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Rosenberg Scours Commitment Of Traders Report, Finds Clues On Navigating The Market
THE LONG AND THE SHORT OF IT
Following the Fed’s first strong hints at QE2 in late August, we saw some wild movements in terms of market positioning across a variety of asset classes. These swings are highlighted in the weekly Commitment of Traders report, which we have discussed in the recent past. While fundamentals, valuation and technicals are all key in determining the direction of asset prices, how investors are positioned is no less important and right now, there is still an extreme level of speculative activity in some cases that is set to unwind as the risk-on trade fades away.
There was a tremendous amount of ebullience over the outlook, beginning in late August, and while some of the data have looked a little better, there is still a list of lingering concerns deserving of a higher, not a lower, risk premia, and in a word it comes down to discord, policy discord, to be precise. Discord within the Fed (Warsh torpedoes any plan for another round of quantitative easing). Discord within Congress (a deal over the Bush tax cuts is still wanting). Discord at the G20 (nothing concrete coming out of the meeting; 17 of the 20 members are not supportive of current U.S. economic policy — see Obama Tries to Repair Damage on page A9 of the WSJ).
Discord over trade issues (the planned U.S.-Korea trade pact was scuttled). Discord within the euro area (see Ireland Stirs Specter of EU Default and Euro-Zone Growth Data Underline a Widening Gap on page A7 of the WSJ).
Of course, there is also this issue of China feeling compelled to fight a food-led inflation surge by tightening monetary policy. This has implications for the commodity complex that may not be so favourable over the near-term. The strong likelihood that this was Bernanke’s last kick at the can means that whatever QE3 expectations being priced into the market (and that is the only way anyone can explain the blowoff following the QE2 announcement, which should not have come as a big surprise) is now in the process of being unwound. Moreover, the chances that a lame duck Congress reaches an agreement on taxes and jobless benefits is not 100%, which Mr. Market had believed at the recent S&P 500 peak.
So, it may pay for the time being to avoid the areas of the market where net speculative long positions exist and is in the process of unwinding. Long covering is a critical source of selling pressure.
- Equities: There are currently 5,780 net long contracts on the Chicago Mercantile Exchange (CME).
- Oil: There are a near-record 208,226 net long contracts on the NY Mercantile Exchange.
- Gold: There are a near-record 253,528 net long contracts on the Commodity Exchange (COMEX).
- Copper: There are a near-record 25,139 net long contracts on the COMEX as well.
- Silver: Not a record or a near-record but still a significant 42,556 net long contracts on the COMEX.
- Australian dollar: 49,743 net long contracts on the CME.
- Canadian dollar: Not as large as Aussie but still high net speculative long exposure, at 21,579 contracts.
- Euro: Huge net speculative long position of 35,879 contracts on the CME.
- The 10-year Treasury note: It now has a net long position of 15,781 contracts on the Chicago Board of Trade (CBOT).
- The 5-year T-note: It is most exposed with a net speculative long position of 167,729 contracts — of course, this is the part of the curve the Fed is targeting.
- The 2-year T-note: It commands a net speculative long position of 43,220 contracts even with a yield that recently was 30 basis points north of zero.
- The 30-year bond: It is the only maturity with a net speculative short position — of 1,917 contracts.
- Volatility: With the risk-on trade in full force for the past two months, the VIX futures has a net speculative short position of 13,345 contracts, which is at the high end of the historic range.
So, here’s how one would construct a strategy to take advantage of the prospect that we are now beginning to see as these speculative positions reverse course:
- It would involve a flattener in the bond market;
- Although we are still long-term bullish on the commodity space, looking at the position in the COT report, selling calls for protection in the commodity space could be a sound strategy. Expect silver to outperform gold still;
- Going long the U.S. dollar against the euro, but within the resource-based units, look for the loonie to outperform the Aussie;
- Look for the S&P 500 to now trade down to the low end of the 14-month long 1,000-1,200 range;
- Buy volatility, which is inexpensive and underexposed on the CBOE, which is bullish.
As for bonds, the Commitment of Traders data show the long bond to be under-bought, and as such, ripe for a rally, especially seeing how high the yield gap is between it and the rest of the Treasury curve. The 5-year Treasury is quite expensive at current levels and even the 10-year is still vulnerable near-term given its net speculative long position and the fact that it is just 3bps away from a technical level that could well set the stage up for a return to 3%-plus yields, which would be a wonderful buying opportunity. There is not a whole lot of fundamentals here behind these moves — the moves of the past week and likely ones in the next few weeks.
The asset classes are merely unwinding the excess risk-on trades and pricing out the chances that QE3 will ever see the light of day. Yes, this is what the market was starting to think since Bernanke left the door open for more in the press statement, but we are finding out ex-post that the Fed chairman has less support around the table than was generally perceived. When Governor Warsh basically comes out and says that he supported Bernanke only because he wanted to be seen as a team player suggests that any further experimentation with the Fed’s balance sheet will not be met with just one dissent from Tom Hoenig. While Martin Wolf did make some good points in the FT last week supporting the Fed, one has to wonder how the Fed’s balance sheet is going to be exposed to huge losses if bond yields ever do back up. I mean, this latest round of Fed bond buying occurred with the yield on the 5-year note at 1.1% and the 10-year yield at 2.4%.
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Sort of useless....Rosie isn't a trader. Where's the change in the net longs...month to month over a time series. This info in a vacuum is not really helpful. Utmost respect for Rosie's analysis. I won't trade off him though.
"Gold: There are a near-record 253,528 net long contracts on the Commodity Exchange (COMEX)."
So what ? Wouldn't that be expected with a nation $13t in debt ????
Agree.
We may have record net longs in gold and oil, but then again we have record lunacy in money printing... and PIIGS at the trough.
When Rosie speaks, we all listen: it is economic reality and an ethics of destitution that speaks through him. But as far as taking trading advice from Rosie: it subtracts the fact that the market is currently running on a high level of illusion. The question for those who want to fade the rally is when will Rosie's brand of reality catch up with the market?
Indeed, Rosie's relatively dismal reading of the economy has been in sharp contradiction to what the market actually did.
Though I appreciate the rigor of his research and his detailed analysis, people would have lost money betting on Rosie for the past two years.
The fact is, throwing $800B of hot Fed money at the markets, when the economy is fundamentally unsound actually supports the opposite of what Rosie is saying. Bubbles will inevitably be created because it would be unwise to invest across the general economy, and instead only a few channels that are going parabolic.
Also, silver does indeed appear to be a decent play, given the recent past when it almost reached $30, and the tightness of the market.
All naysayers are part of the illusion. I feel like Jim Carrey in a Truman Show. Its not real. Gold and stocks go up along with the Dollar? Its not real man . Naysayers are nothing but paid actors. Life is begining to feel like a big movie that is going to have a bad ending.
"Naysayers are nothing but paid actors."
that about covers it - everyone of the players knows it.
it seems their target audience is the hedge fund managers, the one with money to blow the scam out of water...as far as public is concerned they dont have money to pay their rent and bills...forget about buying gold. so, the paid actors are there to continue fooling the hedge fund managers...
when they will smell the coffee? i guess pretty soon...as soon as they awake up one after the other game over...not enough to satisfie demand...at most months away...
Buh-buh-Bennie and the jets!
http://www.youtube.com/watch?v=ZxeBccvWDRQ
Off topic, but China either builds much better skyscrapers than America, or has much better firefighters. When a tall building there burns it does not collapse...
Must be the bamboo scaffolding?
Central bank of China strategy to slow down the economy...
well it probably wasn't loaded with explosives....or maybe american fires burn hotter, cause its america... fuck yeah...
Who is this guy Rosenbergs? Is he on the American Television? Can someone please explains?
Well respected former Merrill Analyst - now works for Gluskin Sheff in Canada. Willing to put his views out, even if they're anti-Wall St. Fundamental Analyst.
Was he deported to Canada by Wall Streets? Is he on the no-fly lists (financial terrorist??)?
No, it was the Ben Bernank.
And, I might add, an analyst who has been more wrong than right on most calls since spring 2009.
As I understand it, he's been long bonds, long dividend-rich stocks, and some PM's? Hardly "wrong" calls. And some people measure their investment performance over longer-terms then 1 or even 2 years, like an investment cycle. Also, he's a top-down economist not a portfolio manager. He was ranked 4th as an economist in 2009 according to one survey.
How'd you like that Empire Index - slow and steady economic growth????
how do you like the trillions coming North on the "bailout express"? "Two men say they're...
In other words, he's long overdue
for a decent call.
If that is the metric for opinion, why the hell do you post?
Dollar Index (DXY) has been nearing 79 for sometime now, hasn't been able to break it... yet.... This week should be very interesting.
It would seem that the powers that control the market are going to play the following scenarios off against each other
- Politically unpopular QE2 - maybe shrink it or reduce
- Irish bailout by IMF, EU etc.
- Stocks about to break lower.
It would seem that there's going to be news flow that gives credence to each of the scenarios. Ultimately, we know what will happen. Stocks will explode higher on POMO !!Yes, and shoot way above the GS EOY SPX target of 1200, which was set there as a ploy to amplify any doubts the media will introduce.
I'm looking for a correction here, Who knows how much we will retrace if we even do... But its very amusing how that works out in regards to the news flow... It all seems arranged, timed, planned, programmed, call it what you want but its organized very conveniently.
Oh and you cant rule out China, perhaps they will be tightening their "monetary policy"
Dollar up today and market following right along. That retail sales number caught a lot of last week's bears off guard. Now we're seeing a stronger dollar and stronger market based upon confidence of economic growth. So even if the dollar breaks above 79, I believe the market will take it as a sign of strength backed by a strong consumer and the upward move will continue.
Bernanke for the mother-fucking-win!!!!!!!!!
The night was young as the actors strolled from the red carpet into the auditorium. As they took their seats the lights dimmed. A figure walked on stage. A tall athletic women wearing a red dress steped to the microphone. "If economics is a science, then Ben Bernanke is Einstein. Please join me in welcoming the man of the night, Mr. Ben Bernanke." The audience rose to its feet in celebration. "Thank you, thank you. You may be seated. Economics was founded by a man named Adam Smith during a time when slavery was then what our technology is today, except for the fact that today the slaves make the technology." From the audience, Alan Greenspan snickered as his lips slithered into a smile. "We have many nations to thank for allowing this old paradigm of rudimentary economics, that which never considered changing inputs when equal Rights were realized since its inception. That is why China and America have worked so beautifully together. But now we take the next step of our journey, and thanks to the PPT led by "Turbo Controller" Timmah, we will see our last victory finalized: we will fuse the dollar and corporations together so tightly that by the time comes to form a new world currency we will see the corporations inherit the economic landscape."
The crowd rose to their feet with applause for the Chairman. He smiled and thanked them.
On stage walked Robert Zoelick, touting a tungsten oscar. "Mr Bernanke, for your performance we would like to give you this tungsten statue of Thomas Malthus." He accepted. "I would like to thank the academic schools of the Ivy league, for without their support, our plan would never have been realized."
The two men strolled off of stage, as Paul Volker and Larry Summers waited in the wings to present the next trophy to Blithe Masters, for "Best Sacrilegious performance".
LOL! Great work as usual Lennon
Wait but CNBC said GM's IPO is going to be priced above the $26-29 range. This must be bullish right??! (Sarc)
I'm so tired, already, of the CNBS hype around the GM IPO, including the absurd incredulity that the public won't be able to buy into the IPO. As if this is some hot IPO, instead of the pig that it is, with many, many more shares to come to market in the future.
I hate to be dense but, how can I evaluate COT on the bond market relative to historical norms given QE? Sure the long-bond is "underbought", and the 5-year is "quite expensive", but isn't that what the Bernank has telegraphed?
Not sure how to trade that.
What no charts?
Gold: There are a near-record 253,528 net long contracts on the Commodity Exchange (COMEX).
Silver: Not a record or a near-record but still a significant 42,556 net long contracts on the COMEX.
What is the delivery date for these December 2010 contracts? We can expect major price fireworks. It would be nice to see a bunch of these demand delivery.
nice indeed. "we've had substantial moves upwards" haven't we? just askin' for some of that "free money" right?
you know you have to stump up with the cash to buy them if you take delivery ... not just your margin!!!? :-)
Good luck on that one...The move is gold is done for now. Theres a -$100 day coming...
Okay, I'll be contrarian. Rosie is
about to nail it for a change.
I believe that Rosie is doing an invaluable service to to those everywhere who simply can not ever think about a time when you can not get "something for nothing." Go Dave Go!
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