Over the weekend, I said the following about the most recent CFTC data which showed specs going net short Russell 2000 minis versus increasing long S&P futs to the highest level since September:
I’ve noticed over the past couple of days that some commentators are cherry-picking the latest CFTC data which, as Bloomberg notes, shows that specs “turned outright bearish on small-cap stocks for the first time since the November election [as hedge funds] went net short Russell 2000 minis by 12k contracts on March 7, after cutting long positions for a 6th straight week.”
Is that evidence that the “pros” aren’t all-in on the equity bandwagon? Maybe. But probably not.
Because after all, that very same money is the most bullish on the S&P it’s been since September. That’s what I mean by “cherry-picking.”
What accounts for the disconnect? Well, if you ask me it’s people trying to fade the Trump trade (short small caps) while staying long the overall rally.
That’s so obvious as to be almost not worth mentioning, but apparently some folks were viewing the perceived discrepancy as some kind of warning sign about hedge funds’ outlook on stocks.
Now don’t get me wrong, I’m certainly not bullish on equities – I just thought it was worth pointing out that positioning is probably more a reflection of people trying to bet on an unwind of the Trump bump while maintaining exposure to the rally. Indeed, I said as much on Monday morning:
if you want to know why specs trimming small cap exposure and adding S&P longs, just look at recent Russell vs. SPX chart.
— Walter White (@heisenbergrpt) March 13, 2017
Well sure enough, SocGen is out saying pretty much the same thing. Consider the following as you think about positioning.
Whilst the S&P 500 is only slightly off its recent all time highs, the smaller cap Russell 2000 performance is looking more problematic. The Russell 2000 was struggling prior to last year’s US election with many investors concerned by overvaluation, struggling profitability and excessively leveraged balance sheets. This attitude almost changed overnight with the index rocketing 20% higher in the weeks after the election of Donald Trump, propelled higher through a combination of bullish Trumpenomics expectations but also a fair amount of short covering. That the Russell 2000 is underperforming the S&P 500 is notable, particularly as it flies in the face of particularly strong small business survey data suggesting better times ahead. It is also worth noting that whilst 2107 EPS forecasts for S&P 500 earnings have barely budged this year, Russell 2000 2017 EPS expectations are down 4%, hardly a disaster but worth keeping an eye on. More broadly, for all the reflation talk EPS momentum remains largely uninspiring.