Trend-following funds are increasing their stock holdings and short positions, according to the latest report.

Investing.com — A report from Bank of America shows that trend-following funds are building short positions in stocks, highlighting a growing cautious attitude among systematic investors as the market grapples with high volatility and macroeconomic uncertainty.

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Commodity Trading Advisors (CTAs) typically follow price momentum rather than fundamentals, and after a period of significant liquidations, they have been steadily increasing their bearish bets on global equities. This shift comes as the market struggles to find direction amid geopolitical tensions, rising oil prices, and changes in monetary policy expectations.

This move reflects a broader reallocation across asset classes. In addition to short positions in stocks, trend followers are also reducing their exposure to U.S. Treasuries while increasing long positions in the dollar, indicating a more defensive stance. Analysts note that these fund flows are primarily mechanical, driven by price trends rather than subjective judgment, but they could still amplify market volatility.

Recent geopolitical developments, particularly the escalation of conflicts in the Middle East and turmoil in the energy market, have heightened the downside risks for the stock market. Soaring oil prices and shipping disruptions in the Strait of Hormuz have raised concerns about global growth and inflation. Historically, such shocks often put pressure on risk assets while supporting defensive trades like the dollar.

Meanwhile, uncertainty surrounding the Federal Reserve’s policy path remains a key driver. Stubborn inflation and higher energy costs could delay interest rate cuts, keeping financial conditions tight for a longer period. This backdrop makes it difficult for the stock market to maintain upward momentum, leading systemic funds to lean toward short positions.

Despite the increase in bearish positions, analysts emphasize that if negative momentum persists, CTAs still have room to further increase their short positions in stocks. This suggests that the market could face additional selling pressure in the short term, especially if macro conditions worsen or volatility spikes again.

However, the same position dynamics could also trigger a significant rebound. If market sentiment improves or key risks alleviate, trend followers may be forced to quickly cover their short positions, potentially leading to a strong bounce back.

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