Castle Securities: The deleveraging phase of the market is nearing its end, systemic capital or re-increase positions in US stocks

The Zhitong Finance App learned that after experiencing large-scale deleveraging at the end of July, some Wall Street institutions believe that systemic funding is preparing to increase stock exposure again. Citadel Securities (Citadel Securities) said that as market volatility recedes and stock correlation falls to close to historic lows, the next round of important mechanical capital flows in a systematic strategy may shift from “deleveraging” to “re-leveraging.”

At the same time, demand for retail capital, passive ETF funds, and corporate stock repurchases is increasing. According to data from Goldman Sachs and Morgan Stanley, hedge funds have also once again become net buyers of stocks, indicating that market capital is changing markedly after previous large-scale position adjustments.

Scott Rubner, head of stock and derivatives strategy at Castle Securities, said, “The leverage reset process is basically over. As volatility declines, there is room for systemic strategies to re-increase risk exposure.”

He pointed out that at present, the breadth of the market is improving, and the correlation between different stocks is close to a historical low. At the same time, investors are increasingly willing to pay premiums for further increases in the stock market. These factors are all conducive to systemic capital re-entering the market.

According to Castle Securities data, the amount of assets managed by leveraged ETFs plummeted in July from US$218 billion at the end of June to US$154 billion, a decrease of nearly 42% in a single month, reflecting the market's previous significant leveraged clearance.

Among them, the semiconductor sector has the most obvious deleveraging. Currently, the related leveraged ETF manages assets of about US$31 billion.

As this round of position adjustments is gradually completed, Castle Securities believes that the direction of capital flow in the market may be reversed. Rubner said that the next round of mechanical capital flows, which will have a clear impact, “may be re-leveraged rather than continued deleveraging.”

In addition to the systemic strategy, other potential buys have also begun to strengthen.

Rubner said that individual investors have once again become net buyers of stocks on the Castle Securities platform last week, but at the same time they are still buying downside protection, indicating that although the risk appetite of retail investors has rebounded, the overall sentiment remains somewhat cautious.

The household sector currently flows in about $7.5 billion a day through passive ETFs. Meanwhile, as the US stock earnings season comes to an end, more and more companies will end the stock repurchase restriction period before earnings are released, and corporate repurchase funds are expected to re-enter the market.

According to Castle Securities data, at present, the amount of capital that US companies have obtained authorization and can be used to buy back their own shares exceeds 1 trillion US dollars. According to Rubner, this is the highest level ever recorded in the same period of the year.

This means that for some time to come, US stocks may simultaneously receive buying support from various aspects such as systemic strategies, retail investors, passive investment funds, and corporate repurchases.

The capital return trend observed by Castle Securities is also confirmed by data from other Wall Street institutions.

According to Goldman Sachs Prime Brokerage data, hedge funds recently carried out the largest round of stock purchases since November 2020, with a significant portion of the capital coming from short payback.

This indicates that some of the bearish positions established during the previous market adjustment period are being closed, and the short recovery itself will also generate additional purchases, thereby further strengthening the market's rebound momentum.

The Morgan Stanley Prime Brokerage team also said that hedge funds became net buyers of global stocks last week. After experiencing a record volume of position cancellations at the end of July, the fund has begun to redeploy capital and restore risk exposure.

Looking at specific sectors, AI-related stocks have once again become an important direction for the return of institutional capital.

Morgan Stanley said that in the US stock market, hedge funds are once again increasing their exposure to general AI-related stocks, and the size of positions currently being re-established has exceeded the scale cut between the end of June and July.

This means that large-scale deleveraging in AI trading before is rapidly being reversed, and institutional funds are once again starting to establish relevant long positions.

In addition to the AI sector, hedge funds have also recently increased their long positions in sectors such as commercial biotech, housing, and real estate investment trusts (REITs). The financial sector also recorded net purchases, including alternative asset managers, banks, and insurance companies.

Overall, data from many Wall Street institutions shows that market capital flows have already begun to change after intense positions were cleared at the end of July. Castle Securities believes that as volatility declines, leverage levels are reset, and corporate repurchase windows are reopened, the next phase of the market's financial strength may no longer be forced deleveraging, but rather systemic strategies and institutional investors to re-increase stock exposure.