Rosenberg on the Near Term

...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.
• 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
• 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.
---iibid