Tag Archives: 10-year treasury notes

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.

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Expected Turbulence in the Financial Markets

I frequently talk about using the commercial traders as a proxy for fundamental information. Commercial traders’ pinpoint focus on the markets they trade takes into account the supply and demand structure within their individual markets, including stocks and bonds. Furthermore, their actions within the markets they trade literally, tell us what they expect to happen within their market going forward. Thus, our thesis that, “No one knows the markets they trade like those whose livelihood is based directly upon the correct forecasting of their market.” All things being equal, when my analysis of the fundamentals seems confounded, I defer to the respective experts within their markets. Finally, when the market sectors are analyzed in total, commercial traders’ actions can lead to a bigger picture. The recent shift in their positions within the financial markets leads me to believe Continue reading Expected Turbulence in the Financial Markets

October Market Volatility Scared No One

Trading is a funny thing. There are times when the reasoning behind a market’s actions are spot on. There are times when the reasoning turns out to be wrong yet the directional prediction holds fast. Finally, there are times when the reasoning is dead right and the market does the exact opposite of what was expected. It appears that our September through October forecast was directionally solid. However, based on the data I’ve compiled over the last week, I believe the jump in volatility has merely shaken things up, rather than signaled a major change in market sentiment.

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Weekly Commodity Strategy Review 09/26/2014

Monday once again started our week off with a bang in our feature for TraderPlanet. We looked at the technical, fundamental and geopolitical support the 10-yr Treasury Notes were nearing and indicated that a buying opportunity was upon us in, “Commercial Traders Support the 10yr Treasury Note.”

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Trading the Decline in Commodity Prices and Volatility

The commodity markets were designed for commodity producers and commodity end line consumers to limit the volatility and risk in their business models. Producers are only willing to keep producing when they can sell their production at a profit and end line commodity processors are only willing to buy them if they can realize a profit upon selling the goods they’ve finished. The creation of commodity trading floors provided a singular location for these transactions to be recorded along standardized times and qualities. Unfortunately, commodity producers only want to sell at high prices and commodity consumers only want to buy at low prices. This created the market makers, floor traders and speculator categories that have come into the markets to provide liquidity by providing bids and offers in between the producers and end users. This week, we focus on the creation of the commodity indexes and Exchange Traded Funds created by the banking sector and what effect the current period of low volatility and declining prices is having on the very banks that created them.

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Commercial Traders Support 10yr Treasury Note

The treasury markets have been stuck in a sideways trading pattern since the Federal Reserve Board’s announcement that they would begin tapering off the additional stimulus with the intention of completing their stimulus additions by year end.

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The Fed is Cornering Itself

The government shutdown has passed and the markets are still here. The stopgap measures that kicked the can into early next year merely provided a buying opportunity in the interest rate sector for the top 1% while providing the catalyst for the final leg up in a bubble that makes the housing issue of ’07 look like an appetizer. Recent reports suggest that two separate papers presented at the International Monetary Fund meeting this week highlight the potential for a serious revision and extension of the fiscal stimulus plans already in place. Given the current nature of our markets, it’s hard to see how this doesn’t turn sour in the long run.

The Federal Reserve Board has two primary objectives; fostering full employment and stabilizing market prices. Historically, market prices referred to those things in life, which affect all of us like, milk, gasoline and farmland. This perspective has increasingly shifted towards the stabilization of more esoteric prices like the stock markets and interest rates. This shift in focus was originally designed to prop up a swooning stock market as well as getting capital flowing again during the heart of the economic collapse of ’08. The markets came roaring back with equities more than doubling and reaching all time highs this year and interest rates have bumped along at historic lows ever since.

The Fed achieved their goal of stabilizing prices ages ago and it has been proven that each additional increase in Quantitative Easing has been exponentially less effective than the previous one. This path will be followed for the next four years as Janet Yellen is handed the reins of the Fed next year. Why would the smartest minds ignore the data that so clearly illustrates these points? The simple answer is that, “and in other news, the Dow Jones Industrial Average reached another new high today,” sounds like a win to the average John Doe. The truth is that the average John Doe has never participated less in a stock market rally. Furthermore, the headline unemployment rate of 7.2% does not take into account that the labor participation rate is at a 35 year low. Therefore, the unemployment rate as published fails to include 90 million Americans who’ve simply given up looking for work and are drawing no unemployment assistance, thus no longer counting as unemployed.

Recent talk of tapering off the $85 billion per month Fed bond buying programs spooked the equity markets and sent the bond market plummeting, and rightly so. There’s no question that the excess capital created by the Fed must end up somewhere. We’ve seen a full rotation out of stocks and interest rates and into commodities and gold. Now, it’s out of commodities and back into interest rates and equities. The government shutdown created the mother of all buying opportunities in the interest rate sector. You can see the commercial trader buying surge as the Fed’s suggestion in May scared the market. I believe this could lead to the final phase of an interest rate bubble that dwarfs the housing bubble because the big money knows the Fed is too scared to take their foot off of the accelerator and has backed themselves into a corner due to their willingness to manipulate prices on the open market.

We’ve already seen some of the smartest bond money in the world step aside with Bill Gross of Pimco choosing to exit the 30-year bond bull. However, like most smart money, he’s probably early on the way out and will probably miss the last leg up. Although, he was recently quoted about buying the bottom of the shutdown that it was like, “picking up pennies on the street. Somehow, I think he’ll survive. His pennies are not the same as my copper pennies. Banking analyst Dick Bove said on CNBC that the US balance sheet shows us at $16 TRILLION in the hole. Most of this is coming due between 2018 and 2020 as the Fed has taken advantage of lower yields across the board to increase the average length of maturity from 4.1 to 5.4 years since 2009.

Finally, the two papers presented this week will suggest that we EXTEND the length of the QE programs from the original goal of 6.5% unemployment and 2.5% inflation to perhaps 6% or even 5.5% unemployment as inflation is yet to rear its head. The Fed has increased its monetary base from less than $1 trillion prior to the economic implosion to more than $3.6 trillion. If the economic stimulus is the cause of the decline in unemployment from 10% to 7.2%, not counting a quarter of the US population who’ve quit looking for work, then a linear equation suggests that another $1 trillion would get us to 6% unemployment.

Current bond market expectations suggest the 10-year Treasury Note may close the year near 2.25%. That’s approximately 60 basis points above our current price of 126^27. The market would have to reach a new all time high of 133^13 for yields to decline this far. This represents a $6,500 rally per contract in the 10-year Note futures. Given the nature of the bond market, I expect to be able to get this market bought around the 125^00 level and would risk the trade to the 16-day government shutdown low around 122^00. This would provide a risk to reward of $3,000 to $8,400. While we fully intend to trade the bond rally, our primary concern remains focused on what happens once it’s over. The big question remains, “How can the Fed weasel its way out of a situation that they created for themselves while continuing to suggest not only its continuation but, its continuation beyond the original scope of its design?”

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Market Reactions to Debt Ceiling Changes

The ongoing budget and debt ceiling issues have arguably become as contentious as the Trayvon Martin case in social media. This is as vocally divided as I’ve seen my social media feeds. The left claims that the Republicans are solely to blame for our issues while the right insists we cannot spend forever what we haven’t got. Personally, I think both sides have their heads shoved very deeply up a warm and dark bodily cavity. While Congress argues about how to spend our money and money we haven’t got, they receive a lifetime’s salary plus benefits for 4-6 years of work yet have the nerve to use the term, “welfare state,” in public.

Whether you agree with the left, right or somewhere in the middle is irrelevant in the world of managing finances and trading. What matters is empirical data, not conjecture. A quick survey clearly shows that the economy is starting to slow due to the government shutdown. Consumer confidence is plummeting along with Congress’ approval rating. Government loans are being stalled for small businesses. Mortgages are stalling because government guarantees can’t be secured. Customs is turning into a choke point for global trade as inspections can’t be done and clearances can’t be granted. These are all quantifiable drags on our economy and will be reflected in lower GDP numbers.

The previous points are all uselessly valid. We don’t trade US Customs volume and our assets aren’t invested in Brazilian oranges left rotting at a dock. Our assets are directly placed in the US financial markets. I’ve spent the last week compiling a spreadsheet of debt ceiling negotiations and raises (there haven’t been any decreases) from the last twenty years and compared it to the most likely assets to be affected: interest rates, the US Dollar, gold and the S&P 500. Professors always say that economic choices are made, “at the margin.” Our philosophy has always been to stay ahead of the margin calls in the first place.

The debt ceiling has been raised 18 times since 1993. I chose this start date because it gives us 20 years worth of data during the most politicized portion of our history. Furthermore, the past twenty years have participated in the boom of the information age where the average person on the street has had more and more access to more and more information than ever. This allows all of us to make investment decisions based on fully formed opinions on events as they unfold. Therefore, the data set should be representative of the current investment climate.

Based on what has happened in the past, how can we best position ourselves for the future? Unfortunately, the data is mixed, at best. Because I’m old school and still do charting and modeling by hand, I chose a simple premise. “Where did the markets close the day before the debt ceiling was raised and where were they trading ten days later?” The range of results varied little by direction. The most predictable asset class is the interest rate sector by using the 10-year Treasury Note as a proxy. Ten year Treasury Notes traded lower (higher yields) 11 out of 18 times. This seems logical as raising the debt ceiling should force us to pay more in future obligations. It is worth noting that the declines in the 10-year Note came against the backdrop of a 25-year bull run in the interest rate sector.

The S&P 500 was the second most bearish market as it was lower ten days after the announcement in 10 out of 18 instances by an average of 1.6%. The S&P also retained its typical character of panic sell-offs. The largest gain was only 4.82% in May of 2003 while there were four occurrences of losses greater than 5%. Two were greater than 10%. The largest 10-day loss was a whopping 22.7%. Therefore, raising the debt ceiling and conducting government business as usual is not always a positive for the stock market.

The lone bull in the markets examined was the US Dollar. The slight bullishness in the US Dollar surprised me. The Dollar was higher in 10 out of 18 instances by an average of 1.3%. This is where multiple types of analysis really work together. Last week, we suggested that the Dollar is setting up for a downward trending run. I stand by that analysis. Monday, October 7th, Trader Planet published a piece I wrote on the counter trend bounce typically found in the US dollar after multiple moves to new 30-day lows. The Dollar situation as a whole confirms this theory. I expect the Dollar to rally short-term but fall over the course of time.

Gold was the final market we went into. I didn’t expect to find much here and I didn’t. Perhaps, the biggest point to be made here is that anyone trying to talk you into buying gold because the government is failing, inflation is coming, the Dollar is dying, etc must have a hidden agenda. The data simply doesn’t support the sales pitch. In fact, the biggest moves in the post debt ceiling adjustments in gold were to the downside. The general direction however remains a coin toss as the gold market moved up and down with equal frequency over the last 18 instances.

Finally, there’s one last point to be made of historical proportion and I have to credit my brilliant nephew, Erik VanDootingh for tipping me off to it ahead of the news curve. The markets are scared. Big, BIG money is scared. This can best be measured by the difference between the interest rates that the US government is paying for loans versus what international banks are charging to borrow from each other. Technically, this is the spread between Treasury Bill rates and LIBOR (London Interbank Overnight Lending Rate). For the first time in history, including the 2008-2009 implosion, our government is being charged a higher interest rate to borrow money than banks are charging each other. Interest rates are based on risk. The higher the risk, the higher the rate charged. Let that sink in awhile as you ponder, “too big to fail.”