The interaction among the 10-Year Treasury Note’s market participants provides a great example of how the commercial traders’ actions, as categorized in the weekly Commitments of Traders report, can be predictive of future market movement. More importantly, this information can provide keen insight ahead of major market news events like the September FOMC meeting.
Our focus on the commercial trader population within the Commodity Futures Trading Commissions’ (CFTC) weekly Commitments of Traders (COT) report is based upon the premise that these people are some of the most well connected members of today’s financial world. Much of the weight we give them is based on years of watching their positions build and decline in conjunction with the economic news of a given market. Their timing is uncannily accurate. Therefore, when their actions forecast a given scenario ahead of an important news event, we take note. When the news, like this morning’s unemployment report, moves the market further against their position, we REALLY take note.
The interest rate sector has been spooked back and forth between the Federal Open Market Committee’s (FOMC) desire to raise domestic interest rates and the global economy’s seeming inability to gain any significant traction. This has led to the conundrum we face as the FOMC raised interest rates for the first time in nearly a decade while, simultaneously, more of the First World’s economic powers slip deeper into negative interest rates. This begs the question, “How can an individual determine the path of interest rates even as the world’s most connected bankers and governments argue vehemently among themselves regarding the same topic?” Our answer in times like these has always been the effective implementation of commercial traders’ consensus combined with good old-fashioned technical analysis.
This year began with a bang. Our forecasting models accurately predicted many of 2016’s early commodity rallies in metals, energies and grains. Our models also expressed the notion that while these rallies would be sharp, there was little evidence to suggest that this was anything more than a temporary spike in a deflating global economy. Therefore, the persistence of these rallies has been the biggest surprise of the year. However, the same factors that have led us to believe that these rallies would be temporary have only increased their alarm. This week, we’ll examine the primary component of our deflationary argument while also shedding some light on an inspired tweak to an existing measure of global economic activity.
The U.S. Treasury Bond market has been held hostage for the last year as the developed world argues about economic stimulus. The argument began to grow back in December of 2014 as Janet Yellen and the Federal Open Market Committee (FOMC) stated, “The committee considers it unlikely to begin the normalization process for at least the next couple of meetings.” This sent rates plummeting and Treasury Bond and stock prices screaming higher. This move was widely anticipated and was perhaps, the last choreographed move between the Treasury and its markets’ participants as market participation since then has declined dramatically. This has left the biggest traders in the deepest markets debating domestic Fed policy in a world of increasingly negative interest rates, while raising domestic rates for the first time in nearly 10 years.
There are times in any endeavor when the stars align and the proper course of action is as clear as a bell. We’ve all had our moments when even we knew we, “were on a roll.” However, most of life’s endeavors and their eventual successes come simply from the honest trudge of hard work and dedication to a specific task. This explains the late 2015 early 2016 success as many of the commodity market were displaying classic commercial trader group clues which we discussed frequently in our Commitment of Traders analysis. This led to catching several of the market rallies like the metals, energies and grains. However, as these moves have disconnected over the last month or so, the next set of predictions becomes much more difficult. This week, we’ll look at the issue of profitable trading via mechanical programs while using the interest rate sector as a barometer for the general markets’ confusion as the global rate picture remains one of the biggest variables.
Has the commodity rally that began just before the New Year ran its course? We posed the argument in early January that the technical breakout in interest rates would point towards the general economic activity of 2016. The interest rate breakout higher, towards lower rates would ultimately show itself in the form of deflation, which would in turn, weaken the commodity sector. I believe we are at a major inflection point for the year’s trading.
We’ve been tracking the interest rate complex even more closely since October when we saw the commercial traders beginning to place their bets ahead the Federal Reserve Board’s (FRB) December meeting and while we’d like to take credit for the predominantly correct calls in the interest rate sector through 2015, we really have to chalk it up to knowing who to follow. The commercial traders have done a great job of anticipating both the FRB’s actions and the market’s reactions. Join us as we determine how their recent actions have affected the bond markets and what the spread movement in this market sector could mean to the broader economy going forward.