What A Difference A Year Makes

As we approached the debt-ceiling debacle last year, there was much wailing and gnashing of teeth among talking heads and portfolio managers and indeed the latter actually started to put their money where there mouth was – i.e. they sold/reduced exposure to US equities. A year or so later and the fiscal cliff and debt-ceiling SNAFU is once again upon us but this time, while sentiment is just as negative, real speculative positioning is at multi-year record high longs. It would seem to us that all those holding out for a hero in Congress and some compromise to provide a liftathon in stocks are already all-in (as the two charts below indicate oh so clearly). One can only hope they are not disappointed as the ‘money on the sidelines’ appears to be more exposed than ever and unlike last year’s massive net short positioning, there is no more squeeze ammunition left for the next leg.


Last Fall’s debt-ceiling-inspired sell-off and massive short-biased position (lower pane) provided just the ammunition to squeeze a huge (central-bank-inspired) rally for the first quarter of the year and claim victory for the bulls from the jaws of defeat… this time the situation is very different…


and as the longer-term chart of relative positioning shows – speculative positioning is as long as it has ever been heading into this extreme binary uncertainty…


The last time we were this net long, the S&P 500 dropped over 20% in the next two months… and the S&P 500 has averaged a -3.3% performance over the following six-months from a 2-sigma net speculative long position such as this – and a 63% hit rate since record began.

It would appear that any sustained rally from here will need to come from fresh and excited money as opposed to the short-squeeze of last year.

We humbly suggest that the next mouth-breather that mentions markets are set for a huge rally if fiscal cliff resolution occurs OR opines of the money that is so desperate to chase into stocks when Boehner and Obama speak next – tell them to kindly look at these two charts and explain how traders have never been so net long stocks…

Surveys Do Not Matter! Real Money Positioing Matters!

Charts: Morgan Stanley and Bloomberg

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