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S&P 500 Futures Positioning Suggests More Down is Coming

Despite the selloff, fund managers and speculators are still hugely long futures, even adding more.
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Commitment of Traders (COT) Report from the Commodities Futures Trading Commission (CTFT), highlights mine.

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.

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

Futures Positions Change From Last Week

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

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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