Commercial traders are pounding the table

Contraction is the dominant commodity market theme. We use the Commitments of Traders (COT) data to identify swing trading opportunities. Swing highs and lows are the failed attempts of new speculatively driven trends. COT data illustrates the battle between large speculators and commercial traders.

Typically, the net and total positions of both groups grow as a directional move develops until the speculative space becomes overpopulated and the commercial traders’ value-based outlook on their market is proven correct. This process has been ongoing in March, as 26 out of the 39 markets that we follow have moved into periods of contracting position sizes among the speculative and commercial trading population. 

The net position of the commercial and speculative traders has moved towards neutral in all of the metals, interest rates and energies as well as most of the currencies and the grains. Most of these markets are also very near their long-term moving averages, further adding to their collective disinterest. Finally, the pace at which both the speculators and the commercial traders have moved toward neutral far surpasses any recent market movement. Collectively, both sides seem unsure about the direction of many sectors.

The most interesting illustration of current market confusion is the disconnection between the stock market and interest rates. There has been an expansion of bullish speculative interest in the stock market and massive speculative short covering in the interest rates. Meanwhile, commercial traders just set a new net-short record position in the Dow Jones futures while offsetting much of their record long interest rate position on the recent bounce in price/drop in yields. It seems that neither the speculators nor the commercial traders have much of an interest rate forecast yet; they’re placing record wagers on the direction of the stock market. Finally, the speculative position is very near to its net, total and COT ratio records. The combination of these readings indicates the Dow Jones futures is ripe for a correction.  

The British pound is showing a widening spread and the potential energy to create a swing worth trading. Obviously, we’ve been wrong here as noted in the November 2016 issue. However, the commercial traders just set another new net-long record along with a record bullish COT ratio reading. 

Conversely, speculators appear to be gaining confidence on the short side as they set a new total position record when the pound traded below
$1.22 versus the U.S. dollar. Prime Minister Theresa May‘s handling of the Brexit procedural issues and the EU summit plan’s specifics are vital to the pound’s stabilization. It is beginning to look like a market with the bad news baked in. We expect any new flush lower is a buying opportunity as the speculators run out of gas.

Finally, a bounce would have a lot of overhead chart space to explore. The pound dropped more than 20% following the vote, and a rally halfway back from the Brexit high to the Brexit low only pushes the pound back towards$1.36, still well below long-term overhead resistance.