Traders Are Massively Short These Commodities
Summary
- Traders are extremely short platinum, cocoa, and coffee futures. Cotton and WTI crude have been recent examples of how crowded positioning can violently unwind.
- EUR/USD and MXN/USD are very crowded on the long side. Speculators were caught off guard with their CAD/USD shorts.
- Spec positioning in the S&P is long, but not extremely so. Traders have steadily grown less short of VIX futures.
Note: My approach for analyzing CoT data to reveal how different types of traders are positioned in the futures markets is outlined here. If you missed it, give the article a read to see the method behind my analysis. All data and images in this article come from my website.
This article outlines how traders are positioned and how that positioning has recently changed. I break down the updates by asset class, so let's get started.
Commodities
Traders haven't been this net short cocoa (NIB) futures in five years.
Crowded short positioning, which I define as a 5-year percentile of net positioning as a % of OI < 10%, isn't simply a reason to go long. Traders who are short cocoa have zero incentive to exit their positions as long as the trend keeps going their way. If the price of cocoa were to reverse, then that might be a reason for concern. This is because you would start seeing a large number of people heading for the exits (to close their shorts) at the same time. I call this a "fire in the theater" situation.
Similar positioning can be seen in coffee (JO) futures. Coffee producers have rarely had so little of their future production hedged. This can be interpreted as a bullish signal - they're anticipating higher prices and don't want to "lock in" currently low prices.
Cotton (BAL) recently provided a good example of what can go wrong when speculators bite off more than they can chew. Back in March they established a massive long position. The commodity has now fallen ~13%, and longs liquidating their positions has likely exacerbated the selling.
Here's how traders are positioned in gold (GLD) futures.
Platinum (PPLT) miners are hedging relatively little of their future production.
WTI crude oil (USO) bounced in 2016 around the current level of spec positioning. Notice how the extreme CoT reading in late February of this year was a great signal to avoid long exposure.
Currencies
The Canadian dollar (FXC) has recently rallied against the USD as the central bank adopted a more hawkish tone. It was strange to see the BoC hike rates since Canadian inflation has trended down. This has taken speculators off guard since the consensus position was to short CAD/USD.
Now that most USD (UUP) bulls have been stopped out, I wouldn't be surprised to see some relief in the selling pressure.
EUR/USD (FXE) has grown to be a massively popular trade among speculators.
Traders are also heavily leaning to the long side in the Mexican peso (FXM).
Stocks
Spec positioning in the S&P (SPY) has steadily trended up as the bull market has remained intact. We're still a bit away from levels that would indicate extreme positioning.
It's been interesting to see traders cover their short exposure in VIX (VXX) futures. You wouldn't be able to tell this from a chart that only showed nominal net positioning levels. It's important to adjust positioning data for the growth or contraction in a market. I wrote more about this here.
Traders removed a ton of long exposure to Nikkei (EWJ) futures a few weeks ago. It should be noted that this is a relatively illiquid contract.
Conclusion
Here's a final overview of how speculators are positioned in all of the commodity markets I track:
And here's that same metric for financial futures:
So what are the main takeaways from this week's CoT data? Two things:
- EUR/USD and MXN/USD are both extremely crowded long trades
- Commercial producers have hedged very little of their future production in three soft commodities: cocoa, coffee, and sugar
If you have any questions about CoT data, don't hesitate to ask me in the comments below.
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