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
Let's start with a deep dive into WTI crude oil (USO) positioning. Traders are currently net long $48 billion of futures. WTI crude fell 18% in early 2017. During this period, speculators reduced their net long positioning from $32 billion to $17 billion. It makes you wonder just how negatively price would be impacted if all the current longs ran for the exits at the same time.
Traders are net long 24% of the open interest in WTI. Open interest measures the total number of outstanding contracts between longs and shorts, so think of it as a metric for the size of a futures market. You can see below that the speculator share of open interest has trended up over time, meaning speculators are controlling more of the market. This is for a variety of reasons and the phenomena isn't unique to WTI. Commodities have become more "financialized" since the mid-2000s, meaning non-commercial speculators have started to play a bigger role.
The chart below shows my personal favorite metric for commodity positioning. It is based on the orange line above (net position as a % of open interest), but normalizes it with a 5-year percentile. 100% = the net position as a % of OI is higher than it has ever been over the past five years, 0% = the lowest it's ever been over the same time frame. As you can see, traders haven't been this bullish on WTI in five years. Being long WTI crude oil is a very consensus trade.
Positioning in sugar (SGG) tells a different story. Traders are extremely net short.
So far I've only talked about how traders are positioned. Commodity producers and users are the other main trader category I track. Producers and users don't trade to make a profit (like speculators), they trade to hedge their price risk. Producers hedge by selling futures to lock in prices for their future production. Users hedge by buying futures to lock in prices for their future inventory needs.
Most of the time producers play a bigger role relative to users. This is because some commodity users can easily pass price increases on to the next company in the supply chain. But commodity producers typically have high fixed costs and are vulnerable to commodity prices falling and making their entire quarter or year unprofitable.
So if producers and users as a group have a historically bullish position on, you can infer this means there's less hedging by producers and more hedging by users.
This happened a few weeks ago in soybean (SOYB) futures. Soybean producers and users were historically very bullish, even reaching a slightly net long position (which is rare). Soybeans are now up 7.5% since.
Positioning looks quite different in soybean meal, where speculators are extremely long.
Speculative positioning in silver (SLV) is getting interesting. Traders were net long as much as $10 billion of futures last April, now they're down to a net long position of $1.5 billion.
Here is my main CoT metric for silver.
Traders are still very long palladium (PALL) futures. Which is what you'd expect, the commodity has risen 100% off of the 2016 lows.
Speculators recently added on some short exposure in natural gas (UNG).
Lumber prices have gone parabolic.
Traders are net long 30% of the open interest in gold (GLD) futures.
This is on the high side, but below the positioning extremes reached in the summer of 2016.
Gold producers & users are net short $24 billion of gold futures. It's interesting to see gold hedgers more bearish now relative to summer 2016 levels, and speculators less bullish.
We're witnessing a positioning reversal in corn (CORN) futures. Traders were net short $2 billion in late January, now they're net long $2 billion.
Like in WTI crude, speculative long positioning is historically extreme in copper (JJC).
Traders are net long $4.3 billion, and they're likely crossing their fingers the USD doesn't reverse higher.
Currencies
NZD/USD is no longer a crowded spec short trade. Traders covered as the New Zealand dollar appreciated against the USD.
Traders are still very long MXN/USD.
Rapid short covering has recently taken place in JPY/USD (FXY). The Japanese currency is typically viewed as a safe haven and caught a bid during the recent volatility.
Here's another view of JPY/USD positioning. Traders went from near-record net short levels to now a net position that's basically flat.
EUR/USD (FXE) has been a crowded speculative long trade for a while. A lot of traders think you should go the opposite of extreme speculative positioning. I disagree. Put yourself in the mind of a hedge fund that's long EUR/USD. The trade has printed money for nearly a year, and the trend has only gone one way - up. There's little reason to dramatically alter your positioning.
But, what if EUR/USD went down 5% next week? Suddenly you'd have a lot of people caught on one side of the boat who need to reduce risk by liquidating long positions. So I personally think crowded positioning + diverging technicals (when price action goes the opposite way of how people are positioned) is a useful way to think about it.
EUR/USD has weakened over the past few trading sessions, but not so much that I'd consider the uptrend broken.
Traders are also very bullish on CAD/USD (FXC).
Traders are more net long GBP/USD (FXB) than they were during 2016's Brexit vote.
AUD/USD (FXA) is less crowded on the long side than EUR/USD or CAD/USD.
Stocks
Positioning in VIX (VXX) futures has shifted after the huge changes to the volatility product landscape.
Traders are now net long $280 million of VIX futures.
Open interest in VIX futures has decreased to 425,000 contracts from 614,000 contracts just a few weeks ago.
Here's the speculative net position as a percentage of open interest.
Traders are still very long S&P 500 (SPY) e-mini futures.
Traders are net long $95 billion across the S&P 500, Nasdaq (QQQ), and Dow Jones Industrial Average (DIA) e-mini contracts.
Bullish spec positioning has decreased in the yen-denominated Nikkei (EWJ) futures.
This might be my most surprising graph this week. Traders are actually more net short Nasdaq futures than they've ever been in five years. This is in stark contrast to how they're positioned in the S&P.
The shift in sentiment wasn't as drastic in the Dow Jones Industrial Average e-mini contract, but speculators definitely took off some long exposure.
Conclusion
Here's an overview of how speculators are positioned in all of the commodity markets I track. WTI crude oil, soybean meal, and copper are the three most crowded long trades. Coffee, sugar, and silver are the three most crowded shorts.
Here's that same metric for financial futures. EUR/USD, CAD/USD, and the S&P 500 e-mini are the three most crowded long trades.
And here's aggregate data on commodity producers and users. It typically looks like a mirror of speculative positioning. Producers and users are positioned for higher prices in some soft commodities like coffee and sugar. Overall though, hedgers are leaning short in most commodity contracts.
So, what are the main takeaways from this week's CoT data? Three things:
- Traders are extremely long WTI crude oil and copper. Both commodities have benefited from an inflationary global growth narrative, and if sentiment were to turn there's a lot of money that could be caught on the wrong side of the trade
- EUR/USD and CAD/USD are the two most crowded speculative trades among the currency contracts I track
- Traders are net long VIX futures, which happens very infrequently
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If you have any questions about CoT data, don't hesitate to ask me in the comments below.
