Each week, the Commodity Futures
Trading Commission (CFTC) releases information on the long and short positions of
traders in a report known as the Commitments of Traders. Groups are identified
and determined by the number of contracts they are currently holding. Commercial
hedgers are involved in the day-to-day operations of financial assets. Large
speculators consists of large pooled funds, and almost always take the
opposite side of commercial traders.
Generally as equity prices rise, commercial
hedgers take on a greater short position, and when price fall they take on a
greater long position. When the position
of commercial traders is significantly short, it suggests a large short
position has been built up. If commercial
traders are short and get their directional bets wrong, it providess fuel for
the market to propel higher as commercial traders have to cover their shorts by
buying stock. In turn, if commercial
traders have closed out their short positions, this suggests there may be
little fuel left for the upside in stocks.
If we add up the total USD of
equity future contracts we can get a sense of the magnitude of the commercial hedgers’
position. In the chart below, we take
the cumulative value of all contracts on the E-mini S&P 400, E-mini S&P
500, Russell 2000, Dow Jones Industrial Average and NASDAQ 100. In May of 2013, commercial hedgers had amassed
a $55 billion short position in the spectrum of equity future contracts. Since then, they have closed (or been squeezed)
out of most of their shorts. As of last
Friday, the total short position of commercial hedgers’ stood at $3.8
billion. In other words, commercial traders
have covered some $51 billion of short exposure over the last 15 months. This short covering induced buying has helped
the equity markets attain all-time highs.
But, now the short covering has largely been completed and will no
longer provide much of a tailwind for stocks.
