While most were bracing for a correction due to bank failures and commercial real estate issues, quant funds went against the grain, buying up stocks rather than selling or shorting. As a result, instead of economic unrest, we saw consistent market indices.
Deutsche Bank reports that quant funds' net share of US assets reached their highest levels since December 2021. Coupled with active corporate stock buybacks, the S&P 500 has swayed less than 1% in either direction for 36 out of the last 46 sessions.
So, what's the mechanism here?
As volatility subsides, quants press 'Buy.' This happened when regulators intervened to prevent a banking crisis, and the Fed indicated an end to rate hikes.
Here you might be asking yourself, “but when the VIX surges, shouldn’t funds counterintuitively reduce their positions?”
Theoretically, yes. Practically, however, no.
Take the May 2019 market crash, when the S&P 500 dropped by around 7% amid panic over the US-China trade war. McElligott estimates quants jettisoned $35 billion worth of stocks within a month.
Of course, you probably noticed that the VIX crossed 20 twice in May. So…why no crash?
First, we don't fully understand quant fund algorithms.
Second, retail investor backing has grown.
Additionally, last week's favorable Nvidia report played its role. The total market cap of AI-related firms swelled by nearly $100 billion in a day.
If all of this is true, then when will the long-awaited correction occur?
Corrections often come when market confidence is high and a 'bullish trend' appears all but irreversible. Once investors start buying every dip, convinced that a surge is imminent...that's usually when the rug gets pulled out from under them—not when everyone is on high alert, shorting left and right, but when they aren’t.
Submitted May 31, 2023 at 06:22AM by bitkogan https://ift.tt/NCObRE4
