Sentiment Check: Large Speculators Get Aggressively Short

April 12, 2023

From the Desk of Ian Culley @IanCulley

Recessionary fears run high.

Everyone is talking about an imminent economic downturn and the next stock market crash.

You hear it on the news and in the streets – talk of the banking crisis, the Fed, inflation, and China pervades the narrative. Even my doctor assured me the world is headed for dark times during a routine appointment earlier this week.

Bearish sentiment is obviously alive and well.

But, as a chartist, I prefer to visualize these rumblings...

Check out large speculators, holding their largest net-short position for the E-mini S&P 500 futures since October 2011:

This is an excellent example of extreme pessimism on the part of large hedge funds. These swashbuckling traders are all running to the same side of the boat, hoping to catch the impending carnage.

However, extreme short positioning like this tends to coincide with significant trend reversals and market bottoms.

This doesn’t mean the S&P will rip higher tomorrow or next week. But conditions are set for a rally.

As JC pointed out yesterday, you need bulls in bull markets.

While fewer stocks are making new lows and Individual Investors (AII) and Advisors (II) show signs of increasing optimism, it all comes down to price.

The bulls need something to get excited about. And the bears need a reason to throw in the towel and accept defeat.

That all hinges on the 4,200 level in the S&P 500:

Fresh 52-week highs are on deck if the S&P 500 breaks out, completing a potential year-long reversal pattern. And fresh highs have a funny way of changing sentiment.

If and when the US benchmark takes out that 4,200 level, I imagine some hedge funds will get caught on the wrong side of the boat. That’s how markets work.

The human condition revels in catastrophe. We can’t avert our eyes from the destruction.

But we can pay close attention to the environment and stay wary of the crowd – especially now.

Stay tuned!

And let us know what you think. We love hearing from you.

Thanks for reading.

Allstarcharts Team