S&P CoT

Maybe the title was a tad sensational lol. But, not sure of how many of you have heard/follow the Commitment of Traders, it’s the weekly breakdown of CFTC required reporting of futures open interest. Easily one of the best open interest reports available. And right now this positioning paints an intriguing narrative.

First, notice how dealer intermediaries (typically market makers), were about as short as they could get in summer of last year. They’ve been steadily accumulating when SPY dropped to $421 in January, flipping to net long just before the market bottomed. The last time market makers accumulated longs to this level was summer 2020. Then asset managers started accumulating and shorts got squeezed out all the way to flat just as the market topped.

The interesting part of this is how the leveraged funds have continued to get progressively more short for this entire time since the lows. Now short 600,000 ES E-Minis, that’s $6 billion dollars just for the maintenance margin on these. Here’s the kicker: ES E-mini contracts are 50x leveraged, so since the S&P is currently worth $4,211, 50x is $210,550. So essentially if you wanted to have the same exposure to the S&P as you do longing/shorting one ES E-Mini, you’d have to buy $210,550 of S&P outright to accomplish that. So at 600,000 short, leveraged funds are short exposed to the S&P by $126 billion dollars. That is seriously eff’d up, and the most likely scenario unless society collapses is that they get squeezed out because they’re over-leveraged and the market rises, even if for no reason.

I know sounds crazy but I think it’s possible the bull train just keeps rolling as asset managers re-accumulate, since they have been overall de-leveraging since the pre-covid peak. And if inflation dies off and consumer sentiment has reached a bottom, asset managers simply have to keep accumulating for their clients. On this chart I want to see asset managers continue their push up, dealer intermediaries to take a turn down and for leveraged funds to get margin called as they find themselves net short and upside down to untenable levels. I am open to pullbacks, but the S&P has sold off this year, and has now returned halfway back up to ATHs, and not once since 1950 have new cycle lows been set after that mid-point re-visit.