Trend followers could keep buying Nasdaq, BofA says

Trend-following funds could continue buying the Nasdaq and Japanese equities if markets remain stable or rise, potentially providing further support to stocks, Bank of America said in a research note on Friday.

Bank of America said Commodity Trading Advisors, or CTAs, continued buying equities for the week ended Aug. 14 as gains across major indexes reinforced positive price trends.

Estimated CTA equity positioning has risen to its highest level since the Iran conflict began in March, but could increase further if summer market volatility continues to decline, analysts said.

Additional buying remains possible in the Nasdaq and Nikkei 225, particularly from slower-moving trend-following strategies, BofA said.

The bank's model showed the Nasdaq-100's short-term trend signal at -7%, compared with 63% for the medium-term signal and 100% for the long-term signal, indicating a mixed but predominantly positive positioning backdrop.

The Nasdaq-100 was at 30,140 in BofA's Aug. 14 model, with the bank's estimated level for the start of long-position unwinds at 28,090. The model projected medium-term trend strength could improve on median and bullish five-day price paths.

BofA said systematic sell triggers remained relatively distant across major indexes, with declines of more than 4% generally needed to generate meaningful CTA selling.

However, the bank noted that systematic positioning has become more skewed toward downside risk after recent increases in equity longs.

Its models estimate systematic strategies could buy $11 billion if global equities rise over the coming week, or $19 billion if markets remain broadly flat, while a down market could trigger about $96 billion of selling.