In this week's COT report we see an extreme in activity by Funds and Commercials in trading Russell 2k Futures. Experience has taught us that it is important to monitor not only the weekly changes, but we want to pay attention to both the 4wk delta, as well as net position of the participants.
We rank all of this activity, factoring in a weighting component, and score this on a 18 month and 5year basis. The relative positioning highlights extremes in position and activity - and both of these have a story to tell.
Please look at this week's report:
We can see that over the past four weeks, Funds have bought/covered over 99k contracts, while Commercials have been on the other side shorting (97)k contracts. This 4wk delta scores a 100% on both a 18m + 5yr basis - meaning on a relative basis, this is the most buying we've seen out of the funds over the last 5 years.
We've seen quite a bit of Media coverage of this Fund buying, with the perception being that it is bearish omen for equity prices - but is it?
Going back to 2006, 2,999 trading periods, the Russell has exhibited a clear upward bias. Measuring the average move higher and lower from each close, shows us that over a 20Trading day interval, the average move up is 34.75 and down was (36.25) - So effectively 1-1 odds.
As a handful of outliers can skew average, we look at at the 80th + 70th percentile movements. We want to know how far prices advance/decline 70+80% of the time. The 80th percentile is 13 up by (7.60) down, and the 70th percentile is 18up by (12.25) down. So across the 70th/80th percentile, odds are about 3-2 in favor of bulls over the last 11 years.
Now Please see here:
This is Alchymist's query table - Here we are querying all records where Net Fund 4wk delta scored 90% or higher, as is evidenced this week. Look at the Average movement over 20 Trading periods now - 38.50 by (19.70).
Meanwhile, the percentile moves are 80th = 21.20 by (5.30) and 70th = 28.80 by (8.80).
So, our average odds have moved from 1-1 to now 2-1 given this fund activity. And the 80th/70th percentile odds have improved from 3-2, to now 4-1 / 3-1 respectively!
This is showing a significant statistical edge to Bulls given this condition.
Lastly, please revert back to the first table, and look at the Net Fund 18m score (column is highlighted in blue) We can see here that even after this massive buying spree, Fund position is neutral, with a 18month score of 51%.
1) Extreme Fund buying in Russel Futures has proven to be a extremely bullish setup historically.
2) Fund position is currently neutral on a relative/weighted basis - This means that funds can continue to pile on many more longs here throughout the end of the year, before their net position reaches an extreme.
3) Remember what time of year we are in - Small caps have exhibited tremendous performance in Q4 going back to 2001.
4) If traders are shorting right here, they are 3-1 underdogs over the next month by every measure. In order to make the odds work to make a bet, you need a payoff of 4-1 or better. Luckily for shorts, the same people buying stocks here are also smashing VIX, allowing us to speculate in options for very little nominal cost.
Currently you can buy a Dec 1450 by 1400 put spread for a net debit of only $8 - Payoff would be $42 if bears are right, so this is a 5-1 payoff.
To further improve odds, close out this spread on a daily close above 1,520 - This would be confirmation bulls are in control as we hit new highs (again).