SMALL SPECULATORS REMAIN VERY BEARISH
16 March 2010 by Cullen Roche
9 Comments
Small speculators remain heavy net sellers of the S&P 500. The latest data from the CFTC showed a continuing net bearish position by small speculators. This data has tracked the bull market to near inverse perfection. The general public remains highly skeptical of the recovery and this data would appear to be consistent with this thinking. As a longer-term indicator, this could be a sign that the rally has legs.
This is misleading. If this is a chart of S&P e-mini positions, which it appears to be, then it is absurd to be considering this a reflection of “small speculators.”
The e-mini is a futures contract, and it has become one of the main speculative tools for institutional and professional investors, particularly hedge funds, simply because it is electronically traded. The price is $50 times the S&P index, and more importantly, the margin requirements for trading the contracts are very high, absolutely no where near what an average “small speculator” would meet. They are traded continuously and rapidly, 23.5 hours a day, with average daily volume well in excess of the aggregate volume of the underlying 500 stocks. They are completely speculative, involve enormous pools of money, are occasionally used to manipulate markets, and at any rate, they rarely ever end a day in the same hands that they started.
It is asinine to think these contracts indicate the sentiment of “the general public,” and it is equally insane to think they tell us anything useful about the direction of the market one week or month from now. The data tracks the market “inversely” until it doesn’t. Still, perhaps small speculators are bearish (they’ve likely lost %50 of what they had more than once in the same decade), but this data does not indicate that, because it cannot.
These are small futures traders. Not mom and pop types.
What?
Having no idea what you are talking about is a requirement for saying this.
First, mom and pop aren’t any type of futures traders. Second, insofar as you are a real futures trader (for stocks), you trade e-minis. Unless of course, you prefer, for no reason, to use the “standing in the Chicago pit crying” method to trade the S&P “big” using your billion dollar portfolio. Most just prefer to use their billion dollar portfolio and continuously bet with the eminis electronically in real time.
These are the largest futures traders, and all others (still hedge funds) in between. “Small speculators” do not generate daily volume worth well over $100 billion by trading futures contracts that they cannot afford to trade.
Hi Andrew,
I get a ton of emails on this indicator. This data does not include commercials and institutions. A lot of people don’t trust this data, but it has tracked so well that I think it’s worth noting from time to time….
TPC,
It’s great that you participate and value comments on your blog. As far as this indicator is concerned, mark me as a huge skeptic. I just do not accept the idea that somehow the positions of “small speculators” are reflected in emini trading. They require substantial capital and margin, and institutions and professional traders make up almost all of the daily volume.
Want to judge sentiment? Judge ever increasing prices after a landmark rally (largest since 1937), in the face of the worst fundamentals that any of today’s “investors” have ever seen.
Small speculator sentiment can certainly be reflected in the price of the Russell 2000, and it cannot be more divorced from reality. It’s trading higher in one of its most overbought conditions ever, with a true earnings multiple of 84 and a hefty dividend yield of 1.05% … a real bargain, thanks to the bears?
VIX is at 2 year lows…that’s a more bearish indicator to me…..
VIX could trade much lower. It’s still high historically.
Perhaps 25%, but not so much in absolute terms. Besides, if it gets that low, we’re talking 2006/7 levels and obviously the playing field is completely different right now. For one thing, unemployment has doubled and given that the consumer is 60% of GDP, I don’t see how anyone could be so bullish.
Additionally, there’s a lot more upside room than there is downside.
Is there a point at which a ‘contrarian’ play is actually contrary to conventional wisdom? Perhaps that point is when ‘self fulfilling prophecy’ actually fulfills.