Currencies: The Dollar Index and, inversely, the euro, Swiss franc and British pound, are ripe for a reversal. The commercial traders have successfully laid off long positions accumulated since early 2014 and appear to be laying on new short positions rather than repositioning themselves on the long side. Commercial traders positioned themselves correctly ahead of Mario Draghi and the ECB’s surprisingly hawkish monetary plan. This indicates that the spread between U.S. and ECB interest rates won’t be as wide as predicted and should tighten.
Grains: Commercial traders have been big buyers in soybean meal, establishing their most bullish position since February of 2012. This sets the stage for a soybean meal rally individually and within the crush complex. The most promising reversal lies in Kansas City wheat. Commercial traders have set a new net long record by more than 20%. A reversal higher could be soon, sharp and lasting.
Interest Rates: Commercial traders expect the yield curve to steepen. They continue to be buyers on the short end of maturities and are increasingly on the sell side as the maturity date lengthens. This fits with tightening expectations and suggests the Fed may follow through with a rate hike in March.
Metals: Gold end-users have created their most bullish position since December of 2001. This has created a situation where the only new selling coming in under the July lows has been by large speculators. This market is more likely to reverse higher than continue lower for very long.
Energies: The energy complex is looking to rebalance within the sector. Nothing looks good, but heating oil futures could certainly rally, given the commercial buying ahead of December’s typical strength. However, this trade may be best played as a spread against the glut in crude oil futures.
Softs: Sugar bottomed on Aug. 28 and sugar producers have sold more than 260,000 contracts on the ensuing rally. This has plunged commercial trader momentum into negative territory even as the market becomes more overbought. This market has rallied about 50% in three months. Based on the commercial positions, don’t expect this rally to hold.
Meats: October’s cattle rally fizzled as quickly as it flamed. Heavy cattle and cheap feed continue to be the order of the day as the U.S. cattle market continues to grow its herd back from multi-generational lows.
Indices: The last time stock indices moved lower through November, December and January was 2009. Experience would suggest that any weakness in the Dow and Nasdaq could be short lived. Barring an exogenous event, the seasonal rally should peak between mid- and late-January.