Below is a weekly chart of the past 3 years of the E-mini S&P500 index traded as ES on the Chicago Mercantile Exchange futures market. The red volume bars represent the amount of S&P 500 futures contracts traded each week, where each contract actually represents 50 S&P500 shares. The average volume of the E-mini S&P500 traded each week equates to over $500 billion USD, and it is one of the most actively traded financial instruments in the world, acting as an important gauge of the world's largest economy.
The Commodity Futures Trading Commission (CFTC) each week releases the Commitments of Traders report, which details the held positions of 3 different classes of traders, indicated in the chart below as COT Net Position. There exists the commercial hedgers (gray), the large/institutional speculators (green), and the general public small/retail speculators (magenta).
Notice that for the past few months, the bullish institutional speculators (green) have been increasing their net position, in effect buying up all the contracts from the bearish retail speculators (magenta), which have been decreasing their net position. As a result, there currently exists a large divergence in net position between the institutional and retail speculators. One will most likely profit at the other's loss, so who will win?
Well look what happened in the chart after the extreme divergence spikes the weeks of 12/14/07 and 07/11/08, the retail speculators were extremely bullish, not too smart as you can see what happened. The highly bearish smart money speculators clearly took home the prize leaving the bullish retail speculators with empty pockets.
Then look again after the extreme divergence spike the week of 03/06/09. This time the bets were reversed with the average retail speculator being extremely bearish, and institutional speculation being extremely bullish, very similar to the present situation. Again, the retail speculators got severely punished, and the smart money bulls clearly proved themselves to be smarter than the average bear.
There are bullish technical signs in the chart as well, price is consistently trending higher, maintaining above the yellow 10 week ma (moving average), aligned above the green 20 week ma and the blue 50 week ma, with all moving averages sloping up, except for the 200 week ma, which is sloping down but has been gradually decelerating its decline. The green MACD is above the zero line, which is a bullish indication. Also, for ADX, blue +DMI is maintaining well above red -DMI, causing green ADX, currently at 22.63, to very slowy rise in the direction of the 25 level of trend territory.
Now a look more on the bearish side: For several months, divergence of rising price with regressing MACD Histogram and mildly over-bought CCI has been developing as a bearish warning. But so far, it has been completely ignored by the still rising price, which can be interpreted as bullish. Also, a bearish catalyst has just occurred last week with the cross of the green MACD with the magenta MACD signal line, also represented as the MACD Histogram cross below the zero line. If this bearish signal does not follow through within the next few weeks, it will be interpreted as another bullish sign of strong underlying support.
Bottom line
So what's the bottom line? Here it is: When everyone you know is getting out, start the process of getting in by doing your research. When your neighbors are euphoric and pumping money into all their positions and telling you it's a sure-thing, think about cashing out.
Not sure we're there yet
Yes, but not sure we're quite at that point yet