Hedge funds have boosted S&P Shorts the most since 2011

The recent stalling out in SPX doesn’t appear too serious and prices remain within striking distance of a possible breakout above 4200.  While a decline lower under SPX-4039 might suggest some minor pullback is getting underway, it’s still difficult to make a strong bearish technical case.  Trends from mid-March remain bullish while momentum is positively sloped while not overbought.

Technology seemed to take the early lead in showing weakness in US equities on Monday; Yet, the Equal-weighted Technology ETF finished positive by more than +1.25%.  Thus, minor weakness in stocks like AAPL 0.04%  and/or GOOGL 1.14%  looked to be camouflaging some of the strength being seen in the broader Technology sector as well as other sectors like Industrials.

Energy kicked off the new week with gains of more than 1.4%, despite some minor weakness in WTI Crude.  This rotation into Energy and Healthcare looks to be a very real near-term bullish development and seeing strength in Healthcare along with some stabilization in the banks heading into Bank earnings could be supportive of further market strength post CPI.

Daily SPX chart shows this ongoing triangle pattern which has provided initial resistance to SPX’s rally from mid-March.  This sideways grind isn’t necessarily a bearish development, but SPX requires a rally back over 4200 to have conviction that the recent rally can extend uninterrupted. 

Barring a larger breakdown in stocks like AAPL 0.04% , MSFT -0.23% , GOOGL 1.14%  which make up meaningful percentages of US equity indices and ETF’s, it’s difficult to make much of a bearish case for SPX given the beginning of other sectors starting to show strength while CFTC sentiment remains quite bearish (More on this later)  As stated previously, it will be important to keep a close eye on SPX 4200 as resistance, while 4039 marks important support.

AAPL stalling out doesn’t look too serious

Given the minor pullback in AAPL 0.04% , ORCL 1.10%  and GOOGL 1.14%  Monday, most seemed to think that Technology was rolling over.  Yet, as discussed, this weakness largely occurred within a few large-cap Technology stocks which comprise large percentages within SPX and QQQ -0.07%  along with many Technology ETF’s.   On an Equal-weighted basis, Technology still rose by more than 1% Monday.

Daily charts of AAPL 0.04%  show this minor pullback which has occurred in recent days.  Technically speaking, this decline happened on low volume and has not done any technical damage to AAPL’s ongoing uptrend.

Overall, uptrends remain intact, and it’s thought that this weakness makes AAPL more attractive on a risk/reward basis to bottom at 158-161 for a move back up to $176.  Only on a weekly close under $157 would this chart show signs of damage, by breaching the uptrend from late December and undercutting the most recent swing high.

If/when more evidence of trend damage starts to happen in late April/May in the large cap Technology names and there’s evidence of some deterioration, then it will be proper to discuss.  At present, this clearly still looks early, and it’s difficult to make a bearish case for some of today’s biggest laggards within SPX such as AAPL 0.04% , MSFT -0.23% , or ORCL 1.10% .

Energy’s recent breakout relative to S&P 500 likely leads to outperformance in the weeks/months ahead

This relative chart of Invesco’s Equal-weighted Energy ETF vs. Equal-weighted S&P 500 index (RYE vs. RSP 0.10% ) has broken its downtrend since last November as of the last week.   This confirms the recent uptick in Energy which started following last week’s bullish output cut of 1.16 million barrels a day, announced by several OPEC + members.

This is a positive development for the months ahead, should lead to a mean reversion-type Snapback in Energy outperformance at a time when many have chosen to avoid this sector based on their potential worry of demand not ratcheting up.

The OECD Pacific and North American Petroleum inventories have plummeted to the lowest levels in nearly two decades, which seem bullish from a contrarian perspective given elevated levels of bearish sentiment.

Overall, this breakout of a multi-month downtrend in RYE vs. RSP 0.10%  is a positive technically and should lead Energy higher in the weeks and months ahead.

Sentiment remains quite negative for Treasuries and Equities

It seems important and positive for risk assets that sentiment levels remain chronically bearish with regards to both Equities and Treasuries as of the recent CFTC readings.

CFTC data released last Friday showed remarkably negative flows in both Treasuries and Equities, with the Treasury sentiment in Non-Commercial positioning having reached the most negative levels since 2018.

It appears like positioning was quite off-guard when the recent Banking crisis resulted in yields plummeting across the curve.  However, this hasn’t changed nearly at all from the prior month and has actually gotten more extreme.  See CFTC charts below, starting with CFTC Non-commercial Treasury futures positioning.

The decline in this dark blue line, shown below, indicates Treasury shorts growing more negative.  As seen below, this peak in sentiment happened in August 2021, when yields bottomed. 

It’s thought to be difficult to see the recent bounce in recent days extend given such bearish sentiment for Treasury notes.  I suspect that TNX is headed back lower to 3.15% or even 3.00% before any evidence of downward exhaustion for Yields.

Equity Sentiment per Hedge funds also remains quite bearish

Similar to Treasuries, the sentiment remains quite lop-sided for Equities when viewing non-commercial positioning (Large Speculators normally thought of as being Hedge funds).

There might be some end-of-quarter type positioning at work given earnings season approaching heading into CPI/PPI following a recent bullish bounce in Equities.

However, this short of -321k contracts looks to be the largest short exposure since 2011.

This data along with the Leveraged futures positioning having reached the most negative levels since 2018 could make the market ripe for a short squeeze potentially if CPI data comes in better than expected.  

While some of the retail gauges of sentiment, such as AAII and CNN Fear and Greed Poll have gotten more constructive, the broader, more intermediate-term gauges per CFTC data which doesn’t switch as rapidly, seem firmly bearish.

I continue to feel that negative sentiment likely will help provide a cushion to any Equity decline into the back half of the month of May which is when a few cycles show more convincing intermediate-term bottoms in the cycle composite.  At present, there hasn’t been enough selling to warrant being concerned about a possible Equity selloff.