Commodities: Recent WTI moves are putting pressure on the massive amounts of speculative longs, platinum producers haven’t had this little of their future production hedged in five years.
Currencies: Traders are extremely short NZD/USD and CHF/USD. EUR/USD spec positioning is still quite long.
Stocks: Spec long positioning in e-mini S&P 500 futures has substantially fallen, traders are now net long VIX futures and options, bullish spec positioning in Nasdaq futures is historically low.
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. All raw data comes from the CFTC’s weekly CoT report. 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, the graph below shows that speculators are very short coffee (NYSEARCA:BJO) futures.
The opposite is true in copper (NYSEARCA:JJCB), where most traders are long.
I also like to look at net positioning converted to dollar amounts. Speculators are currently net long $2 billion of copper futures. This is a substantial drop from a few weeks ago, when copper spec positioning was near a ten-year high.
I should note that all of my positioning data includes both futures and options on futures, with the CFTC’s option positioning data being converted on a delta-equivalent basis.
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 more vulnerable to commodity price fluctuations. 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 corn (NYSEARCA:CORN) futures. Producer and user positioning has gotten less net short, implying there are fewer producers hedging by selling futures and more users hedging by buying futures.
The speculative position in corn futures and options is net long $267 million, well off the highs of $5 billion. You can see that ~$5 billion has marked a ceiling for short-term corn rallies since 2013. The recent negative price action in agricultural commodities has definitely dampened bullish spec enthusiasm.
Traders have grown progressively less bullish on feeder cattle, which is a bit strange to see as the price has drifted higher over the past few weeks. Spec positioning and price action typically move in tandem.
One of the most recent notable changes in commercial positioning can be seen in gold (NYSEARCA:BAR) futures. Producers and users went from being net short $20 billion to now being net short $9 billion, a relatively quick reduction in net short positioning. This implies that gold producers are much less willing to hedge future production at these lower price levels.
Here are the 5-year positioning percentiles for gold.
Traders are now net long $10 billion of gold futures and options, near a 2-year low in bullish positioning.
Long heating oil (NYSEARCA:UHN) is growing to be more of a consensus long trade.
Lumber has been one of the best-performing commodities over the past few years. The substantial uptrend resulted in concentrated spec long positioning.
A lot of people think you should always go the opposite of extreme speculative positioning, but I disagree. For example, a number of people were trying to fade lumber and short it during 2017. Put yourself in the mind of a hedge fund that was long lumber last year. The commodity was in a steady uptrend and there was little reason to dramatically change your positioning.
Last month was a great example of when positioning can become more actionable. Lumber started to weaken. Suddenly, there was 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 more useful framework than analyzing positioning in isolation. Diverging technicals are (typically) the catalyst that causes speculators to flip out of their crowded positioning. And you tend to get big moves when a bunch of traders run for the exit at the same time.
Traders are net short $1.5 billion of Henry Hub natural gas (NYSEARCA:UNG) futures and options, which is historically on the bullish end of the positioning spectrum.
Short covering was a contributing factor to the recent 14% spike in orange juice futures.
Platinum (NYSEARCA:PLTM) is the #1 most crowded spec short trade among all the commodity contracts I track. Speculators haven’t been this bearish on the precious metal in five years. Producers and users are on the opposite side of the trade, with a historically low amount of net short exposure. Like I previously mentioned, producer hedging tends to play a bigger role than user hedging. Less platinum producer hedging implies platinum miners have little interest in hedging future production at these prices. The “smart money” really doesn’t want to be short platinum at these prices.
I was surprised to see the increase in speculative long exposure to silver (NYSEARCA:SLV). It seems like a lot of traders piled in after the early June rally, betting on a bigger uptrend materializing. Their net spec positioning is now net long $3.2 billion, off the lows from the historically very pessimistic net positioning seen in early April.
Here are the 5-year positioning percentiles for silver.
Soybean meal is a great example of why I pay attention to CoT positioning. Two months ago it was one of the most crowded speculative long trades. The commodity immediately reversed and is now down nearly 20% since then. Crowded speculative trades, when and if they quickly turn, typically don’t end well.
Soybean oil has been in a consistent downtrend since last winter and I’m honestly surprised speculators aren’t carrying a bigger net short position.
Soybean (NYSEARCA:SOYB) producers have grown less net short.
Sugar (NYSEARCA:SGGB) is no longer a crowded spec short trade, although that doesn’t mean the commodity couldn’t continue to sustain a bid.
The net spec positioning in sugar has gone from net short $1.6 billion, which was a 12-year extreme, to net long $133 million.
Of all the agricultural commodities, bullish spec positioning has been the most resilient in wheat (NYSEARCA:WEAT) futures.
Let’s now turn to WTI crude oil (NYSEARCA:USO), probably the most watched commodity in 2018. Traders went into early July with a historically extreme net long position.
This amounted to ~$53 billion.
We all know that WTI fell ~5% in a day, and this price action definitely puts the speculative longs under pressure. In my opinion, the short-term uptrend is still intact. Any trade below $65 per barrel would likely make the long case more precarious, especially from a technical point of view.
Currency Futures Positioning
Traders are starting to get very short AUD/USD (NYSEARCA:FXA). I should note that CoT data only covers positioning on listed futures and options on futures, not positioning in the much larger spot FX markets or cash equity and bond markets. That being said, I still find CoT data to be representative of overall spec positioning.
Here’s the spec positioning in AUD/USD as a percentage of open interest. We’re close to the pessimistic levels seen in early 2016.
Similar story in GBP/USD (NYSEARCA:FXB). USD strength has led to foreign currency weakness and more consensus long USD spec positioning.
Traders are now net short CAD/USD (NYSEARCA:FXC) futures and options.
EUR/USD (NYSEARCA:FXE) is no longer a crowded spec long position, but traders are still historically bullish on the currency cross.
Positioning has quickly shifted in JPY/USD (NYSEARCA:FXY). Traders have gone from a large net long position to now being net short.
MXN/USD has been dragged lower with other EM currencies yet spec long positioning remains high. I should note that MXN/USD futures are thinly traded, so interpret the below data with a grain of salt.
An abrupt shift in currency positioning can be found in NZD/USD. Traders flipped from a multi-year high in net long positioning to a near-record net short. Traders are short nearly two-thirds of the open interest, a big position that would suffer if the New Zealand dollar started to appreciate against the USD.
CHF/USD (NYSEARCA:FXF) is the #1 most crowded short among the currency contracts I track. Traders haven’t been this short the Swiss Franc relative to the U.S. dollar over the past five years.
Stock Index and VIX Futures Positioning
Trader positioning in e-mini Dow Jones Industrial Average (NYSEARCA:DIA) futures is right in the middle of its historical range, indicating neither excess optimism nor excess pessimism.
There’s been a big reduction is spec exposure to the e-mini S&P 500 (NYSEARCA:SPY) contract. Traders have gone from a net long position of $100 billion to $54 billion in a month. Traders are still bullish, just less so than they were for most of 2018.
Spec positioning is much less optimistic in e-mini Nasdaq 100 (NASDAQ:QQQ) futures.
Traders are back to a small net long position in VIX (BATS:VXX) futures and options.
Here are the 5-year positioning percentiles for VIX futures.
This net long spec position is ~$51 million. Historically, it’s been rare for speculators to be net long VIX futures and options. I expect the “normal” level of spec positioning in VIX futures to be less net short in the future though, as the February volatility and demise of XIV made the short volatility trade less popular and accessible.
Here's an overview of how speculators are positioned in all of the commodity markets I track. WTI crude oil, heating oil, and orange juice are three of the most crowded long trades. Platinum, coffee, and lean hogs are three of the most crowded short trades.
Here’s that same metric for speculative positioning in financial futures. The US 10-year Treasury note (NASDAQ:IEF), MXN/USD, and EUR/USD are three of the most crowded long trades. CHF/USD, NZD/USD, and Eurodollar futures (the interest rate derivative, not the currency) are three of the most crowded short trades. I should note that while NZD/USD and CHF/USD are definitely crowded shorts, none of the long trades have 5-year net positioning percentiles greater than 90%, which I typically define as a threshold for extreme long positioning. Ignore the “ER2” column, it’s an error that will be fixed.
My last chart shows commodity producer & user positioning. Platinum producers and users haven’t had this small of a net short position in nearly five years. Producer and user positioning is also on the higher end in coffee and Henry Hub natural gas. Commodity producers and users aren’t extremely short any contracts.
So, what are the main takeaways from CoT data?
- Positioning is interesting in a number of precious metals. Traders are extremely short platinum, gold producers and users have significantly reduced their net short positioning, and traders have gotten more bullish on silver.
- Traders are extremely pessimistic on CHF/USD and NZD/USD, with concentrated bets on each currency falling in value relative to the U.S. dollar.
- Price action is going opposite of how traders are positioned in copper (and somewhat in WTI crude oil), two commodities that are tied to the “higher inflation” thesis.
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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.
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