Monday, September 25, 2017

Hedge Funds Ready for S&P 500 Index Plunge

The S&P 500 index, having achieved a record new high of 2508.85 on Wednesday, September 20th, also found on that day a 7th new session high.  The absolute gain from the prior session however had not been substantial – only 1.59 points.  We are drawn more to the nature and extent of the advance than we would be to the historic mark. 

We have always found greater confidence in trend prospects when a new high (low) was achieved with emphasis rather than with modest length.  While a 7th new session extreme is a minimum where overbought (oversold) conditions require greater scrutiny, instances where such a series of new session highs/lows accompany historic new high/low are offered greater importance. 

Last Wednesday’s price action formed a bearish ‘hanging man’ candle formation.  The severe intra-session selloff is deemed significant and combined with the small difference between the opening and closing price, describes both indecision and vulnerability to further protracted losses.  Thursday’s session helped to confirm the bearish implications of Wednesday’s session.  Finally, Friday’s recovery was insignificant and unable to recover any substantial portion of the loss since the record high. 


We are often more cautious in painting scenario with grave implications.  However, we feel it is appropriate at this stage and offer considerable concern for the prospects for an exaggerated pull back in the S&P from current levels immediately. 

Supporting our confidence in a negative outlook for the S&P 500 index is current positioning conditions.  In reviewing data on open interest, we would note that open interest normally climbs in the sessions following the completion of a quarterly roll in futures.  This did not happen in the last roll and the last time (December 2015) it didn’t happen, the S&P 500 Index fell 13% within the next 3 weeks. 

Additionally, CFTC described ‘non-commercial’ accounts, often referred to as ‘large speculative’ accounts comprising mainly of hedge funds, reduced their net long position in E-mini S&P futures by nearly 50%.  The last time (June 2016) ‘large speculative’ accounts reduced their net long positioning by as much as the 82,000 they did in the week ending last Tuesday, the Emini contract fell 6.5% within the next 20 days. 

Finally, we would note the ebbing in the number of higher profile negative assessments expressed on U.S. equity prospects over the last weeks.  All of the above combine to give alarm and for us to suggest there is a strong possibility for a 5-10% correction in the immediate future.  A settlement above 2508 over the next few sessions would put bearish prospects in jeopardy.