Very Late Longs, or Blown Up Shorts

• Posted by DynamicHedge
• on February 27th, 2012

Anytime a couple billion dollars gets traded meaningfully away from the market it should give a market observer pause.  The market leaves a footprint, and I’ve laid out the basics of interpreting that footprint in previous posts.  Today’s activity in the S&P was suspect and a very good tell for the near term.

Below is a chart of the S&P 500 and the S&P 500 Premium.

The three circled areas represent times in today’s session where ~25k emini S&P contracts traded more than 2 full handles away from the market.  The premium level shows that the trades executed meaningfully away from the cash market.  Using the most conservative math that’s around $7 million in cumulative edge given up to get a trade done (presuming it was one fund).  $7 million in slippage will always be a big deal, so don’t even try and tell me it isn’t.  What was going on that someone was willing to give up that much money to get into or out of the market?

Scenario 1: Fund manager(s) buy aggressively after they witnessed the turnaround this morning, finally submitting to the bull after sitting on the sidelines for the majority of the run.

Scenario 2: Fund manager(s) came in short and the market turned higher and found their buy stops.  As they bought their positions in the market moved higher, electing even more buy stops.

Scenario 3: Some combination of the two, or a search for liquidity stemming from another related market.

The size and panicked footprint of the buying, regardless of whether to open longs or cover shorts, is indicative of some very unhealthy froth.  Longs buying size after this run is way to late in the game to be smart money.  And if it’s stubborn shorts buying in a position, there can’t be many more of that size left to cover.  Combine that with the fact that we had a net sell imbalance at the close today and it speaks pretty loudly.  If you’re looking for a tell that this run may be coming to an end, here it is.  None of my long term indicators have turned, but that may be all the blue sky we see in the very near term.

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