CTAs have more room to buy stocks amid Fed pivot, BofA says

Investing.com -- Trend-following funds, or CTAs, still have room to buy equities despite recent market gains amid expectations for the Federal Reserve to pivot to rate cuts, analysts at Bank of America said in a Friday report. 

"All equity indices followed in this report posted gains this week, but our model CTA's positioning remains close to flat," BofA analysts said. This suggests potential for further buying from systematic traders in the near term.

The early August slump in the market has flagged buying signals for shorter-term CTAs, commodity trading advisors -- funds that systematically follow price trends across various asset classes. These shorter-term trend follower are likely to add to bullish bets on stocks, with the S&P 500 and Nasdaq 100 Futures as well as Euro Stoxx 50 in high demand, they added.

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

For the S&P 500, BofA's model, which equally weights shorter and longer-term trend signals, showed CTAs are currently long with a trend strength of 29%. The bank projects this could increase to 36% to 39% over the next 5 trading sessions under median to bullish scenarios.

For the NASDAQ-100, meanwhile, the model indicates CTAs are long with a 6% trend strength, potentially rising to 21% to 22% in the coming week under favorable conditions.

The bullish bets on stocks come amid expectations in Fed policy in the wake of the Federal Reserve Chairman Jerome Powell signalling a September cut. 

"The time has come for policy to adjust," Powell said, vowing to do "everything we can to maintain labor market strength as the Fed continues to curb inflation toward its 2% target.

About 70% of traders now expect the Fed to cut rates in September.