Much of successful trading, like economics, comes from making small changes that over time, affect the big picture. Today, we’ll discuss a marginal improvement to our Commitments of Traders swing trading calculations that improved performance across all of the markets we trade and that leads to big changes in the bottom line over time.
As many of you know, our our primary focus is the analysis of the Commodity Futures Trading Commission’s (CFTC) weekly Commitments of Traders (COT) report. More specifically, our analysis lies in finding and quantifying unsustainable position imbalances among the trader groups. In the past, we’ve measured this against both historical levels and recent changes in actions in order to quantify both market sentiment and market capacity among the different trading groups. Today, we’ll provide Equites.com’s readers with a first look into our new method of calculation. Why we changed and what it’s current telling us about the Chicago wheat market.
We wrote here at Equities.com on June 30th that we thought cattle were finding support in, “Cattle Finding a Bottom into Summer.” Over the last six weeks however, commercial traders have come back to the market on the sell side. Based on the commercial traders’ deteriorating evaluation of the fundamental picture along with the clear technical signals, we’re not only exiting our longs; we’re going short October live cattle.
The Euro has been range bound for nearly 18 months; stuck between $1.06 on the low side and roughly $1.17 on the high side. While the Euro remains stuck, now trading a little over $1.10, there has been growing interest by the commercial traders to own the Euro following the Brexit vote.
Sugar has rallied more than 50% since the February lows, primarily based on supply concerns. There are current weather issues in South America and Southeast Asia as well as structural issues that will see the sugar market shift from surplus to deficit this calendar year. The common news reports regarding global El Nino issues combined with speculators increasing need to own something in a 0% yield investment landscape has led to a new large speculator record long position in the #11 sugar futures contract, according to the weekly Commitments of Traders report. We believe the record position is unsustainable.
It’s one thing to hypothesize that a market is in a speculative bubble; it’s another to let the data write the story. According to the current Commitment of Traders report, large speculators just set e new net long record of 301,920 contracts. This eclipses their previous record of approximately 266,000 contracts set just this past May. We moved out to a weekly chart in order to provide some context for the current situation.
The Brexit vote caused a spike in volatility by creating an instant, “risk off” trade. The ensuing sell-off appears to have created a buying opportunity in unleaded gas futures that should continue to be supported by growing domestic demand through the summer vacation season.
Our trading is focused on the thesis; “No one knows the value of his markets like those who pull it from the ground.” While individual companies or operations may be prone to mismanagement or other bad decisions, the collective actions of the companies within a given sector are rarely wrong. The tug of war between those who pull it from the ground versus those who process it determines true price discovery within the commodity markets. These are the elephants bulldozing the macro moves while the speculators compete for the remnants with the dung beetles. Recently, large speculators have been stocking up on gold futures at a record pace and the gold miners are selling all the forward production they can lock in above $1,220 an ounce. This could lead to quite the washout as speculators are forced to take losses under $1,280.
Last week, we noted that the declining volatility of option prices ahead of this Wednesday’s FOMC meeting was curious, to say the least. As we dug in, we noted the broader scope of this trend towards declining option volatility. Today, I’ll show you another way of using the Commitments of Traders report to track investor sentiment and in this case, why the correspondingly bullish put/call ratio via the large speculators is probably bad news for the stock market.
Soybean farmers are now the most short they’ve been since October of 2012. This means that U.S. farmers who are able to take advantage of South American misfortune stand to have their best year in quite awhile. There’s no question that South American production is not going to pass muster. However, in an interesting twist of fate, the same weather that kept us out of the fields this spring is going to be a boon to late planted soybeans heading into a La Nina fall growing season. Therefore, we view this last leg up in the soybean market as a selling opportunity rather than the emergence of a new trend.