled buy signals for shorter-term CTAs, commodity trading advisors — funds that systematically track price trends in various asset classes. These shorter-term trend followers are likely to add to bullish bets on stocks, with equally high demand, they added.

“Our model shows the largest buying trend in the US (S&P 500 and NASDAQ-100) and Europe (EURO STOXX 50),” the analysts noted.

For the S&P 500, the BofA model, which equally weights short-term and long-term trend signals, showed that CTAs are currently long with a trend strength of 29%. The bank estimates that this could rise to 36% to 39% over the next 5 trading sessions in medium to bullish scenarios.

Meanwhile, for the NASDAQ-100, the pattern points to long CTAs with 6% trend strength, potentially rising to 21% to 22% next week under favorable conditions.

The bullish bets on stocks come amid Fed policy expectations after Federal Reserve Chairman Jerome Powell signaled a tapering in September.

“The time has come for policy to adjust,” Powell said, vowing to do “everything we can to maintain the strength of the labor market as the Fed continues to reduce inflation toward its 2 percent target.”

About 70% of traders now expect the Fed to do so in September.