The central theses
- Most bets on S&P 500 futures contracts now assume that U.S. stocks will rise, not fall, for the first time in more than a year.
- This ends the longest downward phase for S&P 500 futures since data collection began in the late 1990s.
- The shift in sentiment may have been a harbinger of last week's rally in U.S. stocks.
- The margin between bullish and bearish investors remains narrow, with the net long position in the latest data at just 0.2% of open interest or the total number of existing contracts. But as of late May, net short sales accounted for 17% of open interest.
It didn't take long for investors to become bearish on the U.S. stock market following the Federal Reserve's rate hikes beginning in March 2022.
US stocks posted their worst annual loss since the global financial crisis last year. Even after gaining earlier this year, the majority of speculators, including hedge funds and professional traders, remained bearish on U.S. stocks.
Until now.
A report this week from the Commodity Futures Trading Commission, outlining data through Oct. 31, showed speculators were “net-long” positions in S&P 500 futures contracts on the Chicago Mercantile Exchange for the second straight week. Before last week's report, that hadn't happened in 70 weeks.
The data, released weekly by the CFTC, means that speculators, hedge funds and so-called “non-commercial” traders have overall become more bullish on US stocks than they have been since mid-2022 – potentially a positive sign for stock investors.
What the data means
CFTC data shows that traders took more long positions in E-mini S&P 500 contracts – the most popular U.S. stock futures market – than short positions.
This means that the outstanding number of contracts positioned to benefit from future gains in the S&P 500 Index now outweighs the number of contracts positioned to benefit from a decline in the index.
That hasn't happened in several months since the Fed's rate-hiking campaign began, ending the longest streak of weekly net-short positioning since the CFTC began tracking E-mini S&P 500 contracts in the late 1990s.
As Bespoke Investments noted in a report accompanying the data, speculators' positioning in futures contracts provides a valuable indicator of how traders view opportunities in a particular asset class. In this case, that asset class is US stocks.
The margin between bullish and bearish investors remains narrow, with the net long position in the latest data being just 0.2% of the E-mini S&P 500's open interest or the total number of existing contracts. But it wasn't until late May, weeks after turmoil in the U.S. banking sector rocked global markets, that net short selling reached 17% of open interest.
A market harbinger?
To the extent that the E-mini S&P 500 market reflects traders' future expectations, it can sometimes serve as a kind of self-fulfilling prophecy.
After the number of net shorts spiked in late May, U.S. stocks continued to rise and then stalled. The S&P 500 Index rose 10% in June and July before slipping 10% through October 27th.
The shift to net-long positions late last month for the first time in more than a year may have been a harbinger of last week's stock market rally.
The S&P 500 gained 5.9% last week, marking its biggest weekly gain this year and the first time since November 2021 that the index posted gains on all five days of an entire trading week.
Falling U.S. Treasury yields also supported the rally last week, as did a weaker-than-expected U.S. jobs report that raised hopes the Fed could halt interest rate hikes. Market participants are paying close attention this week to what officials at the Fed, which left its key interest rate unchanged last week, say about the future path of monetary policy.
Therefore, real-time events can of course override or reinforce the actual results of what the futures markets believe. Nevertheless, it is clear that speculators and traders have become increasingly optimistic in a short period of time.
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