Thread by @GameofTrades_

Speculators are extremely short on the SP500

Similar to 2020, 2015, 2011 and 2007

A short thread 🧵

2/ Net positioning in the futures market is often a good contrarian indicator

But there's a crucial caveat often overlooked by investors

3/ Bulls point out that high levels of net short positioning successfully predicted market bottoms in:

- 2020
- 2015
- 2011

4/ However, similar net short levels also preceded the 2007 top

Which eventually led to the Financial Crisis

5/ Extreme short positioning isn't always a reliable contrarian indicator

The key difference lies in the monetary policy environment

6/ In 2011 and 2015, a steep 10y-2y yield curve signaled easy monetary policy

An accommodative Fed combined with net short positioning, marked market bottoms in both cases

7/ In 2020, massive stimulus flooded the system with liquidity

Which caught short positions off guard following C19

8/ In contrast, in 2007, the Fed was tightening monetary policy with rate hikes

Causing the 10y-2y yield curve to invert and leading to a recession and rapid market decline

9/ High net short positioning during easy monetary policy increases the likelihood of a market bottom

But when it occurs amid tight monetary policy, shorts often prove accurate

10/ Since 2022, the Fed has been aggressively hiking rates, and the 10y-2y yield curve is the most inverted since the 1980s

This suggests that speculators may be making the right call by going short

11/ Investors must consider the monetary policy context when interpreting net short positioning

As of now, the Fed's policy indicates that caution is warranted for those betting on a quick market rebound

12/ Thanks for reading!

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