Yet, seemingly out the blue, prices suddenly tumbled $4. The media will try to assign a reason for the decline, but there was no piece of news that was any more bearish than anything from the past couple of weeks.
Now to be fair, the gigantic net long position in crude oil was slightly more complicated than the headlines indicated. I wrote about the fact that although specs were record net long in terms of contracts, when measured in dollars, or percentage of open interest, the picture wasn’t quite so extreme. Yet I cautioned that all of the speculative optimism was a huge red flag (Re-evaluating Crude Oil Spec Positioning).
I am reposting a graph from that piece that shows the extended nature of speculative positioning.
Now fading a one way market based on over eager speculators is not for everyone. You’re almost guaranteed to look like an idiot for a while, and once it turns, everyone will claim it was obvious and they weren’t part of the herd leaning the wrong way. But the truth is that few catch the move because it is mentally so difficult to stand on the other side of the masses.
With that in mind, I present the next accident waiting to happen (and I realize you will most likely think me a knob for suggesting taking the other side of this trade).
Speculators are betting heavily that the Federal Reserve will continue raising rates. In fact, they have taken a net short position of over $2.5 trillion dollars of 3 month Eurodollar futures contracts.
Following Wednesday’s blowout ADP report, which printed some 40K jobs higher than the highest estimate, the only possibility for tomorrow’s nonfarm payroll report, the last major economic data point before the Fed’s March 15th rate hike announcement, is to disappoint, especially in terms of wages (which in light of the recent downward revision of Q1 GDP by the Atlanta Fed to 1.2% is not out of the question). That possibility, however, is slim to none if one looks at Wall Street’s forecasts, where virtually every sellside analyst boosted their NFP estimate in the hours after the ADP number. Still, with the market pricing in a 100% chance of a rate hike, only a very disappointing – think less than 100K – report will derail the Fed from hiking for the second time in three meetings.
Here are some of the more notable forecasts for tomorrow’s number::
Bank of America 185K
Deutsche Bank 200K
Goldman Sachs 215K
Morgan Stanley 250K
Putting it all together, here is what Wall Street expects from the February payrolls report due out at 8:30am ET tomorrow morning:
Change in Nonfarm Payrolls: Exp. 193K (Prey. 227K, Dec. 157K)