Opinion: The smart money is record ‘short’ in stocks, and the dumb money is record ‘long’
April 6th, 2017 by Jason B. Vanclef
And that begs the question: Is it time to get out?
In the post-2009 bull market in stocks, investors have been stubbornly bearish — to their own detriment.
The most recent, and most pronounced, bout of pessimism happened in January and February 2016, when we issued a “buy” signal.
Bull markets die of “starvation.” Just as a fire needs wood to burn, the stock market needs fresh buyers to climb higher. Relentless gains have converted many bears into buyers, providing the fuel for an insistent string of new all-time highs.
Speculators are “all in”
According to the CFTC’s commitment of traders (COT) report, speculators are finally all in and more bullish than ever. Speculators have a reputation to be trend followers (for better and, eventually, for worse).
Chart No. 1 plots the Dow Jones Industrial Average DJIA, +0.12% against speculators’ exposure, and illustrates that trend followers are lousy market timers (dashed red lines).
Smart money is “all out”
While trend followers are all in, commercial hedgers (“smart money”) are “all out.”
In fact, hedgers have racked up more short positions than at any other time in history (chart No. 2).
To sum up, smart money is record short, and dumb money is record long.
Just how bearish is this combustible constellation?