Good news for US stock market longs: the heaviest US stock market sell-off since the outbreak of the coronavirus epidemic is over, and now trend-following quant funds are preparing to return to the US stock market.

Scott Rubner, director of the Global Markets Division at Goldman Sachs and an expert in researching fund flows, pointed out that over the past month, so-called systematic funds, which buy stocks based on market signals and volatility rather than corporate fundamentals, have sold heavily in US stocks, with the scale of their sales in US dollars reaching four-year highs.

But now the market has calmed down. As the Chicago Board Options Exchange's CBOE Volatility Index (VIX), known as the 'panic index', trades at around 15, and economic data suggests the Fed may be approaching a soft landing, systematic funds are expected to buy into US stocks again.

Barclays strategists wrote in a report to clients on Monday, 'If the market stabilizes, data improves, and funds become more significantly bid.' Taking the volatility-controlled fund class that is opposite of the positioning and actual volatility as an example, Barclays said that last week's VIX surge triggered a massive selloff by the volatility-controlled funds, with their stock allocation dropping from 110% to about 50%. Now, with the VIX back to pre-sell-off levels, volatility-controlled funds are expected to rebuild these positions.

Usually, volatility-controlled funds sell off very quickly, but it takes some time to rebuild positions. Recently, volatility rose and fell quickly, so these funds may build positions faster than before. Anshul Gupta, head of European Derivatives and Global QIS at Barclays, expects these funds to return to normal positions in a few weeks rather than months.

Barclays said commodity trading advisers (CTAs) could also add buying pressure. Worried about economic growth, they have almost entirely closed all their long positions in stocks. For CTAs, the most important thing is the direction of the market and the many signals it sends, they will track index moving averages and adjust their positions when specific thresholds are reached. The more bullish the price trend, the larger the CTA's position, and the stricter the conditions for triggering selling.

Gupta said of CTAs: 'They just want to see asset prices rise. If the market continues to rebound, they may rebuild long positions more quickly.'

During last week's high volatility and stock market decline, risk parity funds significantly reduced their stock allocation sizes, while their bond allocations may stabilize, as these funds often seek to minimize volatility and correlation with specific asset classes. As the market stabilizes, these funds should also begin buying US stocks.

US July retail sales, released this Thursday, grew by 1% month-on-month, beating expectations. Last week, initial jobless claims in the US fell instead of rising, falling for the second consecutive week to the lowest level in more than a month. This has eased investors' concerns about the US falling into an economic recession. On Thursday, the US stock market continued to rise, with the S&P 500 index up 6.6% over the past six trading days, the largest six-day increase since November 2022, and wiping out all losses this month, including during last week's 'Black Monday', closing at a new high since July 23.

Commentators believe that the gradual rise of stock indexes and the gradual inflow of systematic funds may mean that it will take some time for buying pressure in US stocks to be reflected in moving averages. But Charlie McElligott, cross-asset strategist at Nomura, said that in the long run, the flow of funds buying into these funds is enormous. Nomura expects that if the S&P 500 averages a 0.5% daily volatility over the next month, it will generate about $59 billion of monthly inflows. If the time horizon is extended to three months, the same S&P volatility may attract nearly $191 billion of buying flows.