Record Euro Longs is a Blunt Timing Tool

After rallying for 6 consecutive weeks (the longest weekly winning streak since mid-Dec '17 to late-Jan '18) to the highest weekly close since May '18 last week, the latest CFTC Commitments of Traders report revealed that Large Speculator accounts now hold record net-long positions in euro futures. While this is theoretically a strong contrarian signal, we like to remind readers that the basic positioning data provided in this valuable weekly report should be viewed as a blunt timing tool, not a scalpel. We take the data several steps further, by detrending it and measuring the difference between Large Speculator ("trend followers") and Commercial Hedger ("smart money") positions as a % of open interest. This provides a better sense of when anomalous weekly numbers are likely to produce tradable price corrections or major trend turning points. A full description of our test parameters is provided in the Stats & Distribution section shown at the bottom of this commentary.

Last week, we began to argue that while the long-precious metals/short dollar trade had likely reached a point where tactical profit taking had become warranted, there’s nothing to suggest that momentum associated with this trade won’t, at a minimum, force an eventual retest of the dollar’s recent lows. As we see in the Stats & Distribution section below, this argument gains credence. Specifically, since April ’01 there have been 7 instances that matched last week’s tested credentials. In the end, what’s important to pay attention to is that while these conditions produced a higher likelihood that the euro would see weakness in the next two weeks, the longer-term trend eventually resumed. We think this information fits well with the current wave structure that allows for a late-stage rally to follow the short-term correction that appears to be developing at the start of this week.