There’s been a sudden run on S&P 500 contracts as hedge funds unloaded the greatest weekly total in a year last week. Investors are likely bracing for the shock that’s expected to arrive after President-elect Donald Trump is inaugurated and earnings season kicks into high gear. The sudden surge in sales of S&P 500 contracts comes on the heels of a nine-week buying trend in equities among BAML clients, which had marked the longest buying streak since the financial crisis.

2016 Hedge Fund Letters

Snapping up gold contracts

Bank of America Merrill Lynch analyst Jue Xiong and team said in their Jan. 13 “Futures and HF Positioning Report” that the week ending Jan. 10 brought a significant shift in hedge fund buying. Gold contracts were in, while S&P 500 contracts were out. EMs and EUR/ USD futures soared to record highs on support from institutional investors.

The analysts said CTAs and CPOs bought gold contracts for the first time since the November election, although their net positioning is still on the lower end at the 30th percentile, which is where it has been since 2007.

s&p 500

They add that in the near term, trends for gold are bullish, barring a break below 1171 for spot gold. CTAs and CPOs bought $2.4 billion of gold, $500 million of silver and $400 million of copper but unloaded $500 million in WTI crude contracts.

Contrarian bearish signals on Russell 2000, MSCI EM

The BAML team explained that the buy-side net Russell 2000 positioning remained close to a record high, which for the is a contrarian bearish signal.

However, they add that the long-term trend is still bullish, although for now, if the index dips under 1347.2, a tactical bearish signal would be triggered for the 1308.85 to 1300 range.

Institutional investors pushed their long positioning in the MSCI EM to the highest level in more than 10 years, although again, Xiong and team feel this is a contrarian bearish signal for the buy-side net positioning. They’ll be watching trends here, however, and have pegged the chart resistance levels at 903.1/ 907.5. If the index pushes higher than this range, it would confirm a bullish signal, they explained.

Hedge funds dump S&P 500 contracts

The BAML team found that the week of Jan. 3-10 brought the most sales of S&P 500 contracts among hedge funds in a week since January 2016. Despite all those sales, asset managers in total added $6.8 billion to bring their long positioning in S&P 500 futures to $50.8 billion.

Institutional investors purchased $10.1 billion in equity futures during the week, with $6.8 billion of those being in the S&P 500 and $1.8 billion being in the MSCI EM.

Hedge funds picked up $400 million in EM futures but unloaded all other equity contracts. Of course S&P 500 contracts led the way with $11.1 billion in sales among hedge funds. They also sold $900 million in NASDAQ 100 contracts, although asset managers in total boosted their long positioning in this asset class by $300 million, bringing their total position to $3.7 billion.

10-year Treasury positioning surges

Xiong and team found that the buy-side has bought $41 billion in 10-year Treasury futures since the middle of August 2016, bringing the net position to the highest level since October 2014.

Institutional investors picked up $6.4 billion in Treasury futures in total, favoring the two-year contracts with $4.2 billion in purchases. Hedge funds also favored two-year Treasuries, snapping up $4.8 billion of them, in addition to $300 million in 30-year Treasuries. However, they unloaded $300 million in 10-year Treasury futures.

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