Titan Inv Partners – The so called “smart money” turns bearish on U.S equities

The latest data out of the CFTC reveals that some of the shrewdest money in investment markets have turned resolutely bearish on American equities to add to recent stories of George Soros taking a multi-billion dollar Put option wager too. It thus seems we are not alone in our concerns…

Data published by the US CFTC (Commodities and Futures Trading Commission) in its most recent commitment of traders report for February unveiled that futures positions held by various investor classes shows that hedge funds and other large speculators (the so called “smart money”) have  turned net bearish on the S&P 500  index for the first time since September 2012. The chart below displays what happened next – this was just ahead of a 10% correction in the US equity market.

The data is particularly interesting in that it represents a marked change in their approach as this same investor group was in fact net long of S&P futures as recently as the 10th of January 2014.  Talk in the market is that a notional $6 billion dollars has been wagered on a decline in the S&P 500. Large swings in the positions held by this key group have previously heralded a selloff in the index that measures the performance of the 500 largest quoted companies in the USA.

Most notably in August 2011 when Hedge funds went from net short 4400 contracts in S&P futures to a net short of more than 110,000 contracts. Again the chart below shows that this was just ahead of an additional 10%+ drop after a tumultuous summer that year. The swing through this year’s Januarys net long into February’s net short has been around 70,000 contracts – not as much in August 2011 but still not an insignificant number.

The bar chart below shows just where US futures traders are placing their bets on both the long and short sides of the trade. 

The S&P has risen to as high as 1868 in recent sessions and, as we relay here –  http://www.spreadbetmagazine.com/blog/titan-inv-partners-equity-markets-continue-to-ignore-geopoli.html it seems that even major geopolitical have had minimal impact. We question just how long this can likely continue particularly if there is a ratcheting up of pressure in China & Japan in particular. The hedge funds timing may be particularly prescient…

A blog last week from the highly respected money manager Alliance Bernstein suggests that gains in Global equity markets are being driven by an increasingly narrow and expensive coterie of stocks.

Bernstein’s research shows that

“The average market capitalization of the priciest quintile (20%) of stocks is $17.5 billion, nearly twice the size of the cheapest quintile. Half of the global market’s capitalization is now in the two most expensive quintiles (40%).”

Of course it’s to be expected that successful and sought after stocks will see an increase in market capitalisation as money moves into these names. However, in age where ETF’s and other index tracking products are highly prominent, that relationship can become self-reinforcing and not in a good way. Trackers for example are forced to chase fashionable stocks higher, driving up their market capitalisation and in turn their weighting in a given index, which means trackers need to own more of the same. A self-perpetuating circle is thus created. And one that smart players can take advantage of. Prime example is the ridiculous valuations ascribed to FB, TWTR, NFLX et al.

It seems inevitable to us that the music will stop sooner rather than later as we relayed in the blog detailed above. Trying to pick a top is likely to prove to be a fool’s errand, rather we prefer to watch indicators such as market breadth and put/call ratios, which have historically been very useful in determining changes in sentiment and trends in the equity markets. These are now flashing red but the way we prefer to play this is through options where we know our downside.

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You should not take this piece as an advocation to trade in any of the instruments mentioned and should always take professional advice in relation to your own personal circumstances.