Equities Break Out To Open New Year

Speculators significantly increased exposure to Nasdaq 100 and S&P 500 futures, according to the latest Commitment of Traders (COT) report. Equity markets, meanwhile continue to ignore overbought warning signs, breaking out to fresh record highs to open the new year. Elsewhere, the EUR/USD nears yearly highs as speculation reaches yet again another bullish extreme, and retail FX traders continue to buy the greenback in anticipation of a turn despite broad-based weakness.

E-mini S&P 500 futures continue to mark fresh all-time highs despite extremely (weekly) overbought conditions. In the latest COT report, futures speculators significantly covered short positions, allowing for the net long percentage to jump to 60% from 55% a week prior. Price action in S&P 500 futures, meanwhile, broke-out of the mild correction that took place in the final weeks of 2018, suggesting further upside while maintaining 2695 and/or the 20-day moving average to the downside.

The breakout advance in equities suggests that a blowout phase is likely forming, which typically ends in a wide ranging day accompanied with huge volume, both of which have not been seen yet. As such, equities are likely to climb the proverbial wall of worry, sprinkled in with short bouts of corrective dips, until evidence of a topping phase has materially formed.

The (trade-weighted) Japanese yen reached a new cyclical low to start the new year. The weakness was indeed reflected in the latest COT report as yen speculators shed long positions by roughly 10%, leaving an extremely (net) short that continues to hover near the largest (net) short position in years vs the USD.

Meanwhile, the retail population which had been selling JPY towards the end of 2017, began to buy late last week after the USD/JPY tested 112. If the retail population, however, resumes selling yen, there’s plenty of room for speculators to buy, given only 20% of the total (non-commercial) contracts outstanding are long.