Algorithmic Traders Bullish, Discretionary Investors Stay Cautious Amid Market Divergence

The divergence between computer-driven and discretionary traders has become one of the most striking features in today’s stock market landscape. According to Parag Thatte, a strategist at Deutsche Bank AG, algorithmic traders are showing a level of bullishness not seen since early 2020, before the worst of the pandemic. In contrast, human discretionary investors remain cautious, reducing their equity exposure amid uncertainty about global trade, corporate earnings, and economic growth [1].

This divide is not surprising, as the two groups rely on different signals to make decisions. Quantitative funds and algorithmic traders are guided by technical indicators such as momentum and volatility. Meanwhile, discretionary money managers base their strategies on economic fundamentals and earnings trends. This fundamental difference in approach creates a tug-of-war between technical and fundamental forces, especially in a market like the S&P 500, which has been hovering near record highs yet struggling to break out of a tight range [1].

As of the week ending August 1, long equity positions for systematic strategies were at their highest level since January 2020. This surge in algorithmic buying was preceded by a period of minimal positioning in the spring, leaving room for a strong rebound as the S&P 500 rallied nearly 30% from its April low. In contrast, professional investors have shifted from neutral to modestly underweight in equities, reflecting their wariness of overvaluation and macroeconomic risks [1].

The cautious stance of human investors is understandable, especially in the face of uncertainty around Trump’s trade agenda and the Federal Reserve’s interest rate policy. “Discretionary investors are waiting for something to give,” Thatte said, whether that be slowing growth or a spike in inflation later this year. If economic data confirms their concerns—say, through a market selloff—many discretionary managers could reassess their positions [1].

Meanwhile, trend-following algorithmic funds continue to chase momentum. Their crowded long positions create a risk of a sharp reversal if volatility spikes. Colton Loder of Cohalo warns that the “rubber band can only stretch so far before it snaps,” referring to the heightened potential for a mean-reversion selloff in the current environment. This dynamic has happened before—such as in early 2023 after the S&P 500’s steep 2022 drop—and is likely to play out again [1].

Fast-money investors, including CTAs, are now long $50 billion in U.S. stocks, placing them in the 92nd percentile of historical exposure, according to Goldman Sachs. However, a significant selloff—such as a 4.5% decline in the S&P 500—would be necessary to trigger a reversal. Given the stretched positioning, many observers expect this divergence between computer-driven and human traders to resolve itself within weeks, rather than months [1].

Maxwell Grinacoff of UBS notes that the current level of quant bullishness and uncertainty in the market raises concerns about the sustainability of the current rally. “Things are starting to feel toppy,” he said, warning that the upside for stocks is likely exhausted in the short term. However, he emphasized that the situation, while worrisome, has not yet reached a level that would trigger alarm bells [1].

One potential silver lining is that a pullback triggered by algorithmic selling could create buying opportunities for discretionary managers. Loder of Cohalo explained that asset managers’ light positioning could fuel a “buy the dip” mentality, helping to prevent a deeper selloff. The market’s next move, however, remains uncertain. “Whatever triggers the next drawdown is a mystery,” he said, highlighting the unpredictable nature of the current environment [1].

Source: [1] Computer-driven traders are bullish on stocks, humans are bears (https://fortune.com/2025/08/10/computer-driven-traders-bullish-stocks-humans-bearish/)