FOMC Week - Hedge Funds Are STILL Short The Market

Despite the rally to record highs in stocks, hedge funds remain net short and show no signs of letting up. Here's how we are playing it. Last month I wrote about how July was set up to be a bullish month for stocks, citing futures and options market positioning. We talked about was the indexes had incredibly strong dealer positioning in the options market as well as a tailwind from crowded shorts in the futures market. We suspected that the Nasdaq might have slightly less of a tailwind but that proved to not matter much as all indexes have rallied hard over the last month. Ahead of this week's FOMC meeting, the S&P 500 and Nasdaq 100 sit at all time highs and the DJIA sits just below them. I cannot chase longs into such a volatility event (not to mention it is a jobs week with AAPL earnings mixed in) but if I had to be long an index here I believe that the Russell 2000 (IWM) has the most favorable risk/reward moving forward, despite its recent laggard ship. Here are a few charts to make the case -

IWM ascending triangle (7.25.25)

On the charts here we can see an accumulation pattern that has taken the shape of a bullish ascending triangle.

Call sellers have repeatedly stepped in at $225 however each time they have, IWM has reacted less and less by putting in higher lows and coming back up to that level again. The path of least resistance is clearly higher here.

IWM dealer exposure for 8/1

For next Friday's expiration (8/1) dealers are clearly supporting IWM to $230 so any sort of positive catalyst will be met with additional buying pressure.

You may notice the neutrality at $220 which implies that should that strike give way that the bullish structure may fall apart but here's why I don't think it will -

IWM all expirations 7.25

Across all expirations we can see that while the $220 strike is in negative gamma, net hedging is still positive which indicates that to be a likely floor should it be tested. A clean break above $225 likely nullifies this completely.

/rty COT reports (7.25)

Lastly, we can see that large speculators are still overwhelmingly short, and not only that but some retail speculators capitulated on the trade as well, leaving only the banks to be long. This leaves the overall positioning crowded to the short side which is conducive for a short squeeze rally. Overall, the index has lagged and stocks in general are due for a correction in the near future but if there is still some time on the clock in this rally, the risk/reward makes sense to be in small caps over tech as that is where the positioning is the most primed for whatever upside may be left.

This of course does not mean that tech cannot rally and small caps cannot sell off, it just means that the environment for such a situation is more favorable than not. Disclosure: I have small long positions in TNA and /rty futures 🔐For access to premium trading content including swing trade alerts & live day trading room visit 👉 - https://www.carnivoretrades.com/ 

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