Investing 101

## TL;DR 

- Measure of how many investors are invested in a particular trade, with particular focus on investors with short-term trading horizons
- Assessing whether a trade is crowded is a very common part of professional commentary for asset managers
- Positioning data can be used to predict a potential "short squeeze" 

Positioning of a security to measure how many investors are in the same position for the same reason - in jargon, how “crowded” is the trade. Positioning is usually referred to with a specific focus on speculative investors that might decide to unwind their positions all at the same time.

Positioning is meant to alert you of the risk of a sharp price move against the prevalent speculative trend in a security. It shows that a lot of “impatient” money has recently been invested in a security and might decide to rush out of the trade at the first sign of adverse news. Professional investors are very interested in positioning data, because they fear to be caught in a trade along with many others who came in for the same reason - and might decide to leave all at the same time causing sharp drawdowns.

The most universally accepted measure comes from the [Commodity Futures Trading Commission](https://www.cftc.gov/) in the US - CFTC for short. The Commission produces a weekly report of all positions in major futures traded in US exchanges, and one thing in particular makes their reports very useful: they separate positions between “hedging” and “speculative”.

The latter part of the report allows market participants to assess how much money is long or short an asset and whether this measure changed abruptly. Here’s a nice example for ES, the ever-popular e-mini future on S&P 500.

![S&P 500 speculative net future positioning](https://storage.googleapis.com/toggle-webcm-prod/https://storage.googleapis.com/toggle-webcm/Screen_Shot_2022_02_07_at_9_57_33_AM_1a10c1cd7e/Screen_Shot_2022_02_07_at_9_57_33_AM_1a10c1cd7e.png)

This chart is quite telling: it shows how in mid-2020 the market reached an extreme short position in the market - i.e. investors were betting hard that the market would fall. 

**How do I use positioning data?**

The data is used to assess whether you are taking a very popular position, which might lead you to suffer when your peers unwind the position ahead of you - what’s called a “squeeze”.

Let’s look at this assuming investors believe a stock should fall. When a number of short-term investors all take in a one-sided short position in this stock, there is little selling pressure left (as they all have their desired position) and in fact some of them are even forced to trim their positions for risk-management reasons.

This means they need to buy the stock, adding upward pressure to prices which then forces other speculators to buy the stock...and this goes on until the squeeze is complete and all spec positions are “flattened” (i.e. closed).

**Can you show me an example of a positioning squeeze?**

The chart above about S&P 500 is a great one as it allows us to show a classic example of a “short squeeze”. Let’s add the chart of S&P 500 itself and zoom in:

![SPX speculative net futures positioning vs price](https://storage.googleapis.com/toggle-webcm-prod/https://storage.googleapis.com/toggle-webcm/Screen_Shot_2022_02_07_at_10_09_56_AM_17636af9fc/Screen_Shot_2022_02_07_at_10_09_56_AM_17636af9fc.png)

Here you can see the textbook evolution of a short squeeze.

1. **The emergence of a short thesis**: at the beginning of the second quarter of 2020, the market was reeling from the impact of the sharpest economic slowdown ever experienced. With VIX higher than during the financial crisis, market participants forecast a deep recession
2. **Build-up of short positions**: as the belief in a prolonged recession became shared, market participants became more bearish about the market and began to add short positions - that is the Short Accumulation phase shown in blue. The more markets rallied, the more the short thesis appeared compelling to investors, who piled in to sell e-mini contracts (and their related options).
4. **Short squeeze**: except...markets kept going higher - thanks both to Tech stocks and short covering: speculators were forced to cover massive positions, often at significant losses, thus propelling the market higher

The latter part of this chart shows how some investors choose to use positioning data: for an investor who believed that markets were overpriced and wanted to express a short position, the end of this chart (late Aug 2020) would have been in fact the ideal moment.

Without the noise generated by speculative trading, this investor’s short thesis would have had a better chance to affect the market (if the investor was right, of course). And in any case, the risk to be squeezed for this investor would have been much reduced.

**This is in essence the role of positioning analysis** - ensuring that deeper fundamental views can take hold of the market, once the short-term fluctuations of speculators are over.


Measure of how many investors are invested in a particular trade, with particular focus on investors with short-term trading horizons

Positioning Analysis

Technical Indicators 

Sentiment can be thought of as the overall mood of the financial market. This gauge of the median psychological state reflects the price movements in the market. 

Essentially, rising prices gauge bullish sentiment, while falling prices signal a bearish sentiment towards the security. 

On a short term basis, price movements are not always or entirely based on fundamentals. Several factors come into play - from risk management to exogenous factors - and these include the buy and sell activity driven by psychology and sentiment.

As an example, sentiment in the market turned bearish towards the end of 2021 when inflation was nearing all-time highs, supply couldn’t keep up with the rising demand and company valuations began to appear stretched . 

After almost 2 years of double-digit price appreciation, thanks to the injection of wealth into the economy and quantitative easing, investors finally began to suspect the “party” was coming to an end - and that a correction was on the way. This eventually led to the start of the H1 2022 bear market. 

Here are a few examples of popular indicators which can be used to measure market sentiment:

1. **The VIX.** 
Also known as the fear index, the VIX gauges the price of 1M and 2M options on S&P 500. A rising VIX implies that there is more fear in the market and investors seek protection from downside . 
2. **The AAII Investor Survey**
The AAII indicator is one of the longest-standing surveys of market sentiment. Starting in 1987, the AAII Investor Sentiment Survey queries investors’ views on the market in the next 6 months and provides a gauge to determine moments of extreme exuberance or gloom.
3. **The High-Low Index**
This index tracks the number of stocks making 52-week highs (prices hitting the highest level observed over the last year) versus the number of stocks hitting 52-week lows. When the index value is below 30, that means stocks are trading near lows and investors have a bearish market outlook. On the other hand, a value above 70 means stocks are trading towards their highs and investors have a bullish market outlook. 
4. **Bullish Percent Index**
The BPI measures the number of stocks with a bullish pattern based on point and figure charts. Similar to candlestick charts, P&F charts look at the degree of asset movement however without considering a specific time period. Neutral markets usually have a BPI of 50%, overbought markets have a reading of 80% or higher and oversold markets have a BPI of 20% or below.  
5. **Moving Averages** 
The most commonly used moving average is the 50 to 200 day moving average. When the 50-day moving average crosses above the 200-day moving average (golden cross), this indicates momentum has shifted to the upside, suggesting bullish sentiment. On the other hand, the 50-day moving average falling below the 200-day moving average (death cross), indicates momentum shifted to the downside and hence bearish sentiment. 


Market Sentiment

Positioning Analysis