US Stock Market Extends Losses as Volatility Funds Sell Out
NEW YORK, Aug 2 – A significant decline in U.S. stocks is triggering sales from volatility-sensitive funds, worsening an already severe selloff that has pushed the Nasdaq Composite (.IXIC) into correction territory.
Volatility control funds—systematic investment strategies that generally purchase equities during calm markets and sell during turbulent times—had heavily invested in stocks as indices reached record highs in 2024. Recently, these funds have started selling due to growing concerns over the economy and tech earnings, which have unsettled investors. According to Charlie McElligott, managing director of Cross-Asset Strategy at Nomura, these funds have sold about $83.6 billion in U.S. equity futures over the past two weeks. McElligott noted that such a large sell-off is “extremely rare,” having occurred only 3.2% of the time in the last decade.
This activity coincides with a deepening selloff in U.S. stocks on Friday, following weaker-than-expected U.S. employment data that heightened recession fears. The S&P 500 (.SPX) has fallen approximately 5% from its July 16 record high, while the tech-heavy Nasdaq Composite Index (.IXIC) has dropped around 10% from a record high reached last month, nearing official correction territory. The Cboe Volatility Index (.VIX) is at its highest level in over 16 months.
McElligott stated that the future behavior of these funds will depend on market volatility in the coming weeks. A daily change of 1% in the S&P 500 over the next two weeks could result in another $15 billion in sales, while daily changes of 0.5% could stabilize the situation and prompt these funds to buy around $14 billion. Other slower-reacting volatility-sensitive strategies might also start selling if the market downturn intensifies.
Equities trend-following commodity trading advisers (CTAs) have sold about $12.5 billion over the past two weeks. However, if the S&P 500 were to decline another 4% in the next two weeks, these systematic, rule-based investment strategies could increase their selling to approximately $36.0 billion.