Cable net short hits all time record ahead of Article 50 trigger

Today we're one week away from the promised Article 50 trigger and the net short cable position is the most-crowded since CFTC records began.

That can only end badly, and it will be for the bears.

A Goldman Sachs note has been doing the rounds and it notes that spec shorts have generally been right in GBP but that ignores a couple of important facts.

  1. The pound is in a bear market, so of course shorts have been right because of the Brexit but even before that, the announcement of the vote and BOE missteps put the bears in charge
  2. How aggressive the selling has been. The net short has risen 45% in the past two weeks. With cable in four of the past five days, much of that trade is underwater. That adds far more short-term risk compared to a short position that's comfortably in the money

Article 50 isn't news anymore. Theresa May has promised to do it for months before the end of March and now she has given a March 29 date.

Sometimes markets know things but the general public doesn't and at times like that a crowded trade can work. But Brexit is the most well-covered story in the UK in a decade. Article 50 will be a surprise to no one.

One explanation is that shorts are in it for the long haul and expect trouble in negotiations. That's a fair point, but why the rush into shorts since the start of the month?

The scariest part about fighting the pack is that it's so obvious. A huge squeeze is setting up and there will be a rush to the exits when shorts start to take profit because there isn't going to be a big sterling selloff on March 29.

The thing is, obvious is terrifying. It's rare that an obvious trade that works.

So my thinking is that it's best to wait and see how trading goes on March 29. There might be a spike lower on the announcement. But if the dip buyers come in -- and especially if/when the spike lower is erased -- that's the time to buy. Because once the short squeeze gets going, it's going to be brutal.