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S&P 500 Futures Positioning Suggests More Down is Coming

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20 comments on S&P 500 Futures Positioning Suggests More Down is Coming

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Commitment of Traders (COT) Report from the Commodities Futures Trading Commission (CTFT), highlights mine.

Chart Notes 

  • The above image is a combination of CTFC Options and CFTF Futures Only positions for the S&P 500 Index. Highlights are mine. 
  • I show three groups: Dealer Intermediary, Asset managers, Leveraged Funds. There are two other columns, not shown: Other Reportables and Nonreportable Positions. 
  • COT reports come out on Friday and reflect positions as of the previous Tuesday.

Trader Classifications

  • The TFF report divides the financial futures market participants into the “sell side” and “buyside.” This traditional functional division of financial market participants focuses on their respective roles in the broader marketplace, not whether they are buyers or sellers of futures/option contracts. 
  • The category called “dealer/intermediary,” represents sell-side participants. Typically, these are dealers and intermediaries that earn commissions on selling financial products, capturing bid/offer spreads and otherwise accommodating clients.
  • The remaining three categories (“asset manager/institutional;” “leveraged funds;” and “other reportables”) represent the buy-side participants. These are essentially clients of the sell-side participants who use the markets to invest, hedge, manage risk, speculate or change the term structure or duration of their assets

Futures Notes 

  1. In the futures market there is a short for every long. The net is always zero. 
  2. Market Makers take the other side of the trade. There is nothing either smart or dumb by by what market makers do. Rather it’s mechanical to meet point number 1.
  3. The Market Makers are hedged. If they are long futures then they are short contracts and vice versa. 

What brought this discussion up was a Tweet by SenimenTrader. 

“Smart Money” does NOT use selloffs to go long. The market makers have an obligation take the other side of the trade.

What happened then is despite the selloff (at least through Tuesday),  the “buy side” went increasingly long. 

My chart contains futures and options and just futures.

Dealer Intermediary Changes

  • Futures Only: Dealers decreased longs by 16,581 contracts and increased shorts by 44,020 contracts. 
  • Futures and Options: Dealers decreased longs by 17,814 contracts and increased shorts by 42,467 contracts. 

S&P 500 Barchart 

Image from Barchart shows the S&P 500 with trader positioning.

Futures Positions Change From Last Week

The Box “D” highlights the change in dealer positioning. Image Barchart. 

The positioning is Tuesday-to-Tuesday, not Monday as shown.

Dealers went net short an additional 60,601 futures contracts (-549,195 minus -488,594).

One can arrive at the same number by subtracting -16,581 from 44,020 (lead chart).

My Take 

Despite the selloff there is not that much fear. Especially note Leveraged Funds (purple) change.

Did buy the dip just stop working?

Leverage Funds added 18,566 long contracts and decreased shorts by 26,211 contracts. 

They remain net short in aggregate, but barely. On the long side only, there are 272,641 contracts.

I expect some leveraged long hedge funds to eventually blow up if declines escalate. 

The pain trade on the S&P 500 appears to still be down. 

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Mike Shedlock

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20 Comments
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Eddie_T
Eddie_T
4 years ago
No shortage of pundits out and about this morning, predicting just about any scenario you’d care to believe. I do think this next week is going to be key, as far as giving us some insights into what to expect for the rest of the year. No recent Fed meeting will ever have been watched as closely, nor had the tea leaves of the Fed minutes more diligently pored over.
One good trader I read is NOT calling for a crash, but sees selling into the Fed meeting followed by a bounce….but no longer does he see the melt-up phase some of us having been looking for….more of a Fed-dependent sideways chop, as Powell tries to keep the Titanic afloat without hitting any of the many icebergs out there. If the markets don’t fully tank, it’s still going to be a tough year that will try the souls of patient longs, no matter what they choose to hodl.  I tend to agree with this POV. Nobody knows the future. Not a time to play stocks with leverage.
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Eddie_T
Eddie_T
4 years ago
I will not take the bullish argument for stocks here, although I still think energy and commodity equities (and pm miners) have plenty of upside over the longer term. At this moment, the broader markets MUST reverse, or a much deeper wave of selling is coming that will take down almost everything over the next weeks and months. Those who point to broken technicals and volume sell-off behavior (yesterday particularly) are completely correct to call this a pivot into a bear market…..UNLESS, unless we see the Fed suddenly go dovish…..which I also doubt.
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Doug78
Doug78
4 years ago
Reply to  Eddie_T
Bonds will suck, stocks will suck but commodities will probably do well. I used technical analysis a lot in the ’80s and ’90s but afterwards everybody started using them and I felt that that destroyed the patterns because you can trade against them. Haven’t looked at them for a while. Maybe I should take another look.
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Eddie_T
Eddie_T
4 years ago
Reply to  Doug78
The technicals suck, 4385-ish S&P is the last line in the sand, according to most of the traders. And last Thursday was one of the most volatile days in the last 20 years. 
But it really is going to depend on what Powell does and says on Wednesday. Staying hawkish means the broad markets have more downside, I expect.
Ironically the thesis for “no crash but sideways chop” is based on the positive benefits of Powell taking way the punchbowl before a true final parabolic melt-up really had a chance to get started.
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Eddie_T
Eddie_T
4 years ago
I saw that tweet and it stuck in my mind too. Thank you for the cogent and thoughtful analysis. Your knowledge of how the futures market works and how market makers function always helps me see what’s going on with much greater clarity, when you write a piece like this one.
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FooFooFed
FooFooFed
4 years ago
How do you identify what’s happening in the accepted collateral between banks? If collateral moves to only high quality like treasury issuance doesn’t the plumbing in the market freeze as banks do not want to do transactions between each other when trading lesser quality collateral during market turmoil? Im talking about a global issue not just USA issue. I often wonder if this is a reason the Fed had Black Rock buy Junk Bonds 2 years ago. Junk was accepted as collateral then it wasn’t. market froze. Collateral is involved in FX and Derivatives which is how big of a market today? Does anybody even know how big that market is anymore? Feedback appreciated! 
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kiers
kiers
4 years ago
Reply to  FooFooFed
I can’t imagine Junk bonds as collateral.  But then again……QE was wonderland. Reuters mentions “ECB accepts junk bonds as collateral to help virus-hit banks” from 2020 when corona was new.
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Doug78
Doug78
4 years ago
Just a little reminder about inflation and the stock markets. Take a look at the inflation rates during the 1960’s and the 1970’s.
Now look at the Dow Jones during the same period.
The Dow Jones peaked on Februrary 1966 and bottomed out on July 1982. That is a 16 year bear market.
We no longer know what real inflation is like because only the old ones went through it and they were too young to be homeowners or wage-earners consequently we underestimate the damage it does to company profits. Sure they gain pricing power but that is eaten up by their own increased costs and those cost raise almost daily. Inflation is bad for stocks if it takes too long to get back control. If we are at the beginning of an inflation cycle then maybe stocks are not the place to be. If the Fed has the same worry then they will raise rate and damn the torpedoes. 
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Scooot
Scooot
4 years ago
Reply to  Doug78

In my view they’ll just carry on with planned hikes and tapering until data indicates otherwise or not, regardless of stock prices. 

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Doug78
Doug78
4 years ago
Reply to  Scooot
They shouldn’t care about stock prices at this point in the cycle.
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Curious-Cat
Curious-Cat
4 years ago
Reply to  Doug78
Or any other point in the cycle!
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Doug78
Doug78
4 years ago
Reply to  Curious-Cat
A curious cat answer.
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Scooot
Scooot
4 years ago
Reply to  Curious-Cat
Central Banks have always been concerned about financial prices & market stability, but not necessarily the absolute price level. I’m not exactly sure when market commentators began interpreting this as providing a backstop bid to underpin prices. Maybe when QE began as this is the effect in the bond markets. I’m still not convinced they do with stocks, it’s just that stimulus aimed at supporting the economy often has the affect of supporting stock prices as well. I guess we’re going to find out soon. 
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RonJ
RonJ
4 years ago
Reply to  Doug78
“We no longer know what real inflation is like because only the old ones
went through it and they were too young to be homeowners or wage-earners…”
Depends on how old, old is. I was a young adult in the 1970’s. Was in the military during most of it, so my perspective was different than others. To me, the biggest event was the 1979 oil embargo, during which could only buy gas every other day and waited in line to get it. In 1977 i remember a headline in the L.A. Times which said the median home was $66,000 and rising $1,000 a month, which lead to Prop 13 in ’78. Renting, couldn’t afford buying one anyway, but otherwise never felt like inflation was eating me alive, living frugally.
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Doug78
Doug78
4 years ago
Reply to  RonJ
We were young at the time and our principle occupation was finding enough money for beer and picking up girls. We were not concerned about morgages, schools for the kids and like. I really miss being young. No matter how you turn it getting old sucks.
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klausmkl
klausmkl
4 years ago
TD Ameritrade had zero shares to short of Tesla or the Russel on   Thursday, not one.  This is crazy. Took it as a sign and it was right. We have finished the distribution phase and now it is sell off. Have folks forgotten the 4 stages to stocks? It is accumulation, then mark up, distribution and then sell off.  Then it repeats, so what. 
176 for the russell is my target
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Scooot
Scooot
4 years ago
Looking at the daily chart of the S&P there’s only 26 days since the end of July that you could have bought at a lower level than yesterday’s close. Any purchase on any other day is out of the money, so there’s a lot of hope and finger crossing going on. 
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Too much BS
Too much BS
4 years ago
Boom Went Bust..   https://youtu.be/DcVQQ_uVRIk    One of the  posted comments on this   video  said  Stocks don’t go down.    wonder how he feels after this weeks crash.  Nothing was safe,  nothing got spared.
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Six000mileyear
Six000mileyear
4 years ago
Technically, the SP500 broke below the lower channel created by connecting the October 2020 and September 2021 lows. I count a complete 5-segment Elliott wave from the COVID 2020 lows.
Fundamentally, businesses can’t make or sell anything due to materials and finished goods stuck in a cargo ship.
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Six000mileyear
Six000mileyear
4 years ago
Reply to  Six000mileyear
I spent a little more time looking at other indexes and darling stocks. Netflix broke below the 200 day moving average. Amazon is rallying in a bearish wedge (ending diagonal), as is the Dow Utilities index. In general, indexes have risen on declining volume. Now prices are falling on increased volume. My call that a bottom in the 60 year yield cycle is in remains unchanged, and is reinforced by yields on the 10 year bond rallying above pre-COVID levels. Conditions are ripe for a depression crash (both stock and bond markets selling off deeply in tandem).
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