COT Getting Interesting
We are seeing more and more historic data readings from the weekly Commitment of Traders Report (COT) that the CFTC publishes ever Friday. The COT shows the breakdown of holdings of futures contracts between commercial hedgers (often called the smart money), managed money (i.e. hedge funds, often called the dumb money) and small specs (small speculators that just trade a few contracts).
It has been nearly 17 years since we have seen commercial gold traders (blue line in the chart below) holding more long than short futures contracts with hedge funds net short (red line). The last time hedge fund gold traders were this short (bearish) was December 2001, when commercial buying set up a double bottom with gold near $275. From this base gold launched a 10-year bull market to the historic 2011 market top.
Source: SentimenTrader 9/16/18
In silver, commercial hedgers (blue line) are net long for the first time in history. Since futures markets are zero-sum – with every contract comprised of one long and one short holder – funds (red line) have moved net short, setting a new bearish record.
Source: SentimenTrader 9/16/18
The short bet on Treasury futures (10-Year T-Notes) has never been this crowded hedge funds shorting Treasuries (red line). Small traders are also net short, leaving only the smart-money commercials (blue line) net long — also in record numbers.
Source: SentimenTrader 9/16/18
As these three charts show, smart-money commercials are net long gold, silver and 10-year notes while hedge funds are at record short levels. Typically, when these extremes occur, a tipping point is reached where price reverses forcing the shorts to cover (i.e. they flip from being sellers to buyers) causing a short squeeze. This happened in gold in early 2016 when gold jumped 30% higher while gold mining stocks moved up 156% over the course of six months.
Looking at another indicator that shows what smart-money professionals are doing is the SKEW index, which tracks put buying (bets on lower prices) versus call buying (bets on higher prices) on the stock market. We can see from the chart below that the SKEW is at an all-time high, showing that professionals are buying more puts than calls in the 28 history of tracking.
Source: StockCharts.com as of 9/16/18
Meridian Macro, a data research firm, put together the contracts shorted by the hedge funds and small specs (again, the “dumb money”) in gold, the 10-year Treasury Note and the VIX (volatility index) to produce this chart:
Source: Meridian Macro Research
The conclusion from all this is clear: the boat is very loaded to one side as the bets on lower gold prices (i.e. a higher dollar), lower volatility (i.e. high stock prices) and higher interest rates are at a record. As the trader's adage goes, when the last buyer has bought, prices have nowhere to go but down. One of the reasons buying becomes so frenzied at the peak is FOMO - the fear of missing out. In this case, the crowd is all betting on a high dollar, higher interest rates and higher stock prices, and doing so in record numbers. We'll see how that works out for them.
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