How important were systematics in perpetuating and sustaining the equity rally during the second quarter?

Pretty important, as it turns out.

By now, most readers are familiar with the sequencing. Discretionary investors and the retail crowd were Johnny-come-latelies. Or at least that’s the way it looked according to various measures of discretionary positioning, sentiment, individual investor proxies and fund flow data.

Although systematics were adding exposure ahead of some discretionary investors, 2023 hasn’t been without frustration for “the machines” either. “At various points [systematics] have been stopped-out of legacy trades in a frustratingly trendless fashion,” Nomura’s Charlie McElligott wrote, in his latest, before quantifying the scope of a “long equities/short bonds” force-in during Q2.

Over the past month, CTAs added $43 billion of equities exposure, and vol control $32 billion. Those figures over three months are $62 billion and almost $68 billion, respectively.

As for bonds, CTAs sold almost $72 billion over three months.

The CTA rebuild in equities is approaching “extremes,” McElligott said, and the buying (and selling on the bond side) is obviously “feeding back into momentum moves,” which can become self-fulfilling, although it looks like the signals are pretty much maxed out now (long in equities and short across bonds and STIRs).

Over the first half of the year, vol control added some $150 billion in equities exposure, with the implied allocation now in the ~89%ile.