Net Short No More

Oct 31, 2023

In last night’s Closer, we discussed the latest positioning data from the weekly Commitments of Traders report published by the CFTC.  Released last Friday with data as of the prior Tuesday, the report would have captured October options expiration, and likely thanks to this, there were a number of significant changes to positioning across assets.  As we discussed last night, one key area that saw big changes was equities.

Perhaps the most notable of these was in S&P 500 futures.  Whereas this past summer saw positioning shift to the most net short (meaning a higher share of open interest is positioned short versus long) levels in over a decade, the past few months have seen those readings steadily unwind, and last week marked the first net long reading since June 14, 2022.  Meanwhile, the small-cap Russell 2,000 still remains deep in net short territory, although there was some improvement.  The Russell went from a recent low of 14.3% net short five weeks ago to 8.53% net short last week.  That’s the highest reading since March.

As previously mentioned, the S&P 500 is back to net long for the first time in well over a year. In fact, the streak of net short readings concluded at 70 straight weeks. That is now the longest such streak in the record of the data dating back to the late 1990s.  The only other streak that comes close in length ended at 60 weeks in April 2016.

As for the Russell 2,000, its streak of net short positioning has also been impressive at 135 weeks. However, that is not even half the length of the previous record that lasted from the back half of the 2000s through the early 2010s.  Put differently, positioning in Russell 2,000 futures has historically held a more pessimistic tilt with net short readings 72.5% of the time since data for the index begins in August 2002.  Although current readings indicate there continues to be more speculators betting against rather than for the index, the recent rise also indicates there has been some improvement in optimism towards small caps.

A Slow Correction

Oct 30, 2023

On Friday, the S&P 500 joined the Nasdaq in officially entering a correction having fallen over 10% from its July 31st high without a 10% rally in the interim.  That is the 55th correction since 1952 when the five day trading week began, and as shown below, it was one of the longer streaks for the index to officially hit that 10% threshold.  The median number of trading days across all corrections since 1952 to reach that 10% decline has been 32 days, about half the time the current correction took to hit 10%.  That makes this the slowest (for lack of a better term) correction since May 2015 and April 2011 when it took 65 and 67 trading days, respectively.  However, looking further back, there were much longer periods like 1980 when it took half a year.

As we have noted in the past, the S&P 500 entering correction is not exactly as scary as it may sound with regard to performance going forward. While there is always the chance that a correction will extend further (potentially becoming a bear market), historically, returns have been solid once the index first enters correction.  In the chart below, we show the average one and five-year annualized performance of the S&P 500 from the day the index first enters correction territory (the day the S&P closes 10% from a high without having a 10% rally in between).  As shown, whereas any normal one-year period has seen the S&P average a gain of close to 9%, after the first close down 10% from a high, it has averaged an even stronger 10.6% gain over the following year.  As for five-year annualized performance, periods after a correction tend to outperform the norm albeit by a much smaller margin.