Markets have shown to advance and move forward in the face of a “wall of worry”. Walls of Worry come in many forms, but most often they look like excessive pessimism, weak investor sentiment and poor positioning AFTER something has gone wrong and markets have ALREADY gone down. For almost a year now we have been talking about excessive pessimism and weak investor sentiment as measured by traditional metrics like the Bull/Bear ratio, BofA fund manager survey etc. The Wall of Worry has now been joined by very negative positioning by the hedge fund universe.
The chart below captures the overall net short positioning of institutional investors (i.e., hedge funds). The more net short they are, the more their collective pessimism weighs on the markets. Right now, the net short positioning on the SP500 stands at -321,000 contracts, the most net short the best and brightest have been since November 2011 (AFTER the US credit rating downgrade in September 2011).
Over the past decade or so, there have been four similar periods of very negative positioning:
November 2011 AFTER the US Treasury credit rating downgrade
Fall 2015/Jan 2016 AFTER the collapse of oil prices
May 2020 AFTER the onset of COVID pandemic
Today AFTER the Fed got 3 TDs behind inflation data and the market had sold off
“Walls of Worry” are great counter-indicators. History says so. Most importantly, forward returns from moments of such extreme negative positioning aren’t good, they are well above average.
Conclusion: Don’t fear the Wall of Worry, embrace the Wall of Worry.
Source: CFTC as of April 10, 2023
Chief Investment Officer
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