Is Something Big About to Happen?

David Rosenberg notes the incredible lopsided trading environment. The dollar short/long equities trade has become the no-brainer trade and is beginning to appear crowded. David notes:

Looking at the latest Commitment of Traders (COT) report, we can see some pretty interesting (and potentially disturbing) trends taking place (data for November 3rd):

• The only areas where the speculators (non-commercial accounts) are net short are in Treasuries and in the U.S. dollar. Everything else has massive net speculative longs and hence near-term vulnerable to a reversal.

• There is still a NET speculative short position in both the 10-year Treasury note of 85,551 contacts (on the Chicago Board of Trade). There are 95,648 net short contracts on the long bond too.

• But there are 29,608 net LONG positions on the 30-day Fed funds contract —down from the highs, but it means that Fed tightening is completely off the radar screen. At the same time, there are 152,311 net longs on the 2-year Treasury note, so it would seem as though we have a crowded trade among the speculators on a bear curve steepening trade.

• There is a significant net long position on the S&P 500 to the tune of 208,448 contracts on the Chicago Mercantile Exchange (CME).

• There is also a huge net speculative short position on the U.S. dollar (the ‘carry trade’). For example, on the CME, we have 24,389 net speculative long CAD positions; 50,264 net speculative long contracts on the Australian dollar, and 28,036 net longs on the Euro. These are huge numbers. What happens if/when the U.S. dollar ever undergoes a countertrend rally?

• The largest speculative long positions are in the commodity space (this is near-term bearish) … 271,564 gold contracts (a record) on the Commodity Exchange (COMEX); 44,312 net longs on silver (near-record but not quite), West Texas Intermediate oil contracts on the New York Mercantile Exchange (also a record); 10,871 net long copper contracts (a new cycle high); 5,538 net speculative long contracts on the Goldman Sachs Commodity Index.

Who knows how long the short dollars/long equities trade can go on, but I know when a trade is this crowded it’s generally best to step to the side and let the speculators have their fun. These sorts of lop-sided trading environments rarely end well.

Comments

[woollyB:]

Those numbers certainly comport with the consensus that the dollar can only fall and gold can only rise. Given that the the consensus is always wrong, the next big move looks pretty clear.

Nov 10 04:26 PM

[richjoy403:]

I too read David Rosenberg (B-fast w/Dave)...I understand that he is negative on the economy and stock market (the macro view), and I read him so as to stay aware of the potential results fromr believing we are headed for la-la land.

However, I am also struck by how he manages to find something negative to say about the most positive stats.

On the whole, I think he is one-deminsional, praying that the bottom falls out so he can say...I told you so!...and collecting the worldwide recognition for calling the fall.

Nov 10 04:42 PM

[schlumpf:]

They believe this time is different................
and then pop.

Nov 10 04:49 PM

[twitee:]

Why anyone is surprised on the one sided direction of the market. The market has not made any sense since the March 9 low.

The more bad news the higher the market goes. By now you should realize that the Central bankers are in control with the most amount of free money ever.

The FED is in charge of making sure we would not fall into the deflation spiral like Japan.

The only way to deal with over 600 Trillion (with a "T") outstanding derivatives and CDS around the world is to just pretend it did not happen and try to inflate our way to borrow another 10 years or so time.

We are in the Dollar Carry Trade era. The exworld resurve currency is being used as an instrument to create more bubbles around the world with funny money..... Stick with Gold for a long run as an insurance ......

Nov 10 05:33 PM

[ryanclarke:]

Wall Street needs to get 'stupid' retail investors into this market. They are having a tough time doing so ... don't look for GS or JPM to pull the rip cord until Aunt Mary says everything is OK and takes her pennies out of her bank account and buys some GOOG and APPL ... if the market does shoot past 1120 on the S&P look for the mania to last for about three months ... with the next ticker shock sometime in April when the banks all say everything is clear and steady but the retailers tell everyone Christmas wasn't good at all.

Nov 10 07:20 PM

[bob adamson:]

Thank you for this perspective, The Pragmatic Capitalist. The case David Rosenberg makes is strong but would be much stronger after eight months of dramatic stock market increase if this were any time but the present. Put another way, try to visualize any eight month period in living memory except that since March and ask what the general mood would be if the S&P 500 had increased from 666 to 1100. The general mood would be extremely buoyant and the market consequently probably overbought. What is going on now, therefore?

Arguably the answer is that the back-story we all focus on now is not the eight month dramatic recovery of stock market prices but rather the traumatic drops preceding March of this year (particularly the plunge of October 2008). Might not the nature and depth of this pessimism (unique as it is in comparison to earlier states of market sentiment) mean that it and the current recovery in stock prices will last longer (well into 2010 possibly) than Rosenberg assumes quite reasonably based on earlier experience since the end of WW II.?

Obviously all predictions (mine certainly included) are merely surmises on all our parts and each of us will want to keep a close eye on day to day developments and trends. The only thing that can be said with reasonable assurance is that the current situation is unique in the experience of us all.

Nov 10 07:42 PM

[The Economi...:]

....You really have zero clue. Bravo.

On Nov 10 05:33 PM twitee wrote:

> The market has not made any sense since the March 9 low.

Nov 10 10:03 PM

[Roger Knights:]

In the old days, when exchange rates were fixed, or had central bank backstops, bets against those currencies by speculators could become very overcrowded--and yet the speculators won in the end. Isn't it possible that the same thing is going on here in some of the overcrowded positions, with (for instance) speculators betting against the artificial support being provided to Treasuries by the Fed? Isn't it likely that they will win the bet?

Nov 12 12:24 AM