The British pound lost more than 20¢ to the dollar in less than two weeks following the Brexit vote. The total commercial position had shrunk significantly as players appeared to be taking off positions ahead of the vote. Now that the post-Brexit action is taking shape, we can once again see what is happening in this market given the tools we’re used to working with. The commercial traders in the pound have decided that the low $1.30s is a bargain heading forward. To this end, they’ve grown their total position by more than 35% during the last five weeks and have now set a new record long position. The combination of the increasingly bullish net position on top of a surging total position is akin to the positive correlation between growing volume and open interest along with a market’s trend. This action is exceptionally bullish, expect some backfill as the market tests long-term overhead moving averages near $1.375 to the U.S. Dollar Index.
The post-Brexit period appears to have done little to strengthen the outlook of the commercial traders in the equity indices here at home. The four major domestic stock index futures are experiencing profit taking equivalent to the degrees that the individual indices have made new highs. The exception is the S&P 500, which has made a new high of 4.7% above the 2015 high. Yet, it currently holds the most neutral Commitments of Traders positions. Arguably, this is due to the exceptionally deep option market used to fine tune S&P 500 positions among managers.
The Dow, Nasdaq and Russell 2000 futures markets combined, do not possess the options depth of the S&P. Therefore, it is probably no surprise that the year’s second largest winner, the Dow futures, at just over 4% above 2015’s high, has seen the most commercial selling. In fact, commercial traders have set a new record net-short position in the Dow futures as they lock in the gains achieved in their cash portfolio without accruing the tax liabilities and expense of offsetting core stock positions.
The selling in the Dow has been closely matched in the Nasdaq as commercial traders have reached their most short levels in nearly 10 years. The Russell, meanwhile, has just shifted into negative net position and momentum territory. The last time the commercial trader position in the Russell 2000 dipped into negative territory coincided perfectly with 2015’s high. These moves indicate that the commercial traders are uneasy. Their concerns may be Fed or election-related but either way, they took a substantial amount of risk off the table ahead of the September meeting and presidential election.
Finally, a note on the metal markets. We’ve pointed out that gold and silver had both set record speculative long positions this summer and that those markets were running out of buyers. The 10% correction we’ve seen since the highs is beginning to provide enough room for the commercial traders to rebalance their positions between the commercial producers and the commercial processors. We still have targets in the low $17 per ounce range for silver and $1,225 or so per ounce in gold. We’ll see what actions they take during the recent pause.