S&P 500 analysis: Extreme bearish positioning among speculators

S&P 500 large speculator positioning (from the commitment of traders report):

As of Tuesday 9^th May 2023:

• Net-short exposure was at it most bearish level since October 2011
• Gross-short exposure was at its most bullish level since June 2020
• Gross long exposure continued to trend lower, and is just above 17-year lows
• With such extreme positioning, prices either have to fall to justify bearish exposure or shorts may have to cover
• And that could see volatility increase as markets reprice, with US debt-ceiling talks providing a potential catalyst

 

 

Large speculators are very bearish on the S&P 500. In fact, net-exposure to the S&P 500 futures contract is at its most bearish level since October 2011, which was incidentally a major low for the index. With US debt-ceiling talks dragging on and a real risk that the US could default on its debt, investors are likely hedging their long portfolios with short-future positions and speculators are betting big on a fall.

 

Yet prices on the S&P 500 futures market remain elevated compared to its underlying net-short exposure. And that means prices will either have to move lower to justify the extremely short positioning, or shorts will have to cover which could result in a rally for the index.

 

 

S&P 500 futures weekly chart:

 

Of course, a less extreme scenario could see the two converge, with prices moving lower and net-short exposure diminishing. Yet with the clock ticking for the US debt ceiling, we have a building risk event that could prompt some serious repositioning amongst traders and provide a volatile reaction for markets. 

 

As things stand, it is estimated that the US could default by June 1^st if a resolution is not found. President Biden is set to resume talks with Republican speaker McCarthy today, although talks so far have failed to produce any progress. This has seen indices such as the S&P 500 remain within a low volatility holding pattern, with a mixture of hope a resolution can be found amidst concerns that one won’t.

 

 

S&P 500 seasonality:

 

With that said, seasonality does not generally favour higher levels of volatility this time of year, with returns in May and June being on the lower side compared to the rest of the year. Still, the past 30 years has generated gains in May 69% of the time, even if its high to low range is on the low side (and the variance of May data is the lowest of the year). But as seasonality essentially looks at an average of data, bit themes such as the debt ceiling can easily override seasonality anyway. And if anything, it provides a reason for markets to be awoken from their seasonal lull.

 

 

S&P 500 futures daily chart:

 

The S&P 500 E-mini futures have been confirmed within last Wednesday’s 60-point range, and the daily ranges are becoming smaller each day. That suggests we could be reaching a period of range expansion, but until a suitable catalyst arrives then range-trading strategies are preferred.

 

Note that there has been heavy trading activity around 4133 within the current range, and prices are drifting back towards this potential support zone ahead of the European and US opens. The RSI (2) reached oversold a few bars ago and the stochastic oscillator is within the overbought zone, although yet to generate a buy signal.

 

From here, we’re looking for a bullish setup around the support zone / 61.8% Fibonacci level and an initial retest of yesterday’s high, with the potential for a move for the highs around 4070.

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge