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Specs Too Bullish on Bulls & Steers

04/16/2019 9:26 am EST

Focus: COMMODITIES

Andy Waldock

Founder, Commodity & Derivative Advisors

This week’s COT data shows live cattle and platinum overbought, says Andy Waldock.

This week’s Commitments of traders (COT) data from the CFTC shows that large speculators have a near record level of live cattle longs signaling a short bias in our models.  

Large platinum specs have moved the precious metal into overbought territory.

Live Cattle

The internal imbalance caused by the yearlong cattle rally is beginning to shift from linear to exponential. Large speculators have set another net long position record, which has pushed their COT Ratio of longs/shorts to more than 5:1. It’s been nearly 15 years since we’ve seen a discrepancy of this magnitude between the commercial traders who have cattle to deliver and the large speculators who’ve simply climbed aboard an orderly trend as the cattle market regained trade-war concern losses from more than two years ago.

The weekly COT signals triggered an outright short sale two weeks ago. Our protective stops are always placed at the most recent swing high/low. This June live cattle high of 114.90 has not been breached, meaning this sell signal is still in effect. Friday’s rally leads me to believe this will be the pivot week for the trade. Therefore, add to short positions on a breach of Friday’s low at 120.05. If this order is filled, traders should lower the protective stop to 122.25 or the high for the coming week, whichever is greater when the add-on sell stop is initiated.

Platinum

The platinum market’s recent rally has loaded the market with failure powder. Speculators purchased an additional 3k contracts last week on the market’s breakout above $885. That’s about a 5% pop in total open interest and looks like a healthy trend adding new money as it climbs. However, the commercial position has shifted to -39k, and this is a critical level. This is about the limit for average forward selling by platinum miners. When we hit the $1,150 high in early 2018, commercial traders sold an additional 10k contracts. When we hit the $1,240 high in 2016, the commercial trader net short position reached -60k.

Additionally, each of the last two rallies has been contained in an orderly manner by the long-term averages, now between $910 and $930.

We’ll be watching this market closely for signs of failure. We sent a short sale signal to Daily subscribers last Wednesday.

COT Table

Open Position Commentary

Softs: Orange juice imploded, hitting our profit objective Monday morning. The market made lower highs every day last week. This makes trailing a protective stop much more comfortable. Kudos to those of you who stuck with the trade. 

The cotton market also hit our profit objective before, putting in an outside reversal bar lower. Daily COT signals traders were able to capture a small profit.

Interest Rates: From last week’s letter, “We’ve been waving our hands and shouting about the interest rate trade setting up on the weekly charts.” Their close on the lows for the week, Friday emphasized our expected failure. These are new lows for the recent reversal, and this is precisely what we’ve expected.
Now, let’s look at some short-term targets. Long-term moving averages come into play around 114-16 in the five-year Treasury note, 121-16 in the 10-year Treasury note, and 144 in the 30-year US Treasury bond. We do see this as a long-term play. However, there’s no reason we can’t scalp around a short position.

Those who missed the futures trade but are still interested in the long-term application of this setup could look at inverse Treasury-based ETFs like  iPath US Treasury 10-year Bear ETN (DTYS),  the ProShares Short 20+ Year Treasury (TBF) or the Direxion Daily 20+ Year Treasury Bear 3X Shares (TMV),TMV. As always, check the trading volume and spreads before initiating the position. Obviously, this is less of a concern if this is viewed as a long-term holding.

We offer more specific instructions in our Weekly COT newsletter.
Andy described how traders can exploit the Commitments of Traders report in an interview with Dan Collins at the TradersEXPO New York:
Understanding the COT Report.

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