Will US stocks continue to fall? The S&P has broken through a key level, and the quantitative sell-off has just begun

Despite a brief rebound in the U.S. stock market earlier this week, this momentum quickly reversed.

According to market data, the S&P 500 index fell nearly 100 points from its intraday high, breaking below the critical support level of 5897 points. This level is viewed by several investment banks as a mid-term sell trigger for trend-following quantitative funds (CTA), and a drop below this position could trigger larger-scale quantitative selling.

The interplay of market liquidity scarcity, short covering by hedge funds, and large-scale selling by trend-following CTA quantitative funds has led to greater downside risks for the current stock market. Analysis from multiple investment banks indicates that the wave of quantitative selling may have just begun.

Goldman Sachs analysts pointed out in their market daily report:

"The selling pressure from CTAs remains significant, with the key mid-term level at 5897 points, just 80 basis points away at the time. We expect about $20 billion to flow out of the stock market this week."

Loss of Key Support Level: Market Outlook Worrisome

In trading over the weekend, investors were generally optimistic, especially with expectations of the second-largest short position by hedge funds in five years and the news of Trump announcing support for Bitcoin, leading the market to believe that a strong short covering rally might occur at Monday's open.

However, despite a short-term increase in risk appetite, this momentum quickly reversed, with U.S. stocks continuing to decline throughout the day, hitting an intraday low nearly 100 points below the day's high. Analysts believe there are two main reasons behind the market's sudden shift:

• Extreme scarcity of market liquidity: The depth of S&P 500 futures (E-mini) trading remains low, and any large-scale trades could quickly trigger momentum effects in either direction.
• Quantitative traders becoming the dominant force: Although hedge funds did begin to cover shorts early on Monday, the slower-reacting trend-following CTAs became the dominant force in the market that day. According to Morgan Stanley's report last Friday ("Morgan Stanley warns that panic selling triggers the first round of $40 billion liquidation by CTAs"), the selling actions of CTAs have only just begun.

Goldman's model shows that CTAs currently hold $137 billion in long positions in the global stock market (at the 78th percentile), having sold $23 billion in stocks globally last week, which aligns roughly with Morgan Stanley's calculations. More importantly, Goldman expects that in any market scenario this week, these traders will become sellers of the S&P 500 index.

The current short-term key support level for the S&P 500 is at 6031 points, the mid-term support level is at 5897 points, and the long-term support level is at 5418 points. With the S&P 500 breaking below 5897 points, the downtrend seems nearly inevitable, and with no strong support from pension funds buying, market pessimism is becoming increasingly evident

What makes matters worse is that the dealer gamma value, which was still positive last week, has turned neutral, meaning that any moderate-sized sell-off could push it into negative territory. Once gamma turns negative, dealers will be forced to follow the market downward, further intensifying selling pressure and creating a vicious cycle