Extreme Futures Sentiment

See the stone set in your eyes
See the thorn twist in your side
--U2

One way to gauge sentiment in markets is to examine the positioning of 'speculators' in futures markets. If you open a futures account, you must identify yourself as either a speculator or a hedger. A speculator buys or sells a futures contract with the hope of making a profit.

While it might seem that all market behavior is speculative, some people participate in futures markets to reduce risk. A farmer, for example, might short corn futures to lock in a particular selling price for his crop. These people are 'hedgers'--they typically do business in the actual commodity and use futures to manage price risk.

Both speculators and hedgers are necessary to make markets in futures contracts. Without speculators, hedgers would have no counterparty to which they could lay off risk.

All futures contracts positions are tagged as belonging to either speculators and traders. Reports of these data can be useful for gauging sentiment among these two groups of market participants.

Current data indicate that large specs are very long US equity index futures. The last time large specs were this long SPX futes was, yep, fall of 2008.

Other noteworthy extremes in large spec positioning are in Japanese Yen (large net short) and gold/silver (low net long).

The positioning of speculators is often an effecitve contrarian indicator at extremes. Specs are often longest at market tops and shortest at bottoms.

Couple present large spec positioning in equity futures with 20 yr highs in equity margin debt and you have the recipe for epic optimism among stock market participants last seen in 2008.

position in SPX, gold, silver