Futures positions tell a story ..... every week, in fact
ref :- TRADING POST, Jamie Chisholm in The Financial Times, Markets and Investing
Each week the Commodity Futures Trading Commission (CFTC) publish the net long or short positions held by players on the futures markets, who are obliged to disclose their positions in full. These reports are usually of more interest to market specialists than your average investor, except when they get to more extreme levels in one direction or the other. There are a number of methods of judging whether something is "overbought" or "oversold", but excessively long or short positions held by speculators would certainly start a few bells ringing, and that's when we should all start paying attention.
Mr Chisholm gives us a nice recent example in the Brexit-battered British Pound (apologies for unfortunate alliteration). Record negative bets against sterling, represented by a record number of short positions in the British Pound futures contract, told us two things. Firstly and most obviously, that the prevailing sentiment for sterling has been overwhelmingly bearish ; and secondly, that the speculators have for the most part already committed to their short positions. Since most speculators are in the game for a quick turn, any adverse movement could have them scrambling to cover their short positions in a move that sends the Pound sharply higher -- the classic "short squeeze".
It's one of those exquisite ironies that we come across quite often, it seems -- bearish sentiment leads to too many weak shorts in the market, which is in itself a considerable bullish factor. It's why you might call the CFTC reports "contrarian indicators".
Actually, it's not only extreme net long or short positions that excite interest. Large changes in net positions imply a shift in trends, and TRADING POST wonders what the latest CFTC data is saying about US stock and bond markets.
The Russell 2000 is an index of small cap stocks (as opposed to the S&P 500 say, which is comprised of larger companies). The latest CFTC data shows a net SHORT of over 56,000 contracts of Russell 2000 mini futures. Although not huge, this is the largest net short in 11 months and a major change in sentiment since the large net LONG positions in evidence until the end of February. At the same time, traders have cut their net short positions in 10yr Treasury Note futures from 400,000 contracts in early March to just 69,000 now.
Both these things say the same thing : confidence in the Trump trade, and the president's ability to reflate the economy, is fading. The Russell Index reflects the fortunes of smaller companies operating within the US domestic economy and investors are plainly growing nervous that the gung-ho, post-election optimism may not be fulfilled. Similarly, the prospect of a booming economy and sharply higher rates that prompted the huge accumulation of short positions in Treasury bond futures (remember, bond prices go down as yields go up) is being replaced by a more sober assessment of the likely pace of rate rises.
So the CFTC numbers are more evidence, if it was needed, of a fundamental shift in sentiment. Of course, that begs another question : if too many people start to think the same way, at what point do those less bullish of stocks and less bearish of bonds become vulnerable should the economy actually perform the way Mr Trump promised us it would ?