Why the max pain trade is always down

Forget options and hedges, look at it from this angle…

A simple concept, and yet this idea makes a lot of sense. The following is a quote (lightly edited for clarity) from a Lead Lag interview with Le Shrub. The entire video is excellent, definitely worth a watch. That being said, here’s the part that concerns us.

I kept reading about bearish positioning, bearish positioning, bearish positioning, and it was like, well hold on. No. Real money has been invested, and it’s stayed invested. Now the second data point is that the commercial specs are the biggest net short that they’ve been in a while.

So 260,000 contracts and everyone is saying that the market is the biggest net short but, well, the difference is that the stock market cap is about $50 trillion dollars. So when you’re looking at the net short on the S&P, it’s like, $50 billion. That’s why the pain trade is usually always down! If you have $50 trillion worth of wealth, who cares what the hedge funds do?

For the vast majority of market participants, the biggest pain trade is down. That seems fairly obvious in retrospect, but I didn’t put the pieces together until Le Shrub made his case. I can tell you that personally, all of my friends and family members are unhedged long. It hurts when number go down. Hedge fund XYZ might make a killing on their puts, but everyone else is stockpiling ramen and cancelling their vacation plans.

Every Sunday I publish a recap of all the investing articles and YouTube videos that have really made me think… Here’s 👉 the latest edition.