Positioning Summary: Revealing The Truly Crowded Trades

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Includes: AGQ, BAR, BNO, BOIL, CANE, CORN, COW, DBO, DBRT, DBS, DGAZ, DGL, DGLD, DGP, DGZ, DIA, DNO, DSLV, DTO, DWT, DZZ, EWJ, FXA, FXB, FXC, FXF, FXY, GAZB, GHS, GLD, GLDI, GLDW, GLL, GRU, IAU, IEF, IWM, JJGTF, JO, KOLD, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, OUNZ, PALL, PGM, PHYS, PLTM, PPLT, PSLV, PTM, QGLDX, QQQ, SCO, SGG, SGOL, SHNY, SHY, SIVR, SLV, SLVO, SPY, SVXY, SZO, TVIX, TVIZ, UBC, UBG, UBRT, UCO, UGAZ, UGL, UGLD, UNG, UNL, USAI, USL, USLV, USO, USOD, USOI, USOU, USV, UVXY, UWT, VIIX, VIIZ, VIXM, VIXY, VMAX, VMIN, VXX, VXZ, WEAT, WTID, WTIU, XVZ, XXV, ZIV, ZSL
by: Movement Capital
Summary

Commodities: Copper traders are net long $3 billion of futures and options, speculators haven’t been this net short platinum in nearly five years, and agricultural commodity producers are hedging production.

Currencies: CHF/USD is the most crowded short FX trade, traders have reduced their bullish exposure to GBP/USD and JPY/USD, and MXN/USD has been pulled down with other EM currencies.

Stocks: Traders are once again net short VIX futures, Nikkei speculators got caught on the wrong side of the market in April, and US equity futures positioning is still quite.

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 free website. Seeking Alpha is the sole source for my weekly recap articles.

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

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.

For example, in the graph below, speculators were very short cocoa (NYSEARCA:NIB) futures last summer (right as the price bottomed out) and they’ve since gotten more bullish.

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), instead 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 producer and user positioning (green line) in coffee (NYSEARCA:BJO) futures. Producer & user positioning is high, implying there are few producers hedging (by selling futures) and more users hedging (by buying futures). On the other side of the trade are speculators, who are running a net short position.

The graph below shows speculative positioning in $ terms for copper (NYSEARCA:JJCB) futures. Traders are leaning bullish, with $3 billion of net long exposure.

A lot of people think you should always go the opposite of extreme speculative positioning, but I disagree. This was a big issue with WTI in the second half of last year. Put yourself in the mind of a hedge fund that was long WTI last fall. Oil was in a steady uptrend and the trade consistently made money. There was little reason to dramatically change your positioning since the trend kept going your way.

Last month was a great example of when positioning can become actionable. WTI started to weaken. Suddenly, you had a lot of people caught on one side of the boat who needed to reduce risk by liquidating long 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.

We’re seeing a similar dynamic playing out in the corn (NYSEARCA:CORN) market. Spec positioning hit 5-year highs in May and the price of corn is down 8% since.

Gold (NYSEARCA:BAR) producers & users have steadily gotten less net short futures and options. They’re currently net short $17.6 billion. You can see in the chart below that the producer & user category rarely gets net long, which means that producer selling tends to dominate user buying. It’s also worth noting that a large amount of gold miners don’t hedge future production.

Here’s the 5-year percentile metrics for each trader category in the gold market.

It’s been interesting to see speculators get significantly less bullish as the price of gold has chopped around the past few months. This says to me that some speculators are throwing in the towel on their bullish bets. To be exact, traders are currently net long $17.6 billion, down from $33 billion in late January.

Short lean hogs is the #1 most crowded speculative trade in the commodity markets I track.

Henry Hub natural gas (NYSEARCA:UNG) traders have pared back their short exposure from net short $2.6 billion in early May.

Extreme spec bullish positioning has mostly disappeared in palladium (NYSEARCA:PALL) futures and options.

One of the most interesting positioning charts can be found in platinum (NYSEARCA:PLTM) futures. Traders are super short, nearing 5-year lows in net short positioning. Specs are much more pessimistic on platinum than gold or palladium futures.

Traders are net long $2.8 billion of silver (NYSEARCA:SLV) futures and options, a historically low amount.

And here are the 5-year percentiles for both traders and producers/users in silver.

There’s a been a substantial amount of short covering in sugar (NYSEARCA:SGGB) futures over the past few weeks. Back in early February, traders were net short $1.8 billion of futures, which was a 12-year low. They’ve since gotten slightly net long, although spec positioning is still near multi-year lows.

Wheat (NYSEARCA:WEAT), like corn, is a fairly crowded spec long trade.

WTI crude (NYSEARCA:USO) traders have reduced their net long exposure from +24% of the open interest to +20%. The graph below shows that speculators have steadily owned more of the WTI open interest as years have passed.

WTI producers are nearing multi-year highs in positioning. They’re actually slightly net long (which is rare), and this implies WTI users are interested in protecting themselves from higher prices.

Currency Futures Positioning

Traders haven’t been this net short AUD/USD (NYSE:FXA) since early 2016, when risk-off sentiment was high.

GBP/USD (NYSE:FXB) sold off ~8% in April and May and put all of the spec longs under pressure.

Positioning is mixed in CAD/USD (NYSE:FXC) futures.

Extreme speculative positioning has been a good filter to avoid crowded trades in JPY/USD (NYSE:FXY) over the past few months. Traders were quite short at the end of last year, the currency then rallied 7%, traders reversed their positioning and ramped up long exposure, and JPY has since fallen 5% against the USD. This is a good case study in why I pay attention to CoT data.

MXN/USD has been dragged down with other EM currencies, falling 11% since mid-April.

NZD/USD traders have flip-flopped from net long 50% of the OI to net short 50% since August 2016.

In my opinion, the most interesting currency positioning chart is CHF/USD (NYSE:FXF). Traders are extremely net short, which stands out because speculative positioning is leaning long in most foreign currencies.

Stock Index and VIX Futures Positioning

The chart below plots the $ amount of net speculative exposure to the e-mini S&P 500 (NYSEARCA:SPY) contract. Spec positioning is well off the January highs but is still elevated relative to the past few years.

Bullish positioning is less extreme in DJIA (NYSEARCA:DIA) futures.

Speculative positioning is downright bearish in the e-mini Nasdaq (NASDAQ:QQQ) contract.

I should note that the open interest (# of outstanding contracts between buyers and sellers) is significantly larger in the e-mini S&P 500 futures contract, hence why I assign more weight to positioning in that contract than the less popular Dow and e-mini Nasdaq contracts.

Traders got massively net short yen-denominated Nikkei (NYSEARCA:EWJ) futures in late March, before the Japanese stock index rallied more than 10%.

Traders are now net short VIX (NYSEARCA:VXX) futures and options. You can see in the chart below that CoT data pointed out just how fearful some traders got in April, resulting in historically bullish net spec positioning.

Positioning Conclusion

Here's an overview of how speculators are positioned in all of the commodity markets I track. Soybean meal, wheat, and corn are the three most crowded long trades. Lean hogs, platinum, and coffee are the three most crowded shorts.

Here's that same metric for financial futures. The e-mini S&P 500 contract, the 10-year US Treasury note (NYSEARCA:IEF), and the 2-year US Treasury note (NYSEARCA:SHY) are the three most consensus long trades. CHF/USD, the e-mini Nasdaq 100, and Eurodollar futures are the three most common short trades. I should point out that the long trades aren’t that extreme, no contract has a 5-year percentile north of 90%.

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 platinum, lean hogs, and WTI crude oil.

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

  1. Speculators are significantly long agricultural commodities like soybean meal, wheat, and corn
  2. Many foreign currencies depreciated against the USD in April and May, resulting in an unwind of crowded spec long positions
  3. Some soft commodities (sugar and coffee), platinum, and some livestock futures (live cattle and lean hogs) are the few commodity contracts where spec positioning is historically pessimistic

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 within. GraniteShares sponsors the free Commodity Seasonality website but in no way paid for this article. 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.