Quant View COT Report Analysis

Harel Jacobson, FRM (Harel@Barak-Capital.co.il)

06-April-2012

COT Report Analysis Play the Waiting Game

The latest COT positioning report published on Friday continues to exhibit a sideways move in positioning across the different markets. With no significant move in positioning, it seems like the leveraged community is still waiting for new developments in the macro space to determine its view (as the latest report shows positioning as of last Tuesday, before the release of the FOMC minutes and Friday's NFP numbers, that should act as catalysts for shift in positioning). In FX, The EUR positioning continued to grind higher toward neutral positioning, yet the trend is less decisive than it was a month ago. In the low-yielding currencies, the downtrend in positioning seems to have stalled for now, with a modest reversion in JPY positioning and CHF. In the Commodity Block, positioning was little changed last week across all regions. Positioning in the commonwealth currencies continues to show no actual bias, with the positioning stale from previous week. In CAD and MXN positioning continued to tick higher, supporting the uptrend in US-growth correlated assets. In Metals, The trend in Precious Metals continues to be biased on the downside, yet the momentum of the trend seems to have slowed, with no real move in positioning last week. In the Industrial Metals block positioning was also little changed, but the big picture raises some questions regarding the belief of the leveraged community in global recovery, with the uptrend in speculative positions broken. In US Rates, We finally saw some reversion in the strong downtrend in speculative positions in UST. Positioning in UST 2-years reversed from 4-years' low, while UST 10-years was little changed from previous week. At the short end of the yield curve (Fed Funds contracts and 3-month EuroDollar) we saw mixed positioning, with the positioning in Fed Funds declining and the positioning in EuroDollar ticking up. In US Equities, We start to see some weakness in S&P500 and Nasdaq100 positions, with the leveraged community not really putting bullish positions on US equities. Nasdaq100 positions were largely unchanged, but previous weeks' decline raises some question regarding the integrity of the latest uptrend in NDX100 positions. S&P500 positions declined last week (although the decline was quite small), however, in order to determine if this decline is a "healthy" correction or a breaking point, we need to wait and see some decisive move in the upcoming weeks.

Foreign Exchange
Is it the calm before the storm? Friday's CFTC positioning report shows that the leveraged community has not really changed its positions for the 2nd consecutive week. As the recent developments in the macro space (FOMC minutes, Non-Farm Payroll and Unemployment data) were not captured by the latest report, it will be interesting to see how positioning has changed since the two events. EUR positioning continued to show no real trend last week, for the 2 nd consecutive week, however, the overall trend continues to be on the upside, which seems bit stretched given the declining spread between the German treasury yield and the US treasury yield.

EUR IMM Speculative Positions

3 2 1 0 -1 -2 -3 -4 1.65 1.6 1.55 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15

EUR IMM Spec. Positions

EUR/USD Spot

Data Source: CFTC/Bloomberg

I will risk sounding like a broken record, but the correlation between the EUR IMM positioning and the different driving factors continues to fall toward extreme lows, which may suggest that we are likely to see a reversal of the uptrend (both in spot and positioning, as both are positively correlated).

Correlation between EUR Positions and different factors

0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6

3-month EUR IMM Spec. Positions/Rate Diff. Correlation 3-month EUR IMM Spec. Positions/Risk Reversal Correlation

On the other side of the English Channel, we continue to see uptick in GBP long positions, reversing almost the entire decline of H2/2011.

GBP IMM Speculative Positions

1.5 1 0.5 0 -0.5 -1 -1.5 -2 2.05 1.95 1.85 1.75 1.65 1.55 1.45 1.35

GBP IMM Spec. Positions

Data Source: CFTC/Bloomberg

GBP/USD Spot

In the low-yielding block, we saw almost no change in positioning last week, with the JPY and CHF found well into negative territory. It will be interesting to see the reaction of the speculative investors to the latest data from the US (which will be reflected in next week's report).

CHF and JPY IMM Speculative Positions

2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 0 -0.2 -0.4 -0.6 0.8 0.6 0.4 0.2

JPY IMM Spec. Positions

Data Source: CFTC/Bloomberg

CHF IMM Spec. Positions

In the Commodity Block we saw no change in positioning, which does raise some questions after the better-than-expected PMI data from china (altough AUD data has been coming out quite mixed recently, which can explain the sideways action in positioning).

AUD and NZD IMM Speculative Positions

0.25 0.2 0.15 0.1 0.05 0 -0.05 0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2

AUD IMM Spec. Positions

NZD IMM Spec. Positions

Data Source: CFTC/Bloomberg

CAD and MXN positions ticked up last week, however , the move was quite minor. We continue to see CAD outperforming the rest of the major currencies in term of positioning (against the USD), which is also being supported by the CAD-G9 Basket (equally-weighted basket against its major peers).

CAD Positioning and overall strenght

100 95 90 85 0.5 80 75 70 0 -0.5 -1 2.5 2 1.5 1

CAD-G9 Basket (11/01/08=100)

CAD IMM Spec. Positions

Data Source: CFTC/Bloomberg

With the relatively positive data from Canada and the ongoing improvement of the US data, the CAD seems like a strong candidate to be the best performer in the G10 space. Lastly, we note that the DXY speculative positions declined quite sharply last week (after being on strong uptrend since March-2011).

DXY IMM Speculative Positions

1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6

DXY IMM Spec. Positions

Metals
Friday's report shows that the speculative positions in Gold and Silver were little changed last week, after trending down for the last 4-weeks. COMEX Gold positions declined slightly, and COMEX Silver positions did not change since the previous week.

Gold and Silver IMM Speculative Positions

7 6 5 4 3 2 1 0 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Comex Gold IMM Spec. Positions

Comex Silver IMM Spec. Positions

In the Industrial Metals positions saw a mixed picture, with the Palladium positions declining further, and Platinum positions relatively stable.

Palladium and Platinum IMM Speculative Positions

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Platinum IMM Spec. Positions

Palladium IMM Spec. Positions

We continue to see close relationship between speculative positions in Copper and mining companies' share-prices (indexed by FTSE All-Shares mining index). Given the index price action we can obviously see some weakness in basic materials, and therefore, weaker growth. As we have yet to see signs in other markets concerning slowdown in growth (with the exception of NZD positions, which may have been driven by idiosyncratic factors), this weakness can be a canary in a coal mine.

Copper (Grade A) IMM Speculative Positons

0.7 0.5 0.3 0.1 -0.1 -0.3 -0.5 -0.7 280 260 240 220 200 180 160 140 120 100 80

Copper (Grade A) IMM Spec. Positions

FTSE All-Shares mining index

Data Source: CFTC/Bloomberg

US Rates
Now what? After a sharp decline of long UST positions (both in the 2-years contracts and 10-years contracts), trend seems to have taken a breath. Positions were mostly unchanged from previous week, however, following the latest developments in the US, it will be interesting to watch the change in positioning in the upcoming weeks.

UST 2-years and 10-years IMM Speculative Positions

5 4 3 2 1 0 -1 -2 -3 -2 -4 -6 -8 6 4 2 0

UST 2-years IMM Spec. Positions

UST 10-years IMM Spec. Positions

Data Source: CFTC/Bloomberg

At the short end of the curve we seen a mixed picture, with the 3-month EuroDollar positions unchanged from previous week and Fed Funds long contracts declining further. It seems like the positioning in Fed Funds starts to be quite bearish, which is quite odd given the fact that the Fed target rate is likely to stay at 0-0.25% for the next two years.

Short-End IMM Speculative Positions

8 7 6 5 4 3 2 1 0 -1 40 30 20 10 0 -10 -20 -30

Fed Funds IMM Spec. Positions

3-month EuroDollar Spec. Positions

US Equities
Friday's report shows that Speculative positions in US equities were almost unchanged from previous week, however, the decline in positioning over the last couple of weeks puts the latest rally in equity market (and US market in general) in a significant risk. With global growth not picking up the pace (see the dynamic in basic material and industrial metals), the reversal in equity positioning may be another signal that the rally is over (at least for now). We need to wait, of course, for next weeks' report to see how the leveraged community reacted to the latest data from the US.

US Equity Indices IMM Speculative Positions

8 6 4 2 0 -2 -4 -6 -8 4 3 2 1 0 -1 -2 -3

S&P500 IMM Spec. Positions

Nasdaq100 IMM Spec. Positions

Data Source: CFTC/Bloomberg

To conclude, the last two weeks we have seen no development in market positioning across the different asset classes. However, with the flood of macroeconomic data (both from the US and from China/Europe) we are likely to see a reaction in the following weeks, which may provide us with an idea about the long term trends for the remainder of H1. Of course, the main event is the FOMC meeting later this month, but the market may start position itself ahead of the event. Good Luck, Harel Jacobson