As I continued to parse through the most recent weeks' traders positioning data early last week, I noticed a tiny piece of anecdotal news, namely the Merrill Lynch/B of A investor survey for May. For the first time this year, the long USD (US dollar) trade had been surpassed by the NASDAQ Composite (long) trade as the most overcrowded trade.
While this could be interpreted several different ways, especially with the dollar's latest under-performance, it seemed more pertinent in highlighting the overbought condition in US stock markets.
This news to me signified that the markets were basically fully-invested and that market bulls would find a reason to sell because of the lack of new buyers to potentially accommodate the wave of sellers or in the case, profit-taking from an insanely one-sided move in stocks this year. A day later, the NASDAQ and most equity markets across the globe suffered the largest one-day drop in over a year, as volatility soared on the back of President Trump worries.
Unassumingly, however, last week's COT (Commitment of Traders) report through May 16th, a day before the "sell-off", suggested that large speculators in both e-mini S&P 500 and NASDAQ 100 futures, both of whom tend to follow the trend, were growing skeptical of the soaring run in equities. A run that for the most part had carried stocks to record highs.
With ETF Funds flowing more into Europe than ever (according to EPFR), coupled with the solid performance of the euro currency, dollar-denominated assets have recently been under performing. It is no surprise, however, that the greenback has suffered, the yield curve has been flattening in the wrong way and the latest dose of political turmoil has pressured investors into risk-averse safe-havens such as gold and the Japanese yen.
Plain in simple, it was a bad week across the board for the buck. The euro (EUR/USD) reached 1.12, the pound (GBP/USD) probed the key 1.30 mark for the first in 6-months, and even previous laggards such as the aussie (AUD/USD) and loonie (USD/CAD) rallied against the greenback last week.
Fortunately, things in the stock markets settled down quickly last week, as fears subsided of an imminent disruption in the Trump administration's growth policies. This, however, marks a potential turning point in the Trump popularity, as opinion polls have largely topped-out (in favor of the president) at around 44%, according to the Huffington Post.
Let's face it, the Donald seems more engaged with correlating stock market performance than any other president ever before. So it wasn't surprising to see Trump do what was needed to guide popular opinion and inherently global market sentiment back appropriately heading into the weekend. The problem, however, is this time he (Trump) may not have things in control and may have even underestimated the FBI and ultimately tarnished his on-going legacy and ability to pass legislation through his so-called "divided" government.
Only time will tell, however, and admittedly I'm no political expert. That said, I do believe this week we'll get a glimpse of whether the either the US dollar or all dollar denominated assets (including US equity markets) will show further weakness ahead. Several things hint, however, of at least further currency woes for the US. First, on a trade-weighted basis, the USD has broken down to the lowest levels in the post-election era. Second, and more importantly, large speculators (non-commercial large traders) continue to wind down their bullish trades in the dollar. And lastly, retail traders, who are often wrong in terms of direction, continue to anticipate a dollar turn (back to the upside).
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