It’s no secret that systematic flows can be a deciding factor for equities over short horizons.

Still underappreciated, though, is the fact that the same investor cohorts can contribute to long-lived rallies too, where “long” just means months at a time, not “Buffett long.”

Indeed, when we talk about “stability breeding instability” in modern markets, we’re almost always referring to some combination of systematic behavior.

Recently, the disparity between systematic positioning and discretionary positioning grabbed a few headlines. I covered it extensively. See “Quants Versus Mortals,” for example.

The chart, from Deutsche Bank, showed the divergence at the beginning of May (i.e., the upward-trending green line versus the downward-trending dark purple line). More recently, discretionary positioning inflected, dragging the bank’s overall measure back up to neutral.

With the above in mind, it’s worth noting that the scope of systematic re-leveraging in equities over the past six months is quite substantial, according to one bank’s estimates.

Since late September, Nomura’s QIS CTA model has gone from a peak notional short of $84 billion to a net long, courtesy of $137.2 billion of cumulative notional buying across more than a dozen indexes, the bank’s Charlie McElligott said Monday.

The only legacy shorts still left are in UK equities, Hong Kong shares, H-shares and US small-caps.

Meanwhile, the steady grind lower in realized vol produced a latent bid which manifested in a sizable re-allocation to equities among target vol strats.

Over the past six months (so, the same window mentioned above for CTAs), the vol control universe rebalanced into stocks to the tune of $123 billion, which McElligott noted is 93%ile on a 10-year lookback. 

If you’re wondering whether there’s scope for more, the answer (as always) is that it depends on volatility and, relatedly, how well-behaved (or not) stocks are from a daily range perspective.

But, as Charlie went on to say, “even with such a substantial six-month reallocation, the historical rank of the [vol control] equities component remains ‘just’ 51.2%ile — so plenty more room to add further exposure.”

Do note from the table on the right above, though, that if the daily distribution widens out, target vol support disappears. In the (wildly unlikely) event that stocks start to swing 3% or 4% with regularity, mechanical buying can become substantial mechanical de-risking.