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Delving Into Hedgers' Equity Positions

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...these pictures say one word...caution.

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I have been writing quite a bit lately about the positions of hedgers as it relates to indices and their reputation of being 'smart money.' Their reputation is of getting the big picture right. Yesterday I examined their position in bonds and it shows a blurry picture at the moment. The picture it shows is that they were short the market and have been covering on strength lately. Someone mentioned to me the possibility of being squeezed as the market runs. I would certainly entertain this possibility as true, as they are 'smart money' but not 'infallible, perfect money.' I would like to think of my firm as smart money too at many times but humbly admit to being rather wrong at times. The name of the game in this business is NOT one of perfection. I assure you that anyone that expects it of themselves or of others should try another business. In my book, it is a game of who makes the least mistakes, not one of who wins the most. The key is to recognize your mistakes, cut them short, and learn from it. This trait is one that is had by most every good trader and investor that I know.

Now on to the data. I will be examining the CFTC data (COT data-Commitments of Traders) versus several indices-the Dow, S&P 500, Russell 2000 and NASDAQ 100. It seems that directionally they are making the same bet lately, that is, to be either short or liquidating longs into this much ballyhooed rally. Obviously, this is not a prediction that they will be right or wrong. They are simply data points that I take note of in my firm's overall analysis and asset allocation process. In addition to this data, we have many other data points, notably negative divergences like less new 52 week highs on each new index high and investor sentiment polls reaching 'ebullient' levels. In sum, all the data continues to make my firm cautious, but not bearish. If we are wrong, which is certainly possible, we do so with preservation of our client's capital in mind. Better to miss the end of a move than get caught chasing a market only to wish you hadn't later.

Note that the charts below have circles marking important turning points, rectangles showing persistent positions and arrows showing the direction of their position (an arrow pointing down is a position being liquidated while an arrow pointing up shows accumulation). There is also text in some cases so I will let the pictures speak for themselves. Like I said, in general the hedgers are selling/shorting this rally or in Wall Street parlance, 'fading the rally.' One last note, on all four indices I netted out the 'big' contract and added the electronic version (e-mini as they are called as they are worth 1/5 the value of the 'big' contract) to get a net number of contracts long or short. This is extremely important as more and more volume is taking place electronically as opposed to the 'open outcry' version you would see on the floor of a futures exchange or in the orange juice pits in the movie Trading Places.

Hedgers Overall vs. Dow Jones Industrial Average



Hedgers Overall vs. Russell 2000 (small caps)



Hedgers Overall vs. NASDAQ 100



Hedgers Overall vs. S&P 500



Like I said, pictures tell a thousand words. In this case, and in my book, these pictures say one word…caution.
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