Nasdaq Selloff May Trigger Broader CTA Deleveraging, Bank of America Warns

Friday’s sharp decline in the Nasdaq may have marked the beginning of a wider unwind in systematic equity positioning, according to Bank of America. The bank believes that an additional decline of roughly 2% could trigger a more significant wave of deleveraging across markets.

Nasdaq Records One of Its Largest Volatility-Adjusted Declines

Bank of America strategist Chintan Kotecha noted that the Nasdaq-100’s 4.8% drop on Friday represented its largest volatility-adjusted drawdown since October 2025. The move also ranked as the 13th-largest sigma decline recorded since 1985, highlighting the severity of the selloff.

According to BofA estimates, CTA (Commodity Trading Advisor) stop-loss levels for the Nasdaq-100 were positioned approximately 4.3% to 6.8% below market levels heading into Friday’s session. This suggests that some of the most defensive systematic strategies likely began reducing exposure during the selloff.

More CTA Selling Could Still Lie Ahead

Despite the recent decline, Bank of America believes a substantial portion of CTA long positions remains intact.

“We believe at least half of the CTA long base likely remains intact, and that another approximately 0.9% to 2% downside could trigger broader unwinds,” Kotecha stated.

The bank’s analysis also showed that stop-loss thresholds for the S&P 500 are roughly 0.4% to 2.6% below current levels, while the Russell 2000 could face additional CTA-driven selling if it declines another 2% to 5%.

Record Selling From Leveraged ETFs

Bank of America also highlighted unprecedented selling activity from leveraged and inverse exchange-traded funds.

Its data revealed that these products sold more than $12 billion worth of Nasdaq-100 exposure on Friday alone, marking the largest single-day selling event on record for this category of funds.

Options Market Dynamics Reaching Their Limits

The bank pointed to elevated SPX gamma positioning as another key market factor.

SPX gamma exposure averaged approximately $6.4 billion per day throughout May and early June. According to BofA estimates, this positioning helped suppress realized market volatility by around 1.3 volatility points over the past month.

However, Friday’s sharp market decline may have exposed the limits of this volatility-dampening effect.

Kotecha argued that the strong upside momentum seen in leading artificial intelligence stocks had become overstretched and ultimately reached an exhaustion point, resulting in a sudden fragility event across the market.

Treasury Positioning Remains Bearish

Beyond equities, Bank of America noted that CTA positioning in U.S. Treasuries remains net short.

Friday’s stronger-than-expected U.S. payrolls report reinforced those bearish Treasury positions, suggesting systematic traders continue to expect higher yields and a resilient U.S. economy.

Outlook

While Friday’s selloff triggered initial deleveraging among systematic funds, Bank of America believes the process may not be complete. With a significant portion of CTA long exposure potentially still in place, another modest decline in major U.S. indices could lead to a broader wave of selling pressure and increased market volatility in the weeks ahead.