Bullish bets on VIX rise heading into US election: COT report

Traders seems to be hedging event risk with the VIX heading into the US election, with traders close to net-long exposure despite record highs for the VIX. Asset managers and large specs continue to have opposing bets on the USD index, with the former generally being on the correct side of the dollar’s direction.

Market positioning from the COT report - as of Tuesday 8 October, 2024:

• Large speculators flipped to net-short exposure to USD index futures for the first time since April
• Yet asset managers flipped to net-long exposure and the USD index rose for a second week
• Asset managers switched to net-long AUD/USD exposure (large specs were their most bullish since December 2017)
• They increased gross-long exposure to Swiss franc futures by 16% (1k contracts)
• Large speculators trimmed net-long exposure to gold by -27.7k contracts (longs reduced by 5%)
• Short exposure to WTI crude oil was reduced by -16% (-22.1k contracts) to send net-long exposure to a 9-week high
• VIX futures are on the cusp of flipping to net-long exposure among large speculators and asset managers

US dollar positioning (IMM data) – COT report:

Large speculators flipped to net-short USD index futures for the first time since April, although only just at a mere -1.9k contracts. Yet asset managers flipped to net-long exposure, which again shows they’re the better one to follow for general USD direction given the dollar index rose for a second week.

Moreover, the 5.9k increase of net-long exposure last week was the fastest pace in 14 months. They also reduced short bets at their fastest weekly pace in over three years.

Commodity FX (AUD, CAD, NZD) futures – COT report:

AUD/USD is the king of the commodity currencies, with large speculators pushing let-long exposure to its highest level since December 2017. Asset managers also flipped to net-long exposure. Traders remained net-long NZD futures ahead of RBNZ’s dovish 50bp cut, so I expect to see traders net short by the next report. Net-short exposure to CAD futures also increased on rising bets of further easing.

JPY/USD (Japanese yen futures) positioning – COT report:

Bullish exposure to yen futures dwindled for a second week among both sets of traders, tracking prices lower on yen futures (bullish USD/JPY). Moreover, short bets against the yen increased by 22% (8.4k contracts) from large speculators, and 12.5k contracts from asset managers. Not only is the USD retracing higher due to reduced bets of 50bp Fed hikes, but they’re also scaling back bets of a more hawkish BOJ.

WTI crude oil (CL) positioning – COT report:

Net-long exposure to WTI crude oil rose to a 9-week high, yet speculative volumes for large speculators and managed funds was lower on the week. Large specs reduced shorts by -16% (-22.1k contracts) but increased longs by 3% (8.9k contracts), whereas managed funds trimmed exposure to longs and shorts by -13.6k and -7.8k contracts respectively. Given the doji that formed on the weekly chart and lack of top-tier data this week, we could be in for a smaller-ranged week without a fresh catalyst.

VIX (volatility index) 30-day futures positioning – COT report:

Both asset managers and large speculators are on the cusp of flipping to net-long exposure VIX futures. VIX futures also increased for a fourth week. Not only have we seen a rise of concerns from the Middle East, but I suspect investors are hedging downside risk of the stock market as we head towards the US election on November 5. Still, that hasn’t prevented a new record high on the S&P 500, which is why I suspect hedging against downside surprises over the next month is at play.

Metals (gold, silver, copper) futures - COT report:

Traders have trimmed their net-long exposure to all three metals over the past couple of weeks. While gold futures were lower for a second week, the pullback was shallow and prices remain just off their record highs while net-long exposure remains highly bullish. But with net-long exposure lower, I continue to suspect gold will have plenty of support if bulls are treated to even a slightly deeper pullback. With that said, there has been a slight pickup of short bets against gold futures form large speculators, although the bull/bear ratio remains around 5:1.

We’re not really seeing a pickup of short bets against silver or copper futures, though longs have been trimmed slightly. But with China’s stimulus being unleashed, there could be support for these metals going forward as well.

Wall Street indices (S&P 500, Dow Jones, Nasdaq 100) positioning – COT report:

Asset managers continue to favour the S&P 500, with net-long exposure only slightly lower and off its multi-year highs. Again, this underscores that investors are likely hedging event risk via the VIX.

They also increased net-long exposure to Nasdaq 100 for a third week, although the market has moved sideways over this time. But it is not longer the index of choice to short.

Yet asset managers reduced net-long exposure to Dow Jones future at their fastest pace in nine. Participation is a lot lower than the S&P 500 and Nasdaq, and that also means the weekly changes in percentage terms are more volatile, and net exposure oscillates between long and short more frequently.