Distribution Evidence and Sentiment Data

Zerohedge already remarked yesterday on the client order flow data published by BAC/ML, which show a lot of institutional selling in the US stock market, while concurrently retail clients have turned into large net buyers. This buttresses our recently voiced contention that one must be on the lookout for signs of distribution. This certainly qualifies as one such sign, even though it only shows what the firm's own clients are doing.

However, we wanted to briefly discuss another consensus that has emerged, one that is tied directly to the Fed 'taper' notion and what is really a very simplistic idea of what it will mean for the currency. Clearly, should money supply growth in the dollar area weaken relative to money supply growth elsewhere, this would be a long term positive for the dollar. However, one must not forget what has actually happened over the past five years, during which the supply of dollars has soared relative to the supply of euro, pound and yen. In spite of this, the US dollar has actually strengthened against all these currencies, for the simple reason that other factors can be far more important in the short to medium term (such as trader perceptions, market positioning by speculators engaged in carry trades, interest rate differentials, etc.).

 

Merrill also regularly surveys positioning and sentiment among a large group of fund managers globally (238 participants with total AUM of $643 bn.) and the most recent survey showed several interesting extremes of opinion. The most notable ones were on currencies, specifically the dollar and the yen. The percentage of fund managers bullish on the US dollar for the next year has soared to an all time high of 83% net. Concurrently, emerging market equity exposure has hit a 12 year low, even undercutting the 2008/9 crash lows. US equities are of course seen as the 'safest bet' – in spite of the fact that EM equities are finally actually cheap and US equities are well into bubble territory based on the Shiller p/e and Tobin's Q.

But that is how it goes – these fund managers tend to herd, until they are all in the same trades and are all shunning the same trades. Naturally, they also positively hate commodities and China right now. These may be fundamentally well-reasoned positions, but these people are certainly anything but contrarians. We would in fact say that as a group, they are playing whatever seem to be the most glaringly obvious trends at any given time. Keep in mind in this context how the commodities bull market began. It took about 5 years of rising prices before anyone on Wall Street even mentioned demand from China, and when they did, it was actually erroneous. The real and main driver of the bull market has always been monetary inflation.

These fund managers incidentally also often tend to be spectacularly wrong at junctures that see them all sitting on the same side of the boat. An example for this is e.g. provided by the yen (see below):

 


 

merrill survey-dollarThe bullish consensus on the dollar among fund managers is at the highest in the history of the survey – a big, fat 83%. The yen was only more hated than today in 2001, right at a major low that hasn't been seen since – click to enlarge.

 


 

Regarding the yen, see for yourself:

 


 

yen,LTHere is a long term chart of the yen – the bearish consensus was the biggest in the history of the survey right at a low that has so far held for 12 long years. At its peak, the yen had nearly doubled from there. The survey didn't yet exist at the 1998 low in the yen – click to enlarge.

 


 

A Closer Look at the Dollar

Given the well-known negative correlation between the US dollar and gold (as well as other commodities), this seems to be quite supportive of the idea that a major advance in gold could be in store. One thing is certain: an 83% consensus is very likely worth fading from a medium to long term perspective.

Let us look at the dollar more closely:

 


 

DXY-daily,one year

The US dollar index has been in a choppy uptrend since 2011. Recently, it has become a lot more choppy – click to enlarge.

 


 

The wild gyrations of recent weeks have booted some of the previously extremely bullishly positioned futures speculators out of their DXY futures long positions, but they still retain a fairly chunky net long exposure – this goes  especially for small speculators.

As an aside to this, speculators continue to maintain fairly large net short positions in the most obvious candidates, such as e.g. the Australian dollar, where a record speculative net short position is currently held. Not that we necessarily disagree with the fundamental thesis on the Australian currency, but the positioning has become quite extreme lately. A reaction seems likely.

 


 

DXY-CoT

Positioning in DXY futures: the speculative US dollar net long position has decreased due to recent volatility, but it remains at a historically elevated level nonetheless – click to enlarge.

 


 

One of the reasons why people have turned bullish on the US dollar is probably also its longer term chart – in the late 1980s to mid 1990s, its gyrations were very similar to those seen since 2008, and this was also while coming out of a period of extremely low rates in the wake of the S&L disaster (also, the yen gyrated wildly at the time). However, there is no ironclad law that says that the future must develop in a similar manner.

At the very least we would expect that the recent extremes in the bullish consensus will result in medium term weakness (we are agnostic regarding the short term).

Among the reasons that might trigger such a trend could either be the sudden death of the 'taper' idea due to unexpected economic weakness, or the realization that the damage inflicted by 'QE' already will play out with a lag, regardless of any 'QE tapering'.

 


 

DXY,LTThe US dollar index, long term. The similarity of the gyrations in the late 80s/early 90s to today's are notable. But that is not a guarantee that the outcome will be similar, or that there cannot be a bout of medium term weakness – click to enlarge.

 


 

Lastly here is a look at the EM equities positioning of fund mangers taking part in the Merrill survey – the 12 year low in this data series strikes us as quite notable as well.

 


 

merrill survey-EMEmerging market equity exposure according to the ML fund manager survey: a 12 year low – click to enlarge.

 


 

Conclusion:

A number of medium to long term contrarian opportunities seem to be shaping up. Having said that, many of the trades that appeared 'obvious' have actually worked quite well in recent months (one need only remember the yen, where sentiment and positioning extremes failed to stop a large decline from unfolding). So perhaps alert traders should wait until they see the 'whites in their eyes' as the saying goes. On the other hand, even that trend – namely that all the obvious trades are seemingly 'working' –  is bound to change again.

 


 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “Notable Consensus Extremes”

  • This is an excellent analysis which gets to the heart of why contrarian investing works. Regardless of the fundamentals, any extremely overcrowded trade will inevitably fail. That’s because the financial markets ensure that the greatest number of participants lose money.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Strange Moves in Gold, Federal Reserve Policy and Fundamentals
      Counterintuitive Moves Something odd happened late in the day in Wednesday's trading session, which prompted a number of people to mail in comments or ask a question or two. Since we have discussed this issue previously, we decided this was a good opportunity to briefly elaborate on the topic again in these pages. A strong ADP jobs report for March was released on Wednesday, and the gold price dutifully declined ahead of it already, while the stock market surged concurrently. Later in...
  • Gold – An Overview of Macroeconomic Price Drivers
      Fundamental Analysis of Gold As we often point out in these pages, even though gold is currently not the generally used medium of exchange, its monetary characteristics continue to be the main basis for its valuation. Thus, analysis of the gold market requires a different approach from that employed in the analysis of industrial commodities (or more generally, goods that are primarily bought and sold for their use value). Gold's extremely high stock-to-flow ratio and the main source of...
  • Doomsday Device
      Disappearing Credit All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Ambrose Evans-Pritchard writing for British newspaper The Telegraph:   Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard. Data from the U.S. Federal Reserve shows that the $2 trillion market...
  • The Balance of Gold and Silver – Precious Metals Supply and Demand
      Orders of Preference Last week, we discussed the growing stress in the credit markets. We noted this is a reason to buy gold, and likely the reason why gold buying has ticked up since just before Christmas. Many people live in countries where another paper scrip is declared to be money — to picture the absurdity, just imagine a king declaring that the tide must roll back and not get his feet wet when his throne is placed on the beach — not real money like the US...
  • The American Empire and Economic Collapse
      Dashed Hopes Despite widespread optimism among libertarians, classical liberals, non-interventionists, progressive peaceniks and everybody else opposed to the US Empire that some of its murderous reins may finally be pulled in with the election of Donald Trump, it appears that these hopes have now been dashed.   Liberty... some of it is still above water, but definitely not as much as there could or should be.*   While the hope for a less meddlesome US foreign policy...
  • Pulling Levers to Steer the Machine
      Ticks on a Dog A brief comment on Fed chief Janet Yellen’s revealing speech at the University of Michigan. Bloomberg:   “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Yellen said Monday in Ann Arbor, Michigan. The Fed is now trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.” […] “The appropriate stance of policy now is closer to, let me call it...
  • Credit Contraction Episodes
      Approaching a Tipping Point Taking the path of least resistance doesn’t always lead to places worth going.  In fact, it often leads to places that are better to avoid.  Repeatedly skipping work to sleep in and living off credit cards will eventually lead to the poorhouse.   Sometimes the path of least resistance turns out to be problematic   The same holds true for monetary policy.  In particular, cheap credit policies that favor short-term expediency have the...
  • The Empire Needs an Emperor
      Unknown (sort of) Head of State BUENOS AIRES – Type Swiss President “Doris Leuthard” into Google. You will get about 450,000 results. Do the same with Donald Trump, and the number is closer to 396 million. That’s 87,900% more references. The world’s press is as fascinated by President Trump as it is indifferent to President Leuthard.   Doris Leuthard, President and energy minister of Switzerland. She has won her second presidential term this year. It basically...
  • Mea Culpa – Precious Metals Supply and Demand
      Input Data Errors Dear Readers, I owe you an apology. I made a mistake. I am writing this letter in the first person, because I made the mistake. Let me explain what happened.   The wrong stuff went into the funnel in the upper left-hand corner...   I wrote software to calculate the gold basis and co-basis (and of course silver too). The app does not just calculate the near contract. It calculates the basis for many contracts out in the distance, so I can see the...
  • The Cost of a Trump Presidency
      Opportunity Cost Rears its Head Last Thursday’s wanton attack on a Syrian air field by the US and its bellicose actions toward North Korea have brought the real cost of candidate Trump’s landslide victory last November to the forefront.   It didn't take long for Donald Trump to drop his non-interventionist mask. The decision was likely driven by Machiavellian considerations with respect to domestic conditions, but that doesn't make it any better.   Unlike...
  • India – Is Kashmir Gone?
      Everything Gets Worse  (Part XII) -  Pakistan vs. India After 70 years of so-called independence, one has to be a professional victim not to look within oneself for the reasons for starvation, unnatural deaths, utter backwardness, drudgery, disease, and misery in India. Intellectual capital accumulated in the West over the last 2,500 years — available for free in real-time via the internet — can be downloaded by a passionate learner. In the age of modern technology, another mostly...
  • French Election – Bad Dream Intrusion
      The “Nightmare Option” The French presidential election was temporarily relegated to the back-pages following the US strike on Syria, but a few days ago, the Economist Magazine returned to the topic, noting that a potential “nightmare option” has suddenly come into view. In recent months certainty had increased that once the election moved into its second round, it would be plain sailing for whichever establishment candidate Ms. Le Pen was going to face. That certainty has been...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com