The silver market has been remarkably quiet in the wake of China’s destruction of the gold market. This week, we’ll touch on a couple aspects, specific to silver that show while commercial traders have been buying this decline, it may be prudent to wait a bit longer before stepping in. Normally, I take a bottom up approach to putting these pieces together beginning with macro issues and finishing with trade details. This week, we’ll set the stage and then move from myopically focusing on the current setup before discussing the potential dangers of this viewpoint.
We’ve discussed the peculiarities of the stock index futures’ expiration cycle in detail here before.
Commercial traders in the stock index futures behave quite differently than the Index traders or, small speculators who act as their counterparts. Collectively, this is perfectly logical. Index traders are positive feedback traders. Positive feedback traders add on to their bullish positions as the market climbs and scale out of their bullish positions as the market declines. This keeps their portfolio balanced to their available cash resources. This also places them on the side most likely to buy the highs and sell the lows. Typical trend following. Small speculators are a sentiment wild card. Their position is more price and sentiment based than anything else. The randomness of their sentiment makes their positions too yielding to lean on.
The Commodity Futures Trading Commission publishes a weekly report entitled, “Commitments of Traders.” This report breaks each domestic futures markets’ participants into four main categories – large speculators, small speculators, index traders and commercial traders. Our research has shown a consistently significant advantage in following the trend of the commercial trader group. This week, we’ll look at its application to the Canadian Dollar over the last year and what it says about our current position in the market’s cycle.
The Commodity Futures Trading Commission(CFTC) publishes a weekly report entitled, “Commitments of Traders.” This report classifies the markets’ largest positions by trading groups – speculators, managed money, index traders and commercial traders. Our research focuses on the commercial trader group. We’ve been able to quantify correlated movement between the commercial traders’ net position and commercial trader momentum with the underlying market movement accurately enough to use this as the first screen in our trade selection process. We hypothesize that their accuracy is due to the laser focus necessary when one’s livelihood is derived solely from the movement of an individual market.
We began the week with Bond market analysis for TraderPlanet. We looked at the tremendous and rapid build in the commercial trader position noting that the recent sell off may be nearing exhaustion. Based on Thursday’s reversal and ECB/IMF/Greek hope quickly deteriorating, we feel the short-term bang for the buck may be best on the long side of the market.
Tuesday, we focused on, “A Pause in the Yen’s Destruction.” We noted the rapid application of the Prime Minister and Bank of Japan’s plan to monetize their debt in a last ditch effort to reflate their economy. Like the Bond market, this market has seen tremendous and rapid commercial trader buying as the Yen fell to Y120 = $1.
Finally, we looked at the disconnect between nearby crude oil prices and current fundamentals. It’s hard to get bullish about supply cuts a year out when current inventories are the highest they’ve been in 80 years as we noted in the Energy Information Agency’s, ” Summary of Weekly Petroleum Data.”
Read – “Sell Crude Oil at $65 Per Barrel.”
Currency destruction usually usually places a sovereign national bank at the pointed ends of its citizens’ collective swords. The country’s citizens watch helplessly as they wake up each morning less financially secure than they went to bed the previous night. This general sentiment is why the Japanese Prime Minister, Shinzo Abe’s popularity is counter intuitive. His political platform has been based on the public destruction of the Japanese Yen in a last ditch effort to end 25+ years of secular deflation. As a result of Shinzo Abe’s platform and with the help of the Bank of Japan’s Governor Harihuko Kuroda, they’ve driven the Yen down approximately 20% versus the U.S. Dollar in the last year. Commercial traders are making a strong case that we may be nearing the end of this decline.
The soybean forecasts this year should set another global production record. This comes on the heels of last year’s record harvest which has left many of the domestic bins full. Obviously, supplies have pushed this market justifiably lower since last year’s domestic harvest numbers were confirmed. This leaves soybeans in the same condition as many of physical commodity markets; facing a supply overhang in a world of declining demand. However, those of you looking for a contrarian point of view may want to look at the substantial actions being taken by the commercial traders who are rapidly approaching their record net long position from last fall.
Another week of good calls with two out of three trades well in the money and the third is still hanging on.
We began the week by sending our COTSignals discretionary customers a sell signal in the Australian Dollar on Sunday evening. The market opened Sunday night at $.8026 to the U.S. Dollar and hasn’t looked back. It’s currently pushing $.7800, accumulating more than $2,000 per contract thus far. We detailed this trade for TraderPlanet on Monday in, “Aussie Dollar: A Commercial Trader’s Perspective.”
I understand that our weekly readers may feel like we’re beating a dead horse over the last few weeks. We’ve stated and re-stated various reasons for our concerns regarding the equity markets and this week has provided yet more fuel for the warning signal. First of all, let me begin with my personal bias by stating that, as an S&P 500 pit trader whose only decade on the floor was the 1990’s, I’m used to making money on the long side. However, there are enough warning signs in the marketplace right now that I won’t take a long position home. I believe the next home run trade in these markets will be on the short side and this week, I’ll provide one more big money example.