U.S. Stock Market Sell-off Storm! Quantitative and Leveraged ETFs Sold $70 Billion in One Day, Another $50 Billion in Sell Orders Coming

The sharp decline in US stocks triggered by the technology sector is causing a chain reaction of systematic strategy funds deleveraging. The scale and speed of selling are so significant that market pressure is unlikely to dissipate in the short term.

According to Pursuit Trading Desk, in a report released by the JP Morgan equity derivatives strategy team on November 5, US stocks experienced their worst single-day performance since "Tariff Day," with the S&P 500 index plunging 4.4% and the Nasdaq 100 index collapsing 6.4%. Quantitative strategy funds played a key accelerating role in this downturn—CTA trend-following strategies and leveraged ETFs collectively sold over $70 billion in equity exposure that day.

Even more concerning is that the selling pressure has not yet been exhausted. JP Morgan’s models estimate that Volatility Targeting funds still have about $50 billion of equity exposure to sell in the coming days, to reduce their target leverage from around the 67th percentile down to the 30th percentile. This means that if the market continues to decline, mechanical downsizing will add persistent downward pressure.

CTA Turns Net Short, $11 Billion Sold in First 90 Minutes

The direct trigger for this downturn was the mass breach of momentum signals in CTA trend-following strategies. JP Morgan’s report noted that the early trading session broke several key momentum signals across major US stock indices, triggering programmatic CTA selling that further accelerated the market drop.

Specific data show that within approximately 1.5 hours after the spot market opened, net sales of S&P 500 futures already reached about $11 billion. From the momentum signals, CTA positions in the S&P 500, Nasdaq 100, and Russell 2000 have all turned net short.

JP Morgan’s CTA momentum signal tracking chart shows that the S&P 500 current price is around 7383 points, the 1-month momentum signal is negative, and the CTA signal is now "short." The Nasdaq 100 is in the same situation. Although the 12-month momentum remains positive for major indices and the S&P 500 price hovers near its 200-day moving average—meaning further deleveraging depends on whether the market breaks lower— the report also notes that since most signals have turned bearish, the risk direction is skewed to the upside.

Leveraged ETFs Deleverage Sharply for Second Time in a Week, Tech Stocks Make Up 90%

Leveraged ETFs are another major force behind the recent selling. JP Morgan estimates that leveraged ETFs sold over $60 billion in equity exposure before the market closed, about 90% of which was concentrated in technology products including semiconductors (Semis), Nasdaq 100 (NDX), and technology ETFs (XLK).

This marks the second sharp deleveraging by leveraged ETFs within a week, highlighting the recent market trait of tech stocks dominating the decline. However, the report also notes that in past sell-offs, buying on dips by investors has partially offset the rebalancing sell pressure from ETFs.

After this round of deleveraging, the implied short gamma exposure of leveraged ETFs dropped from about $7.5 billion per 1% volatility to around $6.5 billion, meaning subsequent passive sell-offs triggered by rebalancing will be somewhat reduced in scale.

$50 Billion Looms Overhead, Volatility Targeting Funds Become the Next Focus

The largest source of potential selling pressure currently comes from Volatility Targeting funds. JP Morgan’s models show that as market volatility surges, these funds will need to cut about $50 billion of equity exposure over the coming days to reduce their target leverage from around the 67th percentile down to the 30th percentile.

The logic of volatility targeting strategies is as follows: when market volatility rises, they mechanically reduce risk asset exposure to stabilize portfolio volatility. This mechanism often forms a negative feedback loop of "the more it drops, the more it sells" during market turbulence.

JP Morgan had already warned in its Monday report that macro systematic strategies face risks of bidirectional flows, and in scenarios of sharp declines and soaring volatility, there exists a substantial potential for deleveraging. The day’s market action confirmed this judgment, and the adjustment process may last several days. For investors, the market’s pressured pattern is unlikely to fundamentally change in the short term until the full $50 billion in passive selling is released.