Before And After: About Those “Consensus” Trades

Ever since oil took a dive last week as the market suddenly decided it was time to price in bearish fundamentals, we’ve been curious to discover the extent to which the massive spec long in crude was trimmed.

As we wrote two days ago…

The question now is what the picture will look like come Friday when positioning data is released for the week ending Tuesday. Or, put differently, how will the following charts look once we get a read on how much smart money ran screaming to the exit after finding out that it’s not a good idea to try and swing on a speculative limb when the weight of your collective position is likely to break said limb…

Well now we have our answer. Specs pared their net longs in oil by 75K contracts in the week through Tuesday. That comes on the heels of a week in which that same net spec long was trimmed by 31K contracts. Or, visually:

(Deutsche Bank, CFTC)

So that’s not exactly a mass exodus, but it’s not exactly trivial either.

Now think back to last Thursday. In “‘Wait For Iiiit….’ Crude’s Epic Collapse Is Warning Sign For Another Massively ‘Consensus’ Trade” we asked a very simple question. To wit:

Are all those Treasury shorts going to learn anything from everyone who was massively long crude?.. pic.twitter.com/4BNbFDzRKy

— Heisenberg Report (@heisenbergrpt) March 10, 2017

We used that rather amusing clip to illustrate the juxtaposition between the spec long in crude and the price collapse as follows:

And then we used the same clip to illustrate the setup for the three-sigma short in the belly of the curve:

Well, see the chart in the bottom pane? Yeah so this is what happened on Wednesday after the Fed’s “dovish” hike:

Friday’s CFTC data partially answers the question we posed in the above cited tweet. That is, “did Treasury shorts learn anything about the perils of crowded trades from the huge long specs amassed in crude prior to collapsing oil prices?” Well, sort of. But sort of not. Here’s Deutsche:

Speculators decreased their net shorts in aggregate Treasury futures by 14K contracts in TY equivalents, led by short covering in FV and TY of over 54K and 104K contracts, respectively.

However, they were more bearish in other futures, selling 27K contracts in TU and 32K contracts in US and WN.

Spec shorts as share of open interest was little changed at -8.9% and remained at about -3.1 standard deviations away from neutral.

Specs also got shorter in Eurodollar futures by 90K contracts, taking net shorts to new record of 2,980K contracts for the fifth straight week.

Take away from that what you will, but just remember, that was before the Fed.

So next Friday we’ll be in the same position with the Treasury short that we’re in today with the crude long. That is, assessing the extent to which a significant price move in the opposite direction of the crowded trade prompted an swift unwind.