For the past two weeks I have been observing a divergence from what has been a fairly reliable pattern involving the Swap Dealers and the big Commercials (Producer/User/Merchant/Processor) category. I remarked about this last week in my comments and mentioned that we would be watching to see if this divergence looks like it might be more than perhaps a one or two hit wonder.
This week’s report now shows the 3rd consecutive week in which the Swap Dealers have gone the opposite direction of the other big commercials. What makes this so noteworthy is that by simply looking over the chart, you can see that for the most part these two giants have been pretty much marching in lock step with each other. As the net short commercial position increases, the swap dealer net short position generally increases as well. When it decreases, so too does the Swap Dealer’s.
What appears to be happening is that the Swap dealers are slowly moving out of their net short position using the selling of the Commercial class to provide them with someone to buy from. AS a matter of fact, the swap dealers have been marching in lock step with the Managed money category for the last three weeks.
I do not want to make any sort of dogmatic prediction from just a few week’s worth of data, but this divergence bears watching to see if it really does become something more forcible and predictable. If so, it would indicate that the Swap Dealers are attempting to extricate themselves from their rather sizeable short position. They obviously have a long way to go to become net longs but wouldn’t it be interesting if after all these years of working the short side of the metal, they have had a conversion experience and want to at the very least get out of the short side.
Next week’s report is going to be very revealing because of the sizeable correction in price we have had. If what I suspect is happening, look for the Swap Dealers to have dramatically reduced their short position into the liquidation selling of the general public and the managed money crowd. This time they will be back to going the same direction as the other big Commercial category who no doubt are using the selling of the general public and the Managed Money due to liquidation to cover some profitable shorts.
Keep this development in mind when you are tempted to throw the metal or the shares away on these price reactions. It could be that the very last chance for these near perma-shorts (Swap Dealers) to cover and get out is now occurring and they are attempting to make the best of it.
I also noted a rather large increase in the spread positions of the swap Dealers. They might very well be taking on some long positions to offset some of their shorts as a way to try to minimize some of their short side exposure.
Things are getting interesting.
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