End of the world trade?

In spite of the current upturn in the market today, there is a lot of doom and gloom out in the speculative community. A friend and reader of our sight sent the commitment of traders speculative net open positions for the eurodollar and stock indices through the current reporting period. It looks ugly.

We are at the all time highs in long spec positions and the largest short positions in stock indices in the last three years. The speculative community is betting on lower rates and lower stock prices in a big way.

However, we should be careful with how to interpret these numbers. Generally, commitment of traders positions have been used as a signal at the extremes, but it usually suggests a reversal and not something that should be followed with the rest of the herd. What is very interesting about the eurodollar positions is that they have grown at such a fast rate. Just looking at the chart shows how quickly sentiment in the interest rate markets has changed. we have seen a 25 bp change in less than a month. The stock index spec positions have also changed quickly. Given the size of this change in both market sectors, there is a greater chance for a reversal and a moderation of these extreme positions. Nevertheless, it is hard to say who will be the lucky winners in this trade.