Bank of America Sees Limited CTA Forced Selling Risk Despite Stretched Equity Positions

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Bank of America reports that near-term forced selling risk by CTAs remains limited, even though trend followers hold heavy long positions in U.S., European, and Japanese equities.
Japan stands out as a potential weak spot. The Nikkei is now only 2.2% away from a level that could trigger CTA selling after a 2.6% drop this week.
BofA forecasts that trend followers may sell U.S. Treasury futures and the dollar next week, while staying stretched long in gold, silver, and select currencies versus the yen and Mexican peso.

CTAs Stay Heavily Long Equities, But Forced Deleveraging Appears Unlikely

Commodity trading advisors maintain elevated long positions in major equity markets. However, Bank of America believes the likelihood of immediate forced selling remains low.

Moreover, the bank’s models indicate that medium- to long-term trend-following strategies are heavily long U.S., European, and Japanese stocks. While these positions expose markets to sharp corrections, strategists argue that current conditions do not yet signal a need for widespread deleveraging.

“Heading into year-end, the near-term risk of forced selling stays limited unless markets experience a sharper drawdown,” analysts led by Chintan Kotecha said in a note.

Short-Term CTA Capacity and Volatility Dynamics

On shorter time frames, Bank of America’s CTA models show capacity to increase equity allocations in the U.S. and Europe. This ability could become important if realized volatility continues to decline.

Additionally, analysts suggest that volatility may ease further over the next two weeks as markets enter the holiday period. Such conditions typically support existing CTA equity positions rather than prompting risk cuts.

Japan Emerges as a Key Equity Risk Watchpoint

Japan stands out in the equity landscape. The Nikkei recently fell 2.6%, moving closer to a level that could mechanically trigger CTA selling.

Bank of America notes that the Nikkei is just 2.2% from an unwind trigger in its models, which implies that further weakness could prompt trend followers to reduce positions.

Region / Asset	CTA Positioning	Key Detail
U.S. & Europe Equities	Medium/long-term CTAs stretched long	Short-term models indicate room to add exposure
Japan (Nikkei)	Stretched long	Index fell 2.6%; 2.2% from unwind trigger
U.S. Treasuries (10Y & 30Y)	CTAs long futures	Trend projections suggest potential selling
Korean Treasuries	CTAs stretched short	Existing short positions remain
Bunds	Short bias	CTAs may add to short positions

Rates: Long U.S. Treasuries, But Trend Signals Turn Cautious

CTAs keep long positions in U.S. Treasury futures, especially in 10-year and 30-year maturities. Recent yield drops following labor and inflation releases have supported these positions.

However, Bank of America’s trend indicators suggest U.S. Treasury futures could weaken next week, which might trigger selling from trend-following strategies.

Outside the U.S., CTAs remain stretched short in Korean Treasury bonds and may build additional short exposure in Bund futures.

FX: Dollar Trend Signals Soften as CTAs Eye Rotation

The dollar ended the week stronger, but Bank of America’s trend metrics show reduced support for further gains.

The bank’s CTA model expects potential dollar selling next week. Meanwhile, it anticipates possible buying flows into the euro, pound, Australian dollar, and Canadian dollar.

CTAs still hold long USD versus JPY and short USD versus MXN.

Currency Pair / Side	CTA Positioning / Signal
USD (broad)	Finished week higher; model anticipates selling next week
EUR, GBP, AUD, CAD	Model anticipates potential CTA buying
USD/JPY	CTA positions stretched long
USD/MXN	CTA positions stretched short

Commodities: Ongoing Soybean Selling, Precious Metals Long

In commodities, trends vary across sectors. CTAs continue to sell soybeans, as many models have already exited long positions. Downside pressure could persist if trend signals weaken further.

By contrast, trend followers remain heavily long in gold and silver. Additionally, CTAs could add more long positions in copper, according to BofA’s trend projections.