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Reuters reports that the latest Commitment of Traders report from the CFTC shows a crowded short in the US dollar:

The value of the dollar's net short position rose to $34.9 billion in the week ended March 1 from $22.36 billion a week earlier, according to CFTC and Reuters calculations. It was the largest net short dollar position for which Reuters has data, dating back to June 2008.

The other side of the coin of the short USD trade has been the skyrocketing commodity price. Maryann Bartels of BoA-Merrill Lynch aggregated the COT positions for large speculators in the CRB Index and found that large speculators (read: hedge funds) are in a crowded long position in commodities.

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In the short term, the news from Libya has also served to push up oil and gold prices. We are also seeing strong momentum and funds flows from traders continuing to pile into the cyclical or reflation trade. Despite the 3% drubbing taken by Dr. Copper yesterday, the CRB Index continues to rally to new recovery highs.

Nevertheless, this kind of sentiment backdrop represent high risk conditions for the stock and commodity markets. For traders who want to stay long, I advise a high degree of risk control in order to define the level of losses you are willing to bear. Meanwhile, enjoy the party.

What I am watching for: There have been rumors circulating that Gaddafi is negotiating the terms of his resignation. If that were to happen, oil and gold prices will crater and that will remove the geopolitical noise from commodity prices.

In the event that the Libyan risk premium contracts from recent levels, what I am watching more carefully is the price reaction of the entire commodity price complex to the market environment. It's not just energy and precious metals, but how the softs, agricultural and industrial commodities react for a sign of how market expectations of global growth and inflation are developing.