Examining Crowded Positioning In Precious Metals And Currencies

Summary

Commodities: Traders haven’t been this net short gold, silver, and platinum in over a decade.

Currencies: Long USD is a very crowded speculative position.

Stocks: Traders have been quick to get short 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 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. The below data is for positioning in coffee futures (BJO).

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.

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.

I also like to look at net positioning converted to dollar amounts. Here’s that view of spec positioning in copper (JJCB). Traders are currently net short $297 million, a far cry from the net long of $5 billion they held in June.

Gold (BAR) is certainly a contrarian long trade. A 5-year net speculator positioning percentile of 0% means gold traders haven’t been this bearishly positioned on the precious metal in five years.

And here’s gold speculative positioning in dollars.

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 currently short gold. The commodity is in a steady downtrend and there’s little reason for short traders to drastically alter their positioning.

In my opinion, positioning becomes more actionable when price action goes the opposite of what people are prepared for. What if gold ripped 10% next week? Suddenly, there would be 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 more useful framework than analyzing positioning is 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.

Here’s a look at positioning in platinum (PLTM).

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 above shows the producer & user positioning (green line) in platinum. Producer & user positioning has gotten less net short, implying there are fewer platinum producers hedging by selling futures and more platinum users hedging by buying futures.

Orange juice traders are currently net long $32 million of futures and options, a relatively low amount. They were caught net short last summer during hurricane season.

Similar to gold and platinum, traders are very bearish on silver (SLV).

The speculative net short position of $989 million is a 12-year extreme.

Soybean oil producers have recently reduced their net short positioning. This implies that soybean oil producers are less willing to hedge (by shorting) at current prices, and soybean oil users are more willing to hedge (by buying).

Wheat (WEAT) is a very crowded spec long trade and recent price action has put them under pressure.

Traders are net long $42 billion of WTI crude oil (USO) futures and options.

Currency Futures Positioning

AUD/USD (FXA) has grown to be a more popular spec short. The Australian dollar is correlated to the Chinese economy and recent Chinese equity weakness has likely had an impact on AUD/USD.

Traders are net long 15% of the open interest in EUR/USD (FXE) futures and options.

NZD/USD is the most crowded speculative short position among the currency contracts I track.

Traders are net short 69% of the open interest in NZD/USD futures and options.

CHF/USD (FXF) is also a very crowded speculative short trade.

The above data shows that long the U.S. dollar (UUP) is a consensus position. The rising U.S. dollar has impacted both recent U.S. equity outperformance and commodity weakness.

Stock Index and VIX Futures Positioning

Traders are net long $67 billion of e-mini S&P 500, e-mini Nasdaq 100, and mini Dow futures and options. This is below the $132 billion of net long exposure in early February, but still quite long relative to the past few years.

Here’s the above data as a percentage of open interest.

Spec positioning in e-mini Nasdaq 100 (QQQ) futures and options remains surprisingly low.

Traders are quite long yen-denominated Nikkei 225 (EWJ) futures and options.

Speculators have lowered their net long exposure to e-mini S&P 500 (SPY) futures and options.

I’ve been surprised at how quickly traders have re-embraced the short volatility trade.

Speculators are currently net short $1 billion of VIX (VXX) futures and options. This is more than the $350 million they were net short in late January.

Here’s the percentile graph of VIX positions.

Positioning Conclusion

Here’s an overview of how speculators are positioned in all of the commodity markets I track. Wheat, heating oil, and RBOB gasoline (UGA) are three of the more crowded speculative long trades. Platinum, silver, and gold are three of the more consensus shorts.

Here’s that same metric for speculative positioning in financial futures. There aren’t any extremely crowded long trades, although traders are very short CHF/USD and NZD/USD.

My last chart shows commodity producer & user positioning. It’s been a long time since hedgers had so little net short exposure in these many contracts.

So, what are the main takeaways from CoT data?

  • Traders are very bearish on gold, silver, and platinum.
  • Long the U.S. dollar is a consensus speculative position.
  • Traders have been quick to get short volatility again.

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 and 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.