Observations over the years reveal that hedge fund managers tend to extrapolate current trends of financial markets into the future — just like most Main Street investors.
In other words, hedge fund managers are just as much a part of the “crowd” as the little guy.
So, this 2021 headline from the American Enterprise Institute is not surprising:
The SP 500 Index Out-performed Hedge Funds over the Last 10 Years. And It Wasn’t Even Close
Hedge funds and trend followers are known as Large Speculators in the Commitment of Traders report published by the Commodity Futures Trading Commission. They usually take the opposite side of the trade from a group known as the Commercials; insiders who participate in a business related to a given commodity. The Commercials usually turn out to be on the right side of a trade.
With this in mind, let’s focus on silver. Here’s a chart and commentary from our May 15 U.S. Short Term Update:
Large Specs… are strongly betting that [Silver]’s rally will continue. The middle graph on the chart shows the Large Spec net long or net short position as a percentage of total non-spreading open interest. Two weeks ago, it was 23.49%. Last week, despite a 9% decline in silver prices over just five days, Large Specs are net long 23.14%, hardly budging from their prior stance… We will keep you apprised of new developments.
The U.S. Short Term Update makes clear that Commitment of Traders positions are not a great short-term timing tool. At the same time, be aware that extreme positions often occur at key trend turns.
Also keep in mind that silver’s Elliott wave structure can help you to anticipate price turns.
Indeed, here’s a quote from the Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior:
It is our practice to try to determine in advance where the next move will likely take the market. One advantage of setting a target is that it gives a sort of backdrop against which to monitor the market’s actual path. This way, you are alerted quickly when something is wrong and can shift your interpretation to a more appropriate one if the market does not do what you expect. The second advantage of choosing a target well in advance is that it prepares you psychologically for buying when others are selling out in despair, and selling when others are buying confidently in a euphoric environment.
No matter what your convictions, it pays never to take your eyes off what is happening in the wave structure in real time. Ultimately, the market is the message, and a change in behavior can dictate a change in outlook. All one really needs to know at the time is whether to be long, short or out, a decision that can sometimes be made with a swift glance at a chart and other times only after painstaking work.
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