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Minyan Mailbag - Dow futures and Large Speculators


The smart money is covering their shorts?


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourange an interactive dialoge among the Minyanship. We share this next column with that very intent.

"Large Speculators", thought to be mainly hedge funds, are now net long a record {number of} contracts in the Dow futures. The last time they were heavily net long was in February 2001, and...the Dow cratered 17% in only a month and a half into mid-March 2001." Minyan David


Large specs have been heavily long ("heavily" being a relative term) the Dow futures since November of last year, while the "smart" commercial traders have been getting more and more short (until very recently).

Frankly, I haven't found much, if any, value in looking at the Dow contract on its own (especially since the CFTC changed reporting levels in January). What I do find interesting is when we add up the total nominal dollar value of all net open futures positions for the S&P 500, Nasdaq 100 and Dow contracts - both the full contract and the e-mini.

The chart below shows these positions for commercial traders (in green) and small speculators (in red). Large speculators, the third category, would make up the difference in positions between commercials and small specs.

We can see that late last year, the nominal dollar value of the collective commercial short position exceeded $38 billion, something I touched on a couple of times. Lately, however, they have been reducing that figure drastically, so that they are now short about $12 billion. This is one of the quickest, largest "short coverings" since the spring of 2001.

I find this data to be a minor point to the bulls. Why minor? Because as the chart shows, small specs are still quite net long - I'd rather see these wrong-way traders be heavily short at the same time commercials are covering quickly.

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No positions in stocks mentioned.

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