It’s important to preface this brief update (500 words counts as “brief” ’round these parts) with a reminder: Systematic flows, as important as they are in modern markets, aren’t the sole determinant of equity prices.

I realize that’s self-evident, but readers have a tendency, on occasion, to over-interpret. I’ll concede that might be my fault. I do put a lot of emphasis on model-based buying and selling, and I devote quite a bit of coverage to modern market feedback loops, self-fulfilling prophecies and other dynamics which, at times, can have more explanatory power for a given session’s price action than causal analysis that looks for answers amongst the fundamental/discretionary set.

That’s a needlessly wordy way of saying that equity prices aren’t monocausal.

With that out of the way, I wanted to reiterate that systematic cohorts will likely be buyers of equities over the next week or two barring another shock drawdown and/or dramatic vol expansion. I spoke on this late last week in “The Machines Should Be Buying Stocks From Here,” but it’s worth reiterating.

On Monday, Nomura’s Charlie McElligott reminded clients that the bank’s composite measure of systematic strategy exposure (which incorporates estimates for CTA trend, vol control and risk parity) remains parked at or near the lowest levels in decades, as shown above.

Current exposure, which was purged in the wake of the sudden spike in trailing realized vol that accompanied last month’s tariff soap opera (and the lead-up to it), is loitering around where it sat during 2022’s rate hikes, the original pandemic equity selloff and the GFC.

The figures below focus on CTA trend, visualizing their equity exposure in two ways: Net exposure and gross exposure.

Charlie’s annotations tell the story. Although net positioning’s now back in positive territory (barely), the trend universe’s overall position (i.e., gross exposure) is still very low historically — just 10%ile.

But the big story in this space, potentially anyway, is vol control re-leveraging. That was the subject of the linked article above, and McElligott on Monday emphasized that the bank’s estimates project a meaningful re-allocation to stocks from target vol going forward as last month’s “big move” days drop out of the one-month lookback.

“The next one-week+ is all about reallocation buying from vol control, as we see large notional to-buy due to a number of substantial one-day moves dropping out of the one-month rVol sample in the days and weeks ahead,” he wrote, calling that “another screaming example showing ‘volatility is your exposure toggle’ in modern market structure.” (If Charlie hasn’t had that slogan printed up on t-shirts yet, he should.)

He ran a backtest for historical cases when Nomura’s projection of forward vol control-buying was as pronounced as it is today. That test, he wrote, “shows outlier SPX forward returns with high hit rates.”