Large Commercials Are Hedging S&P 500 Gains

Portfolio managers are going to be scrambling to protect gains already made in the first six months of this year. The S&P 500 (^GSPC) has moved up from 666 to 930.17 for a gain of 222 which is a gain of roughly 40%. This gain was achieved during the first 5 months of the year. This would be a phenomenal year for most portfolio managers. I believe that most managers will seek to protect those gains by hedging themselves.

The way to do this through the futures markets. Managers can stay short the SP500 futures contract, protecting gains made on their portfolios to date. If it appears that the markets are going to move significantly higher, taking out the 5/11/09 highs, then managers can cover their short positions or lighten up on their holdings.

The chart above shows that as of 5/12/09, most of the commercials were net short and the large and small specs were both net long. Large commercials are seeking to hedge gains already achieved during the first 5 months. I would look for the commercials to move to increasingly short over the next several weeks and eventually the large/small specs to swing to net shorts.

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