The Commitment of Traders report for April 6 shows the three "buy side" large trader categories net short the Russell 2000 index futures (proxy IWM).
This image (click to enlarge) summarizes the Commitment of Traders positions for those three US stocks market-cap index futures.
CFTC definition of the three buy-side categories is as follows:
These are institutional investors, including pension funds, endowments, insurance companies, mutual funds and those portfolio/investment managers whose clients are predominantly institutional.
These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC.The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients.
Reportable traders that are not placed into one of the first three categories are placed into the “other reportables” category. The traders in this category mostly are using markets to hedge business risk, whether that risk is related to foreign exchange, equities or interest rates. This category includes corporate treasuries, central banks, smaller banks, mortgage originators, credit unions and any other reportable traders not assigned to the other three categories.
The sell-side traders (not shown in the tables above) are the dealers and intermediaries.
The relative performance charts do not necessarily lead to that net short conclusion, but it is probably worthwhile to at least be aware of the preponderance of opinion among the large futures traders.
click to enlarge
The trailing P/E ratios may be somewhat more helpful. They are (as reported by iShares for their corresponding ETFs):
- S&P 500: 19.44
- S&P 400: 25.12
- Russell 2000: 27.82
With the highest P/E, the Russell 2000 would need the highest earnings growth rate to validate its multiple.
While small-cap stocks tend to grow earnings faster than stocks with larger capitalization, they also tend to be more sensitive to the economic cycle.
With the pending withdrawal of QE II stimulus, and some of the other macro-economic factors around the world, it may well be that the large buy-side futures traders sense a downturn in the economy and a slowdown in small-cap earnings growth rates that would not justify the current valuation level.
In any event, their bets are made and they are what they are, and are probably worth noting and taking into consideration. The fact that they are large traders doesn't automatically make them right, but it is not unreasonable to assume that the professionals have a very good chance of being right.
A contrary thought might be that since all three categories are on the same side of the bet, that they might be wrong. However, there does not seem to be an extreme in their unity that could support that conclusion.
Small-Cap Negativity in the Midst of Extreme Bullishness:
Barron's this past weekend published an article citing the strongest net bullishness among professional money managers since 2007 (before the crash). The author (Alan Abelson) sees that as a contrary indicator, suggesting a correction directly ahead.
The Commitment of Traders report also shows money managers strongly net long for the S&P 500 and the S&P 400, but net short on the Russell 2000. So there is a divergence there, and divergences are typically worth examining.
Given the extreme bullishness of professional money managers in general, it is noteworthy that the futures crowd, at least, has a less rosy view of the small-caps than the large-caps and mid-caps.
We have been looking at reducing volatility in this time period, and as a result closed our small-cap fund positions, and increased cash, as a precautionary measure.
The standard deviation for the three market-cap indexes are (again provided by iShares for their corresponding ETFs):
- S&P 500: 21.84
- S&P 400: 25.84
- Russell 2000: 27.73.
We could be wrong, of course, in reducing small-cap exposure, but winning by not losing is an important part of we attempt to do.
Small-caps are more volatile than large-cap stocks and mid-cap stocks.
We expect our bias toward dividend paying stocks to further reduce our volatility exposure -- noting that we can't escape the fact that in a sudden panic correlations become very high during the drop.
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