Market volatility has been on the rise in recent days, with the S&P 500 experiencing significant declines. While there are many factors contributing to this market behavior, one key driver is the supply from systematic macro strategies, such as CTAs, vol control, and risk parity. These strategies have been leveraging equities at a high level, with potential supply growth if equities continue to decline.

According to MS QDS, the elevated equity leverage sitting in the 90th percentile versus the last five years has the potential to grow supply from these strategies. If the S&P 500 ends the day at a significant decline, such as -1%, the potential supply growth could be modest at -$8 billion (-0.3 z-score magnitude) in the next week. However, if the decline is more pronounced, with the S&P 500 ending the day at -1.5% or lower, the potential supply growth could reach $20 billion (-0.8 z-score magnitude) or even $35 billion (-1.1 z-score magnitude) over the next week.

It’s worth noting that option dealers are long around $8 billion of gamma exposure for a 1% move at spot, with slightly longer positions on down moves. This can provide some intraday cushion to US equities, but levered ETF rebalancing flow is expected to be larger, given much of the levered ETF short gamma is benchmarked to Tech, which is underperforming. With the Nasdaq Composite (-2.3%) and S&P 500 (-1.4%) both experiencing significant declines, levered ETF rebalancing supply is estimated to be over $11 billion today, with $8.5 billion of that supply in the Nasdaq/Semis/Tech sector. This would be one of the largest days on record for levered ETF supply, according to MS QDS estimates.