How much did systematic re-leveraging matter for the rebound in US equities from October through the end of January?

It’s hard to say when you phrase it that way. A lot of things “matter.” It’s often better to simply quantify the scope of various flows and leave it at that. In my experience (and this goes not just for markets, but for life in general), causal attribution is mostly impossible, and very often leads us astray.

Before I venture too far into the philosophical, let me steer this quickly back onto the highway. According to Nomura’s estimates, CTA “re-accumulation” in equities from late September through early February was on the order of $170 billion.

That’s consistent with Monday remarks from Morgan Stanley’s Mike Wilson, who wrote that “much of the rally since October has been driven by non-fundamental flows [like] trend-following strategies.”

Of course, the sudden regime shift in rates (as traders reassessed the Fed’s policy path) prompted some of those flows to reverse. Nomura’s Charlie McElligott on Monday described “substantial and unemotional deleveraging over the past two weeks, with ~-$40 billion of selling across global equities from CTA Trend, alongside another ~-$5 billion from Vol Control.”

As the table on the left shows, it wasn’t just a stocks thing. CTAs deleveraged across assets, building on bond shorts and cutting exposure in commodities.

“Particularly within equities, technical dynamics between systematic- and options related- flows have largely occurred within this tactical ‘window for a pullback’ allowing for a two-week sell-down,” McElligott said. In addition to CTA deleveraging, he cited “an enormous” long delta purge in the options space into and out of expiry (right table above).

Where does that leave us? Well, the good news is that positioning is now in a more “balanced place,” as Charlie put it. At the least, it’s “less-asymmetrical.”

So, it’s just a matter of waiting on the next narrative to emerge. Or the next shoe to drop.