Looking Into the Future(s)
That's right...keep 'em guessing!
Todd mentioned something in Buzz & Banter this morning about Jeff DeGraff's work regarding commercial positions in S&P 500 futures. This data is made available weekly from the CFTC, with commercial traders representing any trader than currently holds 1,000 or more S&P 500 futures contracts and is using them to hedge their day-to-day business risk. The position reporting limit for the S&P 500 e-mini is 300 contracts, but everything else is the same.
I don't know how Jeff calculates his dollar-weighted futures positions, but I do something similar for all index contracts. In order to compare apple-to-apples, though, let's just look at the data for the S&P 500. What the chart below represents is the total dollar value of the net position (long minus short) of commercial traders in both the S&P 500 large contract and the e-mini contract. The large contract is worth $250 times the current value of the index while the e-mini is worth $50, so it is one-fifth the size of the full contract.
As of last Tuesday, commercial traders were holding about $15 Billion worth of futures net short (this is a rough approximation). This is the largest net short they have been since early July 2002, and traditionally would be considered to have negative implications for the market.
My issue with the Commitments of Traders data is that there has been a large migration to the e-mini contract, and there is a definite inverse correlation between commercial positions in the full contract and that of the e-mini. Meaning, when commercials become longer in the full contract, they tend to become shorter in the e-mini. This has made analyzing the data all the more difficult, and frankly I don't put nearly as much weight behind the readings here as I used to a year or two ago.
Just one stark example is from this past January, when the net positions were the most positive they had been since early 2000. This would normally be very bullish for the market, yet that marked the top. That is unusual for this type of data and suggests something else is going on. It would be a stretch to consider the data as presented above to be bullish, but I think it's also not necessarily a reason to be bearish. Changing market dynamics change various indicators all the time, and I think this is one of those data sets that has been "compromised".
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