Regular readers are familiar with, and probably a bit confused by, the remarkable disparity between recent trends in systematic investor behavior and discretionary equity positioning.

If you’re looking for someone or something (and that distinction is becoming more urgent+ with each iteration of ChatGPT) to thank for 2023’s equity gains, you can tip your hat to technology either way. Mega-cap US tech shares are responsible for almost all of the S&P 500’s YTD performance, and unemotional, systematic investor cohorts were the flow driver as volatility receded.

That latter phenomenon has been well-documented, both in these pages and elsewhere. Goldman, among others, recently suggested systematic re-leveraging might’ve run its course after almost $174 billion in buying across global equity futures in the short space of a month.

I don’t have a crystal ball, and contrary to popular belief, neither does anyone else, but I can explain the above-mentioned disparity for those who may still be a bit perplexed by headlines touting “disagreement” between quants and non-quants.

It all comes back to volatility, which, by definition, dictates exposure for vol-sensitive strategies. When volatility recedes, those strategies re-allocate as part of what can become a self-fulfilling prophecy. By contrast, discretionary (which is to say human) investors aren’t required to buy stocks just because volatility falls, even as it’s generally the case that, on a conceptual level, everyone (man and machine alike) is operating under the same risk management framework.

With that in mind, the figure below shows Deutsche Bank’s proxy for discretionary investor positioning in equities.

The measure is now in “the bottom of its one-year range and into the lowest decile,” with a z-score that ranks in just the 9%ile, the bank’s Parag Thatte and Binky Chadha wrote.

Meanwhile, Deutsche Bank’s measure of systematic positioning continued to rise last week, in keeping with the recent decline in historical vol.

I realize it’s tempting to compare various banks’ measures of systematic positioning in an effort to determine which is the most accurate, but I discourage that. Trying to time the market based on imprecise estimates of these strategies’ equity exposure is perilous, and it’s important to remember that as dominant as these flows and associated dynamics can be during any given session, they aren’t the only flows.

For what it’s worth, Deutsche Bank’s systematic strategies positioning measure is in the 44%ile, and “slightly above neutral for the first time since December 2021,” as Thatte noted.

It would appear, on the bank’s measures, that systematics have room to add more equity exposure, but again I should caution that no bank’s estimates are perfect. They’re just estimates. Indicators are merely indicative.

The figure below, which showed up in a passable mainstream financial media article on Monday, shows the disparity between discretionary and systematic positioning on Deutsche Bank’s indicators.

The bank’s overall measure of aggregate equity positioning (the light blue line in the chart) is a very modest 27%ile on a longer lookback.

So, what’s the takeaway? Well, just that there’s a divergence. Nothing more, nothing less. You can extrapolate and suggest systematics are “out of ammo,” or nearly so, as one bank recently did. Or you might suggest discretionary investors will eventually be forced to participate if stocks refuse to roll over in the face of scary headlines. But beyond that, there’s not much to add.

Deutsche’s Thatte and Chadha did take a glass half-full approach to the authorized / executed discussion around buybacks. Announcements, they wrote, have “continued to boom,” and that probably implies “robust actual” repurchases.