LME COTR - Funds start year in a quiet way

Net impact: Bullish

Comment: The money managers' net long position climbed 1,554 lots - the first uptick in four weeks - but this was via 2,127 lots of short-covering and long liquidatation of 573 lots. 

The net long money managers' position remains elevated at 68,938 lots - the range last year was -3,079 to 79,191 lots.

Given the rise in prices since late in October and the loss of upward momentum in December, it is not surprising that stale long liquidation has emerged, especially ahead of the end of the year. 

The low level of gross short positions suggests the market is not overly bearish. We were waiting to see if the gross short position picked up because that could have triggered a bearish head-and-shoulder pattern on the three-month price chart. But with prices heading higher again this year, the H&S pattern looks less likely to be triggered.

The technical chart looks bullish again - we will wait wait to see if the fund longs start to buy again and whether shorts cover further. The gross short position of 63,531 lots is still quite large, even though it is the lowest we have on record - see red line on chart.

Net impact: Doubly bearish

Comment: While long liquidation continues, shorts have increased their positions, leading to selling from both camps. So it has not been investor buying that has lifted prices at the start of the year - it suggests consumer have been pricing material.

The gross long and short positions are still well below their highs. The gross long position is in mid-range while the gross short position is near its lows but it has been climbing recently. With neither at an extreme, the current trends could continue.

Still, firmer prices could lead to short-covering and a return of fresh buying by money managers.

Comment: The net long money managers' position dropped 2,239 lots - fresh selling (2,847 lots) outpaced fresh buying (608 lots). The net long money managers' position has fallen in eight out of the past ten weeks but it is still relatively high.

Long liquidation has to some extent been offset by increased shorting.

Given stronger prices we wait to see if shorts start to cover again and if longs build up their position further. 

Comment: The seven-week drop in the money managers' net long position ended last week when fresh buying outpaced fresh selling. 

The short position had been falling for most of 2016 but it has edged higher for four weeks now while the long liquidation had run for five weeks. This also ended last week.  

The downward-trending green and red lines indicated that money managers were losing interest in lead. Given the fundamentals and the price drop, we had expected fund buying to return; we think that may be under way now. Lead prices have rallied 11% in seven days.

Most of the weakness in recent months in lead's money managers' position has come from long liquidation. The recent rally may see money managers rebuild their positions now.

Comment: The net long money managers' position edged 835 lots higher last week.

Longs added 1,716 lots and shorts added 881 lots. The lack of volatility and the downward slopes on the red and green lines suggest money managers have not been that engaged with zinc. 

We said recently that, with the gross long position still relatively high, zinc probably needs further fund buying for prices to hold up. The run-up in prices this week may well mean that is now being taking place, which should put off further stale long liquidation.

Comment: Money manager longs and shorts reduced their exposure last week

Given the run-up in the gross short position in the fourth quarter, there is a danger of short-covering should prices break above $21,500 per tonne. But for now a lack of upside progress has been prompting longs to liquidate too.