Silver Bullishness At 12-Year Low

by: Movement Capital

Commodities: Silver traders have a historically low amount of long positioning, speculators reduced their long exposure to copper futures, and soybean meal producers and users are very net short.

Currencies: Traders significantly cut their long CAD/USD exposure, JPY/USD flipped from a crowded short to a crowded long in three months, and dealers are heavily short NZD/USD.

Stocks: Speculators haven’t been this net short Nikkei futures in a decade, are still quite long S&P 500 e-mini futures, and are net long $1.5 billion 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.

Commodity Futures Positioning

I've been surprised to see speculators not add to more of their long exposure in cocoa (NYSEARCA:NIB) futures. The chart below shows my favorite metric for commodity positioning. It takes the net (long-short) position for each trader category, scales it by the market's open interest (total # of outstanding contracts), and normalizes that net position as a percentage of open interest (OI) into a 5-year percentile.

If my indicator is at 100%, it means the net position for that trader category (as a % of OI) is higher than it has ever been over the past five years. If it's at 0%, it means their position is the lowest it's ever been over the same time frame. This way, I have a single indicator to compare the positioning between markets of totally different sizes.

This 5-year percentile metric pointed out the extreme speculative net short position in cocoa last summer. Cocoa has since rallied ~40% year-to-date and I fully expected to see a massive amount of speculative long positioning. That's not the case though, and spec positioning is relatively neutral relative to the last five years.

The other trader category I look at is producers and users, sometimes called "commercials". Producers and users don't trade to make a profit (like speculators), but 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 in the futures markets 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, 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.

The chart below shows the raw producer and user net position (as a % of OI) for cocoa. Last summer they were actually net long, implying there were few producers hedging (by selling futures) and more users hedging (by buying futures).

Traders are extremely short coffee (BJO) futures. A lot of people think you should always go the opposite of extreme speculative positioning, but I disagree. Put yourself in the mind of a hedge fund that's short coffee. The trade has made money for more than a year since the price of coffee has steadily trended lower. There's little reason to dramatically change your positioning if the trend keeps going your way.

What if coffee gapped up 10% next week? Suddenly, you'd have a lot of people caught on one side of the boat who need to reduce risk by liquidating short positions. 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. So for coffee, pay attention to any future price strength.

Positioning has quickly been changing in copper (JJCB) futures. Speculators have reduced their net long positioning and producers have reduced their short exposure.

Here's another way to examine the net spec position. Traders have gone from net long $5 billion to net long $2 billion in around a month's time.

Corn (NYSEARCA:CORN) has grown to be a more crowded speculative long trade. Recent down moves in agricultural commodities due to tariff talk are putting those with long positions under pressure.

In $ amounts, corn traders are net long $3 billion worth of futures.

Gold (NYSEARCA:BAR) traders recently raised their long exposure. Positioning is below the summer 2016 highs but is still elevated relative to the past few years.

Gold producers & users are net short $23 billion worth of futures contracts.

In $ terms, gold traders are net long $31 billion.

Positioning is getting stretched in lean hogs. Commercial producers are relatively unhedged and speculators are very short.

The price of lumber is up more than 130% since September 2015. This massive trend has definitely drawn in a ton of speculators, although like I said above, extreme long positioning (by itself) isn't actionable information.

Traders are net short $1.7 billion of natural gas (NYSEARCA:UNG) futures. Positioning is leaning long relative to the past few years.

The crowded speculative long trade in palladium (NYSEARCA:PALL) has been under pressure. Similar to lumber, palladium has been one of the highest performing commodities over the past few years.

Speculative long positioning in silver (NYSEARCA:SLV) futures hasn't been this low in 12 years. Their net position is long $532 million of futures, a historically low amount.

Soybean meal is the second most crowded long trade among traders in commodity futures (right behind WTI crude oil).

CoT data showed just how extreme commercial positioning in soybeans (NYSEARCA:SOYB) was in January. They were actually net long, which implies few soybean producers wanted to hedge future production at January's low prices. Soybeans rose 10% shortly after the highs in commercial positioning.

Traders are extremely short sugar (NYSEARCA:SGGB).

Their net short position is worth roughly $1.6 billion.

These last commodity positioning charts of WTI crude oil (NYSEARCA:USO) are probably the most important of all. Traders are super long WTI futures.

The $ amount of the net speculative position is north of $50 billion.

As a percentage of open interest, traders have never been more net long. In the chart below you can see how commodities have become more of a financial asset over the last decade. Speculators have steadily controlled more of the futures open interest.

Currency Futures Positioning

Speculators haven't been this net long GBP/USD (NYSEARCA:FXB) futures in 3.5 years.

Traders significantly reduced their long exposure to CAD/USD (NYSEARCA:FXC) last week.

Long EUR/USD (NYSEARCA:FXE) is still a very crowded trade among speculators.

One of the biggest recent shifts in positioning has been in JPY/USD (NYSEARCA:FXY) futures. In early January they were extremely net short. The Japanese yen has appreciated against the USD since then, catching a bid since it's a safe haven asset and financial markets have been more volatile over the past two months. Positioning is now extreme in the other way, with long JPY/USD being a very consensus long trade.

Long MXN/USD is no longer a crowded trade.

Dealers are now very short NZD/USD futures. The last time this happened was in August of 2017, and NZD/USD fell -8% over the next few months.

Stock Index and VIX Futures Positioning

Traders started the year net long $79 billion of S&P 500 (NYSEARCA:SPY) e-mini futures. This increased to a peak of $119 billion in early February, and is now presently $92 billion. I'm surprised this amount didn't decrease more. There's still a huge amount of speculative long exposure to US equity index futures.

Speculators are much more bearish on Nasdaq (NASDAQ:QQQ) futures, but I should mention that Nasdaq futures are significantly less popular than the previously mentioned S&P 500 e-mini contract.

The chart below aggregates the speculative net position between S&P 500 e-mini, Nasdaq 100 e-mini, and Dow Jones Industrial Average (NYSEARCA:DIA) e-mini contracts. It's extremely similar to the first chart in this section, and that's because S&P 500 e-mini futures are the dominant contract.

Traders reversed their positioning on Nikkei (NYSEARCA:EWJ) futures.

They haven't been this net short in 12 years. The magnitude of this positioning move relative to the price action is rare.

Positioning in Russell 2000 (NYSEARCA:IWM) futures isn't as crowded on the long side as it is in S&P 500 e-mini futures.

Positioning is now extreme in VIX (NYSEARCA:VXX) futures. Traders have increased their long exposure and dealers are adding to their shorts.

Speculators are net long 19% of the open interest in VIX futures. They've rarely been net long.

Open interest has dropped by 300,000 contracts since February, which is a result of the changes in the VIX ETFs and ETNs.

In $ terms, VIX traders are net long $1.5 billion. This is an eight-year high and is a historically significant amount.

Positioning Conclusion

Here's an overview of how speculators are positioned in all of the commodity markets I track. WTI crude oil, soybean meal, and lumber are the three most crowded long trades. Sugar, silver, and lean hogs are the three most crowded shorts.

Here's that same metric for financial futures. JPY/USD, EUR/USD, and VIX futures 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 soft commodities like sugar, coffee, and orange juice.

So, what are the main takeaways from this week's CoT data?

  1. Speculators have historically extreme long positioning in both JPY/USD and VIX futures, meaning risk-off futures positioning has grown more consensus.
  2. Short the U.S. dollar is a contrarian trade. Traders are very long JPY/USD, EUR/USD, NZD/USD, and GBP/USD - all betting on those currencies to appreciate against the USD.
  3. Long silver bullishness has rarely been this low.

Follow me on Seeking Alpha to stay up to date on positioning in the futures markets. If you have any questions about CoT data, don't hesitate to ask me in the comments below!

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.

Additional disclosure: The author does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked in this article or incorporated herein. This article is provided for guidance and information purposes only. Investments involve risk are not guaranteed. This article is not intended to provide investment, tax, or legal advice. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.