Equities Break Out To Open New Year

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Includes: CROC, DAUD, DDM, DEUR, DIA, DOG, DRR, DXD, EEH, EPS, EQL, ERO, EUFX, EUO, FEX, FWDD, FXA, FXC, FXE, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL-OLD, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UAUD, UDN, UDOW, UDPIX, UEUR, ULE, UPRO, URR, URTY, USDU, USSD, USWD, UUP, UWM, VFINX, VOO, VTWO, VV
by: Peter Ruud

Summary

Speculators significantly increased exposure to equities.

Euro speculation remains at extreme.

Retail traders continue to buy the USD.

Speculators significantly increased exposure to Nasdaq 100 and S&P 500 futures, according to the latest Commitment of Traders (COT) report. Equity markets, meanwhile continue to ignore overbought warning signs, breaking out to fresh record highs to open the new year. Elsewhere, the EUR/USD nears yearly highs as speculation reaches yet again another bullish extreme, and retail FX traders continue to buy the greenback in anticipation of a turn despite broad-based weakness.

E-mini S&P 500 futures continue to mark fresh all-time highs despite extremely (weekly) overbought conditions. In the latest COT report, futures speculators significantly covered short positions, allowing for the net long percentage to jump to 60% from 55% a week prior. Price-action in S&P 500 futures, meanwhile, broke-out of the mild correction that took place in the final weeks of 2018, suggesting further upside while maintaining 2695 and/or the 20-day moving average to the downside.

The breakout advance in equities suggests that a blowout phase is likely forming, which typically ends in a wide ranging day accompanied with huge volume, both of which have not been seen yet. As such, equities are likely to climb the proverbial wall of worry, sprinkled in with short bouts of corrective dips, until evidence of a topping phase has materially formed.

The (trade-weighted) Japanese yen reached a new cyclical low to start the new year. The weakness was indeed reflected in the latest COT report as yen speculators shed long positions by roughly 10%, leaving an extremely (net) short that continues to hover near the largest (net) short position in years vs the USD.

Meanwhile, the retail population which had been selling JPY towards the end of 2017, began to buy late last week after the USD/JPY tested 112. If the retail population, however, resumes selling yen, there's plenty of room for speculators to buy, given only 20% of the total (non-commercial) contracts outstanding are long.

That said, while price-action in the USD/JPY remains north of the key 112 mark, technically there's a high probability of re-testing key resistance at 114.33 once key trendline resistance in the mid-113 region is cleared. If, however, the USD/JPY, manages to slice through key support at 112, then only 111.67, where two key moving averages reside, protect the 110.87/111.00 area from being re-visited to the downside.

The latest COT report revealed once again that speculative euro positioning by non-commercial traders reached another record net long position. This demonstrates that speculators remain extremely optimistic despite being overcrowded as a trade and near key technical resistance vs the USD. According to recent retail trading data, the retail population continues to sell the EUR vs the USD, taking the net percentage (of long positions) to 31%, near the extreme low of 26% seen last July.

If the EUR/USD, however, fails to clear key resistance near the 1.21 handle, it could be due to the fact that retail traders have exhausted their bearishness, which could then shift the immediate focus back down towards the 1.19 handle that serves as the most recent range's midpoint. That said, if the EUR/USD manages to close (a day) above 1.21, then momentum would quickly shift to the 1.2167/1.2266 area ahead of the 1.25 region.

The most recent COT report highlighted that the overall (net long) position in British pound futures is now stabilizing in the 55% region. The retail FX population, however, has continued to scale back their long positions, which could allow the GBP/USD to re-test the post-Brexit high of 1.3655 if this trend in sentiment persists. A clean break to new cycle highs would expose 1.3822 ahead of the psychological 1.40 handle. If, however, the key 1.35 pivot fails to hold to the downside, then the 1.3420/50 region should be exposed ahead of the 1.33 handle.

Speculative sentiment in Australian dollar (futures) has been interesting as of late. Since seeing a rather sharp adjustment in gross long positions a few weeks ago, the unwind from September's extreme (net long) positioning has seemingly continued. Despite the dramatic increase in short contracts, the Aussie has enjoyed 4 weeks of uninterrupted gains, highlighting a growing divergence between speculators and price-action. That is because, the more important development continues to be the move in retail sentiment. According to the latest retail FX positioning data, the retail trading population has brought the net long percentage (of the AUD/USD) down to 51% after reaching a 2017 peak of 76% just a month ago.

With room to go for this trend in retail sentiment, long-term technical momentum has shifted back to the upside, re-opening the psychological 80 cent handle ahead of the 2017 highs near the .8100 region. That said, if the .7900 handle is not cleared, then potential fears of a lower top could ensue, possibly shifting the immediate focus back down to .7688 initially.

Canadian dollar futures (bullish) speculation has dipped as of late, as positioning continues to unwind since recently reaching the highest level of net longs (by percentage) over the past 5 years. The important trend in sentiment, however, involves the retail traders once again. According to recent FX data, the retail population continues to sell the CAD vs the USD, bringing the net long percentage down to 39%.

The USD/CAD, meanwhile, ended the first week of 2018 by thrusting lower towards the bottom half of the range that has persisted since September. A clean break below 1.2387 would indicate another key technical shift that could expose last year's lows in the 1.21 region.

Gold futures (bullish) sentiment continues to improve since early-December's modest correction. According to the latest COT report, the number of (gross) long contracts increased by 20%, but was tempered slightly by a 12K bump in gross short contracts. As a result, net longs inched up to 76% (as of January 2nd) from 75%, the week prior. Meanwhile, Gold futures continued to recover for the 4th straight week, coincidentally as the retail population continues to sell the yellow metal uninterruptedly in the same time span.

Although, retail optimism has neared last August's extreme low, from a technical perspective, there's very little resistance ahead of the 2016/2017 highs in the 1355/75 region. A clean break of 1307 to the downside, however, would likely highlight a long-term bear trendline which could further delay strength and shift the immediate attention to 1291 initially.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.