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Systematic buyers are getting ready to load up on stocks again after a massive unwind, according to Citadel Securities.
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“The leverage reset has largely run its course, creating room for systematic strategies to add exposure as volatility falls,” said Scott Rubner, head of equity and derivatives strategy at Citadel Securities. “Breadth is improving, correlation is near record lows, and investors are increasingly willing to pay for upside.”
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August is primed to draw back buyers after leveraged ETF assets under management plunged to US$154 billion last month, a nearly 42 per cent drop from US$218 billion at the end of June, Citadel Securities data show. The sharpest drop was in the semiconductor space, where leveraged ETFs now hold about US$31 billion of assets.
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The firm says the potential for a rebound is building. “The next meaningful mechanical flow may be re-leveraging rather than deleveraging,” Rubner wrote in a note to clients.
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Individual traders are also returning and were net buyers on the firm’s platform last week, although they’re still paying for protection, he added. Households are logging US$7.5 billion a day in passive ETF inflows while the end of earnings season promises to reopen the corporate buyback window.
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Companies are now authorized to buy back more than US$1 trillion in their own stock, “the largest amount on record at this point in the calendar,” Rubner said.
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Altogether, the firm is pointing to demand for stocks rising and investors releveraging.
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—With assistance from Yiqin Shen.
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