Will the S&P 500 tank (or will bears be forced to capitulate?)

SP:SPX   S&P 500 Index
Whilst this year's 'rally' on the S&P 500 has been mediocre at best, the increase in net-short exposure to S&P futures has been impressive. As of last Tuesday, large speculators pushed their net-short exposure to the futures contract to their most bearish level since late 2007.

Yet with prices rising whilst speculators increase bearish exposure, there is a clear mismatch between the two data sets. And one that will need correcting, one way or another.

Prices will either need to roll over to justify the short-exposure of large speculators, or bears will have to capitulate which could also trigger a short-covering rally to send prices higher.

A potential catalyst could be if (or when) the US increase their debt ceiling, with reports suggesting we are on the cusp of a 2-year raise - and that could support risk assets such as the S&P 500. But if the talks break down, the deadline is missed and the US government defaults (which would also see the US lose their 'AAA' rating), it could be a case of 'watch out below' as the market slumps to justify the aggressive positions of bears.

Either way, this is one to watch as the week's progress.


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