When you're trading it's often not about what the markets should do but what all the other market participants will do.
Hedge funds seem to be taking an interesting position ahead of the US election.
There is a useful guide to what the big speculators are doing, this comes in form of the weekly Commitment of Traders (COT) report from the US Commodity Futures Trading Commission (CFTC).
Amongst other things, the COT report shows how firms with significant positions (typically hedge funds) have increased or decreased their positions over the week. The report also shows whether the hedge funds are long or short of a market.
The latest report was released late on Friday 4 November and covers the week to 1 Nov 2016, it shows:
| Market | Long Position : Short Position Ratio |
| Dow Jones Index | 2.6 : 1 |
| S&P 500 Index | 4.1 : 1 |
| Gold | 3.9 : 1 |
| US Dollar Index | 5.2 : 1 |
Looking at the week to 25 October 2016 the same markets were:
| Market | Long Position : Short Position Ratio |
| Dow Jones Index | 3.0 : 1 |
| S&P 500 Index | 2.4 : 1 |
| Gold | 3.2 : 1 |
| US Dollar Index | 4.9 : 1 |
Interestingly, the latest report covers the period when the Hillary Clinton email saga was put back on the front pages, a period when Donald Trump has been in the ascendancy.
If Trump becomes President I'd expect many traders to be hitting the sell button like the buttons of a 1980s arcade game.
Quick 3-5% falls in the Dow Jones and S&P 500 are possible. Likewise, the US dollar could take a similar hit.
Many investors treat gold as a safe haven in times of uncertainty and a Republican win could bring a lot of uncertainty and increased market volatility. Therefore it makes sense that the hedge funds have been getting longer of gold.
However, rather than flattening their books or being a little more risk averse, the hedge fund have also increased the number of long positions on both the S&P 500 and the US dollar index.
The COT report shows that there are more than 4 long trades for every short of the S&P 500 and more than 5 longs for every short of the US dollar index.
The positions on the Dow Jones looks a little more cautious but they are still 2.6:1 long and haven't taken much money off the table.
There are certainly some mixed messages.
Given how close the polls are and the distinct possibility of some strong short-term selling if the Republican wins, you have to wonder why the hedge funds appear to be so risk-on.
The most obvious answer seems to be that the hedge funds are taking a longer-term view.
They seem willing to ride out the possible short-term storm and think the markets will rise whoever wins.