Why were you in that trade?


I want to ask a question of those who are trading the S&P futures. Since the audience of this blog is primarily smaller traders, I guess it would be more correct to say the mini S&P futures. I want to hear about how you’ve been trading the last couple of weeks because I have seen some really amazing actions among the smaller traders in that market.

Let me explain.

I have posted previously on the Commitment of Traders Report, which shows the positioning of the three primary types of futures market participants (Large and Small Speculators and Commercials). It’s a report I look at each week for my job.

Something really amazing showed up in the most recent data from last Tuesday. In a market where there’s been a very strong, very clear downside bias the Small Speculators as a group not only cut their shorts, they added to their longs. In September they had begun lightening up on their longs (they’ve been net long for over a year), paring back to 59% long from 68% long. Then they started building again at the end of the month, back up to 62% long as of September 30th.

As of last Tuesday, a day when the market closed basically on the day’s lows, those same Small Specs were out to 76% long as the result of nearly cutting their shorts in half and adding more than 10% in additional new longs. This blows my mind.

So here’s my question: If you were long the mini S&P at the end of the day on Tuesday of last week (10/7), why? I really want to hear the things that were justifications for being so.

I hope I get a bunch of responses here. This isn’t about embarassing anyone. I want this to be an educational opportunity. My suspicion is there are two major reasons for being long at that point – 1) the “it can’t go any lower” justification, 2) expectation that government action would turn the market higher.

Please, though, share your thoughts with the group.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • Federico Tewes

    The Small Speculator group most likely does not have access to the Commitment of Traders report. Instead, they use the WSJ as their guide. Last week there were plenty of articles offering historical evidence where the market was “overshooting to the downside” and other analysts claiming the 8300 area to the the bottom compared to the 2003 levels. This media influence led to Small Speculators switching to the long-side early despite the downward pressure.

    To paraphrase Goros’ theory on human behavior: People mistakenly believe they can predict the future, not realizing that the future depends on how you react to it. During times of pessimism and fear, doing the “right thing” (perceive that this is the bottom) becomes less painful than doing the “wrong thing” (perceive to miss getting at the bottom).

    It seems that the Commitment of Traders report concludes that switching to the long-side now is a trading error. Well, according to Mark Douglas’ “Four Primary Trading Fears”, 95% of the trading errors are due to the following fears:
    1. Trader’s attitudes about being wrong (“Need to be Right to Make Money” or “Outcome Bias”)
    2. Losing Money (“Loss Aversion”)
    3. Missing out (“Sunk Cost Effect”)
    4. Leaving money on the table. (“Disposition Bias”)

    Self-identifying these fears has been the hardest trading lesson so far…

    Regards, Federico

  • Stan Hoffman

    I am primarily a Spot FX trader. But, in recent weeks, the Bonds and Equities have been a major focus. (Ya think?) And, several of my trading buddies are equities day and swing traders. They are one of my sources for insight into the ‘mind’ of the markets.

    So, here’s my $0.02 – from what folks tell me.

    Short term/Intraday – Ride the Bear down and pocket some change.

    Mid term – expect a Bounce, not a dead cat bounce, but a wave 4 Elliot type bounce. A “whew! that’s over. Let’s buy some bargains” type bounce.

    Then, a sharp sell-off. Return to retail panic. The world is ending, Fifth wave down. But, without the heavy buying in wave 4 (retail is still skittish, and the funds don’t have the credit lines and leverage to jump in as heavy as usual) wave 5 will be a short drop.

    Then the real bargain hunting begins. Which should cause, at least a consolidation area, if not a bottom.

    But, in the background is all the media hype, Central bank intervention, and psychological hope/greed/fear. And, people wanting to believe that the powers-that-be know how to pull out of this.

    The typical:
    “OMG, look how much I’ve lost!”
    “The Government CAN’T let the markets fail.”
    “Look at the bargain prices.”
    “It can’t go to Zero.”
    “We need to make back our losses.”, etc.

    So, for me. I trade the Intraday ups and downs, and LUV this volatilty. For my equity buddies, a mixed bag. Intraday, some are making a killing, some are on the sidelines being cautious. And, a few are looking for this to be the beginning of Wave 4. But, I haven’t heard any of them call this the bottom.

    Happy Trading,
    Stan H

  • http://www.theessentialsoftrading.com John

    Federico – Good comments. As for the COT report not being available to retail traders, that’s incorrect. The data is freely available on the CFTC site and in other places – as I noted in the related post I linked to here.

  • Stan Hoffman

    Too true, John. The data is available.

    But, as to whether Joe Trader
    a) knows that the data is available
    b) knows how to interpret the data ina useful manner
    c) has the discipline to follow his analysis

    Well, let’s just say that many traders don’t read your blog. (Though, if they did, they’d be sitting much prettier in this market.)

  • Barb

    Nope. I was swing trading options the last two weeks. Even with today’s humongous swing up, I don’t think we are at the lows yet. On the sidelines today – too bad.