Quant Buying May Add `A Few Percent' to Stocks, Kolanovic Says

  • S&P 500 2,100 level to compel $80-$100 billion in CTA buying
  • Trend-following CTAs last buyers in equity market, JPM says

The unleashing of $100 billion into the U.S. stock market by computer-driven quant funds would boost benchmark indexes by a few percent, though after that buying may dry up, according to Marko Kolanovic, the JPMorgan Chase & Co. derivatives strategist.

Speaking Wednesday on Bloomberg Television, Kolanovic expanded on research reported yesterday that said the Standard & Poor’s 500 Index has reached a level above 2,100 that may trigger momentum buying by automated, trend-following strategies. Should the S&P 500 remain there for a few days, it could coax $80 billion to $100 billion worth of inflows, Kolanovic said.

Other automated managers that use volatility and risk parity strategies already own a lot of stock and that leaves trend-followers as the last group with room to buy, he said. Kolanovic has built a following on Wall Street with predictions on how sophisticated quantitative funds will react to volatility, valuation and other market inputs.

“If we see this type of trend following inflows into equities, that will probably be the last leg. I don’t see many more buyers in the market after that point,” the New-York based head of quantitative and derivatives strategy said. “Multiples are pretty high and systematic funds apart from CTAs are fairly leveraged, so they will probably be the last buyer of the market.”

Should the market reverse recent gains and the S&P 500 fall more than 2.4 percent from here, CTAs may start selling. At the 2,030 to 2,050 range, momentum becomes negative and it could “turn things ugly,” Kolanovic said.

The gauge breached the 2,100 level for the first time in four months on Tuesday, putting it only 1.4 percent away from an all time high. The S&P 500 was little changed at 2,099.73 at 10:24 a.m.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE