Original author: Zhao Ying
Source: Wall Street Journal
The sharp decline in U.S. stocks, triggered by technology stocks, is triggering a chain reaction of deleveraging among systematic strategy funds, with the scale and speed of selling creating sustained market pressure that is unlikely to dissipate in the short term.
According to the Wind Trading Desk, a report released on November 5 by JPMorgan’s equity derivatives strategy team stated that U.S. equities suffered their worst single-day performance since "Tariff Day," with the S&P 500 plunging 4.4% and the Nasdaq 100 dropping 6.4%. Quantitative strategies played a key role in accelerating this decline—CTA trend-following strategies and leveraged ETFs collectively sold off over $70 billion in equity exposure on that day.
More concerning, selling pressure has not yet been fully absorbed. According to JPMorgan’s model, volatility targeting funds still have approximately $50 billion in equity exposure to liquidate over the coming days to reduce their target leverage from the ~67th percentile to the 30th percentile. This means that if markets continue to decline, automated de-leveraging will exert sustained downward pressure.
CTA turns net short, sells $11 billion in the first 90 minutes of trading
The immediate trigger for this downturn was the simultaneous breach of momentum signals by CTA trend-following strategies. According to a J.P. Morgan report, the sell-off during early trading hours broke multiple key momentum signals across major U.S. stock indices, triggering automated CTA selling and accelerating the market's decline.
Specific data shows that within just 1.5 hours after spot market opening, the net selling volume of S&P 500 futures reached approximately $11 billion. From a momentum perspective, CTA positions for the S&P 500, Nasdaq 100, and Russell 2000 have all turned net short.
JPMorgan's CTA momentum signal tracker shows that the S&P 500 is currently at approximately 7,383 points, with a negative 1-month momentum signal and CTA signals already in "short" mode; the same applies to the Nasdaq 100. Although the 12-month momentum remains positive across major U.S. equity indices, and the S&P 500 is trading near its 200-day moving average—suggesting further deleveraging depends on whether the market continues to break down—the report notes that, since most signals have turned bearish, current flow risk is skewed toward the upside.
Leveraged ETFs underwent significant deleveraging twice within a week, with technology stocks accounting for 90%.
Leveraged ETFs were another major force behind this sell-off. JPMorgan estimated that leveraged ETFs sold stock exposures exceeding $60 billion before close, with approximately 90% concentrated in technology products, including semiconductors (Semis), Nasdaq-100 (NDX), and technology ETFs (XLK).
This is the second significant deleveraging of leveraged ETFs within a week, reflecting the market's recent trend of sustained declines led by technology stocks. However, the report also notes that buying pressure from investors purchasing on dips during previous sell-offs may have partially offset the selling pressure from ETF rebalancing.
After this round of deleveraging, the implied short Gamma exposure of leveraged ETFs has decreased from approximately $7.5 billion per 1% volatility to about $6.5 billion, meaning the scale of passive selling triggered by subsequent rebalancing will be reduced.
$50 billion hanging over head, volatility target funds become the next focus
The largest potential source of selling pressure in today’s market is volatility-targeting funds. JPMorgan’s model shows that as market volatility surges, these funds need to reduce their equity exposure by approximately $50 billion over the next few days to compress their target leverage from the ~67th percentile to the 30th percentile.
The operation logic of the volatility targeting strategy is: when market volatility increases, risk asset exposure is mechanically reduced to maintain a stable portfolio volatility. This mechanism often creates a negative feedback effect of "selling more as prices fall" during periods of sharp market fluctuations.
JPMorgan Chase had previously warned in its report on Monday that macro systematic strategies face bidirectional flow risks, with significant deleveraging potential in scenarios of sharp declines and surging volatility. The market movement that day confirmed this assessment, and the adjustment process may continue for several days. For investors, the market's pressured outlook is unlikely to fundamentally change in the short term until the $50 billion in passive selling pressure is fully unleashed.