Commercial Traders Ahead of the Fed

I’ve posited several times that the commercial trader group in the Commodity Futures trading Commission’s weekly Commitment of Traders report are the best predictors of medium term moves in the market. Their models are better. Their information is better. Their access is better. These statements apply to everything from their weather models to the latest in artificial intelligence to having ears in all the right places. Before this is dismissed as a cynic “hating” the game, remember that we can put the commercial traders’ actions in the markets to use for our own benefit. That is the basis behind our research at COT Signals.

Look at the following charts covering crude oil, gold, 10-year Treasury Notes and the Nasdaq 100 futures. You tell me if the commercial traders’ actions aren’t predictive….especially in front of the FOMC meetings!

Beginning with the least obvious, we can see that the Fed’s January meeting which forecasted strength in the overall economy helped to stall crude oil’s free fall. Is this the only reason, of course not. The point is that these simple rules will in put us on the right side more often than not.

Commercial crude oil traders were able to get contracts bought before the January "growth" meeting. The second pop came on continued low rates making commodities an inflationary bet.
Commercial crude oil traders were able to get contracts bought before the January “growth” meeting. The second pop came on continued low rates making commodities an inflationary bet.

Our methodology won’t catch every move. We missed the January crude oil rally because the daily volatility within the market was not sufficient to create an oversold condition on our proprietary short-term momentum trigger. We did, however catch the March 20th COT Buy Signal. Should it be a big surprise that commercial traders carried their biggest position in nearly a year into the meeting?

The last three charts, gold, 10-year Treasury Notes and the Nasdaq 100 fairly speak for themselves. We’ll move to gold next since there is a buy and a sell. This is directly based on the Fed’s interest rate decision and economic outlook. Somehow, maybe they’re just that much smarter but, the commercial traders nailed BOTH sides of this trade.

Commercial gold traders nailed both sides of this trade to perfection. Almost like they met with the FOMC before their announcements.
Commercial gold traders nailed both sides of this trade to perfection. Almost like they met with the FOMC before their announcements.

Both the sell and buy were published in the nightly COT Signals discretionary email. The nightly email comes as a simple Excel spreadsheet compiled by hand, from the charts you see here.

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Now, let’s look at the 10-year Treasury Note futures. Fair enough to say this is an interest rate sensitive product and as such should be keenly aware of the Fed’s actual and intended moves.

Commercial traders in the interest rate futures have been able to profit handsomely heading into FOMC meetings.
Commercial traders in the interest rate futures have been able to profit handsomely heading into FOMC meetings.

Again, two COT Buy signals published in real time, ahead of the FOMC meetings. By now, the pattern across markets should be pretty clear both in terms of their past actions as well as their forward predictive power. After all, we don’t have the advantage of hindsight. Therefore, better to place our bets on the best, brightest and most connected individuals within the markets we trade.

Commercial traders ahead of the Fed have profited well on both the long and short side of the stock index futures.
Commercial traders ahead of the Fed have profited well on both the long and short side of the stock index futures.

Here is another example of the commercial traders appearing to have inside knowledge heading into the most important financial meetings of the year. Somehow, they manage to be on the right side of both the healthy economy long trade from January yet, are able to flip to the short side ahead of the FOMC’s concerns over global growth. That’s more than a 10% swing between the two signals, not counting what they’ve made on the decline! I know I didn’t capture the whole thing but, I was grateful for the tips.

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If you prefer purely mechanical strategies, we’ve done that as well. See our mechanical system EQUITY CURVES.


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

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