May Was A Month of Discontent: Significant Shifts In Positions And Sentiment

(This is an excerpt from an article I originally published on Seeking Alpha on May 31, 2016. Click here to read the entire piece.)

At the beginning of this month, I claimed an unwind of confidently long positions was imminent for the Australian dollar. {snip}


Speculators have quickly retreated from a net long position that was at a 3-year high.
Speculators have quickly retreated from a net long position that was at a 3-year high.

Source: Oanda’s CFTC’s Commitments of Traders

{snip}


The CurrencyShares Australian Dollar ETF (FXA) has sold off for almost all of May and has reversed a breakout that began in March.
The CurrencyShares Australian Dollar ETF (FXA) has sold off for almost all of May and has reversed a breakout that began in March.

Source: FreeStockCharts.com

At the end of April, I anticipated an unwind in confidently long positions for the Japanese yen (FXY). {snip}


Speculators have spent most of 2016 growing net long positions on the Japanese yen. At one point, they were higher than they have ever been since at least 2008.
Speculators have spent most of 2016 growing net long positions on the Japanese yen. At one point, they were higher than they have ever been since at least 2008.

Source: Oanda’s CFTC’s Commitments of Traders

{snip}


CurrencyShares Japanese Yen ETF (FXY) is retesting its uptrend for 2016. If the 50DMA uptrend fails, the 200DMA awaits below for the next natural support level.
CurrencyShares Japanese Yen ETF (FXY) is retesting its uptrend for 2016. If the 50DMA uptrend fails, the 200DMA awaits below for the next natural support level.

Source: FreeStockCharts.com

The Australian dollar and the Japanese yen are just two examples of several that demonstrate a change of sentiment and positioning in currency markets. It is as if summer is bringing a season of discontent with the positioning that dominated the first part of this year.

The U.S. dollar index (UUP) has been much maligned for most of 2016; the index was in decline as defined by its 50DMA downtrend until a major breakout May 18th. {snip} The market has responded to the Fed’s urgings. The Fed will deliver its next rate hike in July assuming it maintains its current strategy and pattern of giving the market exactly what the Fed has convinced it to expect. In other words, the Fed coaches the market well in advance of its moves in order to avoid disruptive surprises. As a result, I am assuming the dollar index printed a bottom in May that will last at least through a July Fed rate hike.



(Around 4:15 mark in the video, the host gave Yellen an opportunity to give money managers the info they needed before clearing out their offices for the Hamptons)
The U.S. dollar index appears to have printed a major bottom in early May with likely confirmation coming from the market's acceptance of a rate hike as early as July.
The U.S. dollar index appears to have printed a major bottom in early May with likely confirmation coming from the market’s acceptance of a rate hike as early as July.

Source: FreeStockCharts.com
Market projections for the next rate hike has shifted dramatically in less than two months. Yellen helped nudge the odds for July to 60%.
Market projections for the next rate hike has shifted dramatically in less than two months. Yellen helped nudge the odds for July to 60%.

Source: CME Group’s FedWatch

Just as May was pivotal for changing the directional bias for the U.S. dollar, the positional discontent has cascaded out to gold and silver as well. {snip}


The SPDR Gold Shares (GLD) has suffered follow-through selling after the 50DMA uptrend broke down. This move leaves behind a 15-month high which will likely serve as a top for more months to come.
The SPDR Gold Shares (GLD) has suffered follow-through selling after the 50DMA uptrend broke down. This move leaves behind a 15-month high which will likely serve as a top for more months to come.

The iShares Silver Trust (SLV) has filled the large gap up from April 19th and is now struggling to hold onto support at its 50DMA uptrend.
The iShares Silver Trust (SLV) has filled the large gap up from April 19th and is now struggling to hold onto support at its 50DMA uptrend.

Source: FreeStockCharts.com

Starting in May, speculators drove net long gold positions to levels not seen since at least 2008. The large pullback in the past week is the first significant move its kind since the run-up began in earnest in December, 2015.
Starting in May, speculators drove net long gold positions to levels not seen since at least 2008. The large pullback in the past week is the first significant move its kind since the run-up began in earnest in December, 2015.

Speculators have frequently held net long silver positions surpassing anything seen since 2008. Will silver survive yet another pullback from fresh 8+ year highs?
Speculators have frequently held net long silver positions surpassing anything seen since 2008. Will silver survive yet another pullback from fresh 8+ year highs?

Source: Oanda’s CFTC’s Commitments of Traders

Of course, a new catalyst can always come along and rekindle interest in gold and silver. When I used Google Trends to claim that gold had not yet experienced a blow-off top, I relied on continued strength in interest in silver and 30-Day Fed Fund Futures as supporting casts to my assessment. Those catalysts dramatically changed in less than three weeks. If a new set of catalysts arrive, I do not expect them to arrive until after the Fed’s July rate hike. {snip}

{snip}

Be careful out there!

Full disclosure: long GLD, SLV, net short the Australian dollar, net short the Japanese yen

(This is an excerpt from an article I originally published on Seeking Alpha on May 31, 2016. Click here to read the entire piece.)

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.