This has been the constant theme for the entirety of this new year and it continued again this past week in the Oil markets.

Here is a breakdown of the LARGE SPECS positions.

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The hedge funds have covered a whopping 136,500 short positions since the start of the year bringing their outstanding short positioning to the lowest level since early June 2015.

If you include the Other Large Reportables, the reduction in overall short positions among these powerful large speculators is even more dramatic. Together they have liquidated/closed out/covered 160,598 total short positions since the new year began.

What is also revealing is the CONTINUED LACK OF NEW AGGRESSIVE BUYING.

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The number of hedge fund long positions has barely budged over the last 6 weeks. In actuality is is SMALLER this week than it was six weeks ago!

This is further confirmation of something we have been noting here for a while now – the recovery in many individual commodity markets, but especially the oil,has not been led by fresh longs/influx of hot money, but rather a closing out of existing bets on lower prices.

This is why I am very cautious about getting bulled up on some of these markets. Short covering produces huge moves higher in price, especially if the short side trade has been very crowded as it had been in oil, but that is a far cry from transitioning to a rip-roaring bull market.

My interpretation of this is something I have written repeatedly this year – traders playing the short side of many of these markets seem unwilling or hesitant to press them into new lows in the face of obvious reflation efforts by the Central Banks ( negative interest rates, ultra low rates, dovish Fed, etc.) based on the axiom that one cannot fight the Fed ( central banks) and expect to win. On the other hand, the efforts by these same Central Banks has largely proved ineffectual in achieving their stated goal of producing economic growth of a rate strong enough to generate an annual inflation rate of 2%.

In other words, “We can’t get these Central Banks to stop interfering with the markets so we cannot press it lower but at the same time I do not want to chase it higher because economic growth stinks to high heaven”.

Thus we seem to have arrived at a situation in which the main question, now that prices appear to have hit bottoms in many commodity markets, has become. “NOW WHAT DO WE DO?”

That leads me to believe that unless we see some sort of economic data suggesting that growth is truly on the mend and prospects are looking much better, the more probable outlook for prices is meandering choppy movements in price.

We need to see either a rash of very negative economic news to allow us to press the downside once more or some sort of very decent economic news to bring out “the animal spirits” in traders which would make them willing to step up and really start to chase prices higher by committing lots of new money into these markets on the long side. So far, we are not getting either.

I view this as more confirmation that we need to continue to remain more short-term oriented in our trades and not read too much into the day to day “noise” in the hope that eventually a trend of some sort will assert itself. If you get a trade that can make you money in some markets that last for more than a few days, be thankful for that but manage it to make sure you lock in some profits while they are there.

AS a practical matter, this means do not get carried away with overly large position sizes. Whenever I see short covering the dominant feature of any market, it makes me nervous because in the past it has always led to unstable and rather choppy trading with little continuity from day to day at times. The reason is because there is such a lack of conviction on the part of both bulls and bears that everyone is jumpy and it does not take much for either side to head rapidly to the exits. In short – panic buying and selling is more than abundant.

By the way, here is the Commitments data for oil showing the NET POSITIONS.

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Notice if you did not have the chart I started off this commentary with, you would see the Hedge fund net long position growing and would be tempted to say that the hedge funds are growing more and more bullish on oil. That is NOT CORRECT. They are growing LESS BEARISH. That is much different than BULLISH. If they were growing more and more bullish, we would be seeing more and more NEW LONGS being instituted by them. This is important in grasping the sentiment correctly.

When large specs are strongly bullish, they tend to come into a market and BUY DIPS in price with the result that the market sets back, finds support, then moves up another leg higher, then retreats somewhat in price, finds more support as dip buyers come in, then moves up another leg higher, etc. That is the action in a bull market. What we have instead in oil is a market that has forged a bottom but is reluctant to push substantially higher due to the fact that a large number of the big spec shorts in this market have already been flushed out. Without their buying to push the price higher, gravity is taking over because there is a lack of fresh buying to provide the thrust necessary to keep the price elevated. Whether that will change is unclear since none of us are clairvoyant but I can categorically state one thing, unless we do see NEW BUYING and lots of it, crude oil is going to struggle to push substantially higher.

Maybe that Oil producers meeting next month will produce an actual CUT in production instead of just a freeze. If so, that might be the impetus to take the price higher and actually turn this short covering rally into an actual bull market but we will have to wait until then to see if that is the case. Guessing what that group may or may not do is a fool’s errand.