'Brace for selling': A Wall Street quant strategist warns that stock-market buying power could evaporate just one week from now — opening the floodgates for a 'sell in May' episode
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- Masanari Takada, a macro and quantitative strategist at Nomura, thinks a “sell in May” stock-market unwind is on the horizon as the Nasdaq 100 lingers above a key technical level.
- Takada notes dwindling long positions in Nasdaq 100 futures and lack of risk appetite in global macro funds to bolster his near-term bearish thesis.
- Takada says buying power for US stocks could cease as soon as May 8.
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To say that Wall Street is in a precarious position at this moment would be an understatement.
Despite a deluge of atrocious economic data, the S&P 500 posted its best monthly increase since 1987, leaving many market participants scratching their heads in disbelief. But not all think the latest push upward has staying power.
Masanari Takada, a macro and quantitative strategist at Nomura, says trend-following strategies — commonly known as CTAs — are propping up the market in unsustainable fashion. And he sees a reckoning on the horizon as Nasdaq 100 futures linger above a key technical threshold.
“We think a key concern here is whether the Nasdaq 100 manages to hold the trigger line that we believe exists at around 8,180,” Takada said. “It appears that CTAs have put a stop to their accumulation of long positions in Nasdaq 100 futures.”
For reference, the Nasdaq traded around 8,700 on Friday, meaning it’s stayed above Nomura’s key technical threshold by a large margin. The chart below shows, however, that CTAs have put a hold on bullish positions in Nasdaq futures, suggesting the run may soon be over.
Nomura
Takada ultimately thinks buying power may start to dwindle in the near future as much of the equity appreciation in April was attributed to these CTAs and trend-followers — which now represent a weak hand in the market.
“In terms of technical patterns, we think that CTAs may take another stab at chasing the market up starting around April 29, provided that the index stays above this line,” he said. That’s a situation that’s since transpired.
Takada continued: “However, if such an upside attempt were to fail to squeeze some investors out of shorts or convince others to stake out fresh longs, we would expect the buying pressure generated by these CTAs on their own in the US equity market to fizzle out on or around May 8.
“This would imply a need to brace for selling in tune with the ‘sell in May’ adage.”
In addition to the technical issues Takada is seeing, he also notes that funds focused on fundamentals aren’t especially keen to pick up shares.
“In particular, the global heavyweights among macro hedge funds are still bearish on equities,” he said.
The chart below shows the current net exposure of fundamental and global macro strategies. Note that the latter group is actually net bearish right now.
HFR, Bloomberg, Nomura
Takada thinks these funds will remain on bearish until the economy looks like it’s on stable footing. And since no one really knows when that will be, any prolonged recovery could culminate in a broader shakeout.
Going beyond the tech-heavy Nasdaq, Takada says the benchmark S&P 500 is also in a precarious position that could see buying support vanish in the near term. At present time, the index appears hesitant to skew in either direction. But its chart closely mirrors that of the Nasdaq, implying that any overall downturn in US equities that impacts the index will hit the S&P 500 as well.
Nomura
Time will tell if Takada’s prediction will come to fruition. Although he’s quick to relay that market sentiment can shift before a firm bottom in economic indicators materializes, he doesn’t think it’s an oppressive threat at this time.
“Of course, it could still happen that investors quickly become more optimistic before economic indicators have had a chance to bottom out,” he said. “However, with equity sentiment stubbornly parked in negative territory, our impression is that there is not much impetus among global macro hedge funds to rethink their current strategies just now.”