What Happens When Large Speculators Go Short

Large speculators just hit 250K net short on the E-mini futures for the first time in two years

Senior Quantitative Analyst
Aug 31, 2022 at 8:00 AM
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According to the weekly report by the Commodity Trading Futures Commission (CFTC), large speculators have been getting more and more bearish on the market. Large speculators consist of funds or banks that trade huge volumes of futures contracts. The chart below shows their net position (long contracts minus short contracts) on the E-mini S&P 500 Index (SPX) futures is short 250K contracts, the largest net short position in about two years. Tracking large funds and banks sounds like a smart money indicator but I’m never convinced until I see some numbers. I want to see if their past big, short positions have tended to lead to stock underperformance. 

iotw chart 1 aug 30

Large Speculators Hit 250K Net Short

I looked at historical data from the CFTC reports and found times that the net short position hit 250K contracts on the E-mini futures. It had to be the first time hitting that level in the preceding three months. Doing this gives us seven prior results. I show the individual dates and returns after these instances in the first table. Below that table, I summarize the returns and finally, I have summarized return data for all dates since 2006. If these large institutions are, in fact, smart money, the returns after these instances should lean bearish. In the short term, this has been true. One month after these occurrences, the S&P 500 was negative more times than positive. The median return was -0.87%. The index averaged a gain of 0.37% but it underperformed the typical one-month return of 0.67%.

iotw chart 2 aug 30

I was also curious to see stock market drawdowns after these big institutions got very short. The table below shows the dates of each signal but instead of showing the stock return over each time frame, it shows the maximum drawdown over the time frame. The signal really nailed the financial crisis with the net short position hitting 250K in July of 2008. The S&P 500 fell over 40% within the next six months. Since that signal, large speculators have been correct in their bearish bets in the short term but there haven’t been any huge losses in the longer term. 

The underperformance, however, has only been short term. The returns at three, six and 12 months after these seven signals slightly outperform typical returns. With the S&P 500 down about 7% since the recent signal, which was two weeks ago, the short-term underperformance might have already been realized.

iotw chart 3 aug 30


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