One of the most covered pieces of “news” on Bloomberg today is the chart below. According to Sundial Capital Research, leveraged funds are not fleeing stocks “fast enough”. They conclude that there is probably more room for capitulation when it comes to US stocks.

They also write:

“Their returns are still showing consistently positive correlations to movements in the S&P 500, suggesting they haven’t reduced their exposure much despite the volatility.”

“Near other good lows over the past decade, exposure has dropped to 30 percent or less, and we have a long way to go there,”

The chart below shows the logic they explain. The red area is what they call the sell zone, and the green is the buy zone. Bashing out stocks should collapse further, seems not overly unique given the fact SPX is down some 11% from recent highs.

Sure, sentiment is awful and everything feels very bearish, but given the fact the mighty SPX is approaching the big 2600 level, these types of bearish calls always catches our attention.

Could the inverse be about to happen?



The CTA index (white), calculates the daily rate of the 20 CTAs selected from the largest managers open to new investments. It is considered as the key managed futures performance benchmark.

Despite the two-day lag in the CTA chart, we note that the CTA index, which we view as a good aggregate barometer for at least the “model” hedge funds, has been rather steady since the drop in early October. During the same time the SPX has fallen some 150 points.

Do note that the CTA index has actually been rising as the SPX has been falling over past weeks. At least, It doesn’t look like the biggest “model” funds are overly bullish here.

According to the sell/buy zone chart above, we note the biggest sell zone areas occurred around 2006. We all know what later happened in 2008, but from mid-2006 to 2007 highs, SPX increased by 30%.

The other big sell zone occurred in 2016/2017, as well as the spike in 2018. From mid-2016 to early 2018 highs the SPX increased by 35%.

In early October we suggested VIX as the best global hedge for a possible market correction. That logic played out well. Back then there were no bears and no fear. Two months later, and all we hear is bearish calls and fear.

Below chart shows the SPX (orange) versus VIX net non-commercial positioning (white). Going into the October sell off, the crowd was rather short VIX. Post the sell off, this entire trade has reversed, and the crowd is now long VIX. The crowd might be fearful, but they have loaded up on protection.

Source: charts by Bloomberg

We have no huge conviction calls at the moment, but given the fact people are so fearful here, we are starting to look at possibly going against the crowd soon, especially as the most run story today, represented by the first chart, seems to be fascinating reporters that hardly understand what a hedge fund even does.