If there is no fear, then how is it that net speculative position on gold on the COMEX is back near an all-time high.
Okay, this really is one weird market.
I am looking at the hedge fund proxy market positioning from the latest Commitments of Traders report from the Commodity Futures Trading Commission, and the results are startling. I’m quite sure I have not seen such levels of confidence on one hand, and cognitive dissonance on the other, before in my entire professional life (and that spans 30 years).
First, there is a very large net speculative long position on the Chicago Board of Trade (CBOT) with respect to the 10-year U.S. Treasury note – a 96,007 futures and option contract net long position to be exact.
This has doubled since the aftermath of the Brexit vote, and this congestion may well be the reason why yields have stopped going down (actually up 25 basis points from the nearby lows) – the buying power has been exhausted.
The speculators have been net long the U.S. Treasury market each and every week since June 14th. Once these trapped longs exit the market, it will be safe to dip your toes back in but not likely before.
Yet, at the same time, the net speculative position on 30-day Fed funds has gone short – to 96,712 futures and options contracts from 31,600 at the end of June, so if anything, the hedge funds have become more convinced that the Fed is going to hike. And yet, they have also stepped up their long positions on the 10-year note.
Maybe they think the Fed goes, but it will be a mistake and send the economy back into a deflationary downturn.
But how can that be the case when this same “smart money” crowd has built up a net speculative long position in the S&P 500 to the tune of 28,809 futures and options contracts?
This net long position has nearly doubled since late June and you have to go all the way back to April 26th to find the last time that these folks were net short. The net speculative position on the CBOT in terms of the Dow has soared to a record 38,382 futures and options contracts.
As for the NASDAQ, the net speculative longs have nearly tripled since late June to 26,014 net speculative futures and options contracts, a level only surpassed a handful of times in the past. To say that market positioning is wildly extreme right now would be an understatement.
The “greed” factor is also highly evident on the Chicago Board Options Exchange (CBOE) where net speculative shorts on the VIX have reached 114,603 futures and option contracts, a level reached only once before. The bull market is in complacency.
But this begs the question, if there is no fear, then how is it that the net speculative position on gold on the COMEX is back near an all-time high of 326,264 futures and options contracts?
Rare is the day that record net longs here coincide with record net longs in the Dow. Ditto for silver, where the net speculative long position has soared to an unheard-of 96,782 futures and options contracts.
And yet, even with these commodities priced in US dollars, the net speculative position on the trade-weighted dollar itself is 15,560 futures and options contracts on the Intercontinental Exchange (ICE).
So you see what I mean by cognitive dissonance, right?
Long bonds, short the Fed funds futures. Long equities but long bonds. Long gold but long equities. Long the dollar and long the precious metals.
At the same time, if risk appetite is so acute, why then are these people long the U.S. market and the large caps and at the same time short the emerging market equity space (which is outperforming by the way) with a net short position of 13,319 futures and options contracts (highest in 15 months) and a net short position on the small caps (1,948 futures & options contracts on the Russell 2000 on the ICE)?
It is next to impossible to make sense out of this; I’m not even sure Graham or Dodd could if they were still alive.
And this also seems surreal with respect to the Canadian economy. An economy contracting at roughly a two per cent annual rate. More than 100,000 full-time jobs lost in the past two months. A record-high $40 billion trade deficit. Exports sagging at a 20 per cent annual rate. About 30 per cent odds of a Bank of Canada rate cut priced in. A housing bubble so pernicious that British Columbia boosted the land transfer tax to 15 per cent for non-residents. And no Olympic gold medal just yet, either.
And yet here we have a situation where the net speculative position on the Canadian dollar has almost doubled in the past five weeks to 19,237 futures and options contracts on the Chicago Mercantile Exchange.
You have go all the way back to April 5th to see the last time the “smart money” was net short the loonie. My big concern is that this money has turned a bit “dumb” on this bet.
Courtesy: David Rosenberg
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