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Speculators’ Verdict on Stock Market's Future Volatility

Here's what you need to know about the "net-short position" of many hedge fund managers

by Bob Stokes
Updated: April 09, 2019

Even a casual stock market observer knows that volatility has been a lot tamer so far in 2019 versus Q4 of 2018.

Many market participants are getting comfortable with this calm condition. Moreover, they believe it will last. And we've seen this before -- many times.

Our April 5 U.S. Short Term Update showed this chart and said:

SpeculatorsVolatility

A late-day look at the Commitment of Traders report shows that Large Speculators, a cohort mainly comprising hedge funds, are virtually certain that stock market volatility will remain low. As shown on the graph, the Large Spec net-short position as a percentage of open interest in VIX futures dropped to a new extreme last week. It's now at the lowest level in nearly a decade.

That's saying a lot, considering there have been significant stretches of low market volatility in recent years.

But, here's what EWI's analysts have noticed over the years: First, "when complacency reigns, investors get wet." Second, Large Speculators (hedge funds et al) tend to be wrong at major trend changes.

You only have to go back to the latter part of 2017 to find an example.

Our December 2017 Elliott Wave Theorist showed subscribers this chart and said:

SpecsBiggestBet

Large Speculators are short a record number of VIX futures contracts.... This stance indicates that they believe the VIX will not only continue to lower levels but that it will also do so by a substantial enough amount to make big bets on it worthwhile. But the market is a fractal, not a linear system, so change is inevitable.

And it wasn't long before that inevitable change unfolded.

As you'll recall, stock market volatility took a big jump in late January and early February of 2018, with the DJIA surrendering 10% in less than two weeks.

Could the next jump in volatility be even more dramatic?

Learn what our analysts are saying through a risk-free trial of our detailed market forecasts. Find out more just below.


U.S. Financial Markets Reach Pivotal Junctures

EWI's analysts see historic shifts ahead for major U.S. asset classes: Yes, "historic" is a sweeping word -- but once you read our forecasts for stocks, bonds, gold and other markets, you'll likely agree that the word is fitting.

Almost no one expects historic turns in major markets before they happen. Hence, EWI strongly suggests that you not look to the mainstream financial press for guidance.

Instead, get an independent perspective that we believe will serve you well in the months just ahead.

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