Contrarian Indicator for WTI Crude--Managed Money Positions

If you want a contrarian indicator for where WTI crude price is going just look at the positioning of managed money, especially the bears--the short traders.  The main stream financial media loves to talk about hedge fund positions on WTI crude, especially during a down swing.  But if you have followed the crude market in 2015 closely, you will have discovered that shortly after the media is telling us that the hedge funds are shorter than they have been in a long time, crude reverses higher.

For the purpose of this post I'm defining bulls and bears as speculative bulls and speculative bears that invest via managed money.

Part of this is related to the fact that what is being stated as hedge fund positioning is really managed money in Commodity Futures Tradind Commision (CFTC) terms which also includes money in ETFs or ETNs such as DNO, USO, DWTI and UWTI.  Stating this is the position of the hedge funds makes it sound like all the money is under professional direction by a hedged fund manager that might have inside information, when the majority could actually be just your average person who decide to either buy some oil or short some oil since they just heard it is moving one direction or the other.

The data shows just how poor of an indicator managed money is, but it is a pretty good contrarian indicator.  Most traders and investors say the little guy is always wrong and CFTC data tends to confirm that.

Let's look at this chart in more detail and discuss some of 2015 price movements.

Spring Surge
Notice that price bottomed around the week of  3/17 but bears kept adding to their short positions--not by much, but a little--the following week of 3/24 while the weekly Tuesday price surged from $43.11 to $48.38.  Then the bears slowly rolled out of their short positions until price topped out and plateaued over $60 during the summer.  You will also notice about 70,000 short contracts were added during the Feb-March collapse from about $53 to $43 but the same 70,000 short contracts were closed as price rose back up to about $54.  The group that sold the last 70,000 short contracts likely made little or nothing and likely lost money.

Summer Collapse
Notice how the bears really didn't get involved until crude dropped below about $50-$52.  Isn't it strange that these bears were very excited to short oil at a low price as it dropped from $53-$43 but were not confident to build up a short positions during the summer when price was much higher, in the high $50 to $60 range  Only after price started to really break down did the bears come back out.  Short positions went up about 30,000 during the first drop from around $58 to $52, but 60,000 short contracts were added during the remainder of the move from $52 to just under $40.

Late August/September Surge
Notice again how the bears ended up closing up short positions as crude rose in late August and September and really failed to reestablish new short positions near the Sept/October highs, only really adding to short positions again as crude fell.

November/December/January Collapse
Shorts again have added over 30,000 short contracts to the already robust 150,000 short position as crude moved down in late November and December.  Given last weeks action and the chart history, it is very likely bears added a lot more short contracts this past week.  We have yet to find out how this truly ends up for them.  But if history repeats it won't end well.

It is interesting to note that the bulls smartly dropped about 60k-70k of contracts during the summer early summer highs.  However, it is also obvious that bulls are no better at building long positions when price is low than the bears are at building short positions when the price is high.  I've studied CFTC data going back to about 2006 and managed money was a good contrarian indicator when crude bottomed out in 2009 as well.

There is are a couple of other speculative bull/bear groups, they are the Other Reportables and Non-Reports in CFTC terms.  These groups trade futures directly and seem to do a better job of positioning ahead of large price swings rather than jumping in after the move has begun missing out on large gains.  I'll post more details about these groups later.