We’ve written quite a bit over the past several months about the importance of watching the weekly CFTC positioning report (always released on Friday afternoon and current through the previous Tuesday).
What’s particularly amusing is the extent to which it’s been a pretty goddamn reliable contrarian indicator of late.
Recall that in March, a massive net long in crude was hit with a reality check during CERAweek, catching a lot of folks offsides. And last Friday, when the latest CFTC data hit, we learned that specs had covered the entirety of their 10Y short on the way to building the biggest long position since 2008 on the heels of an extended rally in Treasurys.
Oh, and don’t forget what was perhaps the most hilarious example of extended positioning gone wrong: the Russell 2000 short which got blindsided by the risk-on sentiment that accompanied the market-friendly outcome of the first round of the French elections.
On Tuesday, we noted that net spec length in crude is now low enough that it might presage a rally, although that notion was undercut by a certain Saudi prince and bearish EIA data out Wednesday morning.
It’s in this context that we present the chart of the day, which comes courtesy of SocGen.
So this is an indicator of positioning-related news flow plotted against an indicator that measures only commodities-related positioning news flow. As SocGen notes, this would certainly seem to suggest that “positioning has become increasingly important in commodity markets.”
Perhaps the most widely followed area of the COT report is the net speculative position of the Money Manager (MM) category. This group is also commonly referred to as the “funds” or “hedge funds” category. Reports referring to hedge funds being record long crude oil for example, are typically using MM positioning data.
Market participants care disproportionately about the MM category for several reasons: hedge funds are often considered “intelligent” investors, such that their positioning is used as an indicator of price direction. Hedge funds can hold large and leveraged positions, which means their trading activity can have a significant price impact. Furthermore, as they do not go to physical delivery, this means that large positions are often more critical than equivalently large consumer or producer positions, as the positions must either be closed out or rolled prior to expiry.