Sunday, June 29, 2003
I’ve received quite a few emails about the changes in the most recent Commitments of Traders report this weekend, so I figured I would send out a note and try to answer as many of the emails as possible in one fell swoop.
For the most recent reporting period, which includes positions through this past Tuesday, we saw both commercial traders and small speculators change their positions by the greatest number of contracts in history. When we look at the changes as a percentage of total positions (which eliminates the distortion caused by an ever-increasing number of total positions), the changes remain close to all-time highs – expiration-related or otherwise. Beyond a doubt, expiration had a large impact on this data, as both sets of traders simply let their outstanding contracts expire without necessarily initiating new ones. Out of the 20 weeks with the largest overall position changes since 1993, 7 of them were during an expiration. Considering that there are only four expiration weeks a year in the S&P 500 futures, it is quite clear that expiration tends to account for more than its fair share of large position changes.
This week commercials were shorter by 60,590 contracts than they were last week, while small specs were 56,211 contracts longer this week than they were last week. When taken as a percentage of total contracts held (and assuming that commercials becoming shorter and small speculators becoming longer is a negative development), this was a negative 30% swing in total positions. In the history of this data, going back to 1986, this is the second-highest negative adjustment in history. It is exceeded only by a negative 40% change in August 1987 – this coincided with the market peak right before the crash of ’87. However, at that time the CFTC collected the data only every two weeks, as opposed to every week as they do now, and they freely admit that timeliness was not of the essence at that time, so the reliability of the data then is somewhat suspect.
The chart below shows the entire history of commercial and small speculator positions plotted against the S&P 500.
It is obvious from the chart just how unusual the current changes are. Actually, it looks almost exactly like a mirror-image of what occurred in mid-March, when there was a large change in the other direction and we emerged out of the “unusually bearish configuration” we had been in since 2000. That proved to be a strong signal that we were about to see a rally unlike any we had seen during the bear market (which I unfortunately didn’t pay enough attention to). While there could be many reasons why we could “explain away” the current changes, I think that would be a mistake. The expiration of the June contracts undoubtedly had an inordinate impact on these changes and it probably isn’t a “pure” reflection of the underlying sentiment. But the changes are historic, and I don’t think they should be ignored any more than the ones in March should have been. Obviously, now all of our indicators based on this information, such as the stochastics and the Futures Balance Matrix, are negative (for the market) across the board for the first time in a long while. Watching this data over the next couple of weeks should prove telling as to how they are playing this market environment without the distorting effects of expiration.
In the e-mini contract, the changes were also dramatic. You’ll recall that in that contract, commercial traders were at a record net short position last week, while small speculators were close to being a record net long. This week, so many contracts expired that the commercial net short position was reduced by a whopping 85% and the small spec net long position was reduced by an even larger 90%. Technically, this has moved the e-mini positions into their least bearish configuration since March.
I have advised against doing this since the e-mini began seeing increasing position sizes nearly a year ago, but let’s take a look at what the combined contracts look like. The following chart depicts the total dollar value of the net positions, for the full contract and the e-mini combined. Commercial positions are added (since they are considered positive for the market) and small speculator positions are subtracted (since they are considered negative for the market). Total dollar value is obtained by the following formula:
Full contract = Net position x $250 x Index level
E-mini = Net position x $50 x Index level
As an example, here is what the dollar value would be for one full contract and one e-mini contract, assuming the underlying S&P 500 futures contract closed at 990.
Full contract = 1 x $250 x 990 = $247,500
E-mini = 1 x $50 x 990 = $49,500
By buying one full contract, traders are in essence controlling about $250,000 in stock while an e-mini trader is controlling about $50,000. The performance bond (margin) a trader has to have available in their account in order to trade these futures is around $17,000 for the large contract and $3,500 for the e-mini, which is about 7% of total contract value. When we plug in the net positions for commercial traders and small speculators (again, adding commercial positions together but subtracting small spec positions), for both the full contract and the e-mini, we see the following emerge:
In March 2001, the total dollar value of these net positions was nearly -$70 billion, as commercial traders were heavily short in the full contract while small specs were heavily long, which obviously did not bode well for the market at that point. Much of that had been worked off by March of this year, when commercials began covering those shorts and the public was abandoning their longs, in both contracts. That created the most positive condition for the market in years, which once again has now been reversed. Currently, the total positions are around -$40 billion – the most bearish they have been in over a year, but not near where they were at the previous bear-market extremes.
You’ll recall from Thursday that we have recently seen the second-highest bull ratio reading in the history of the AAII sentiment survey. The highest occurred right before the crash in 1987. We can now add to that this change in the COT information, which is also close to the most negative in the history of the data, second only to the period right before the crash in ’87. I don’t want to draw a spurious correlation and suggest that we’re about to experience what we did in ’87. I’ve stated several times recently that many of the longer-term measures I’ve been observing are actually quite bullish. But in the intermediate-term, out several weeks at the least, there is not much evidence from a sentiment perspective that would lead me to look to the long side here.
- Jason Goepfert
Disclosure: long OEX puts
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
© 2003 Sundial Capital Research, Inc. All Rights Reserved.