COT Report Analysis - a thread on market sentiment

Page 131, the inverse correlation crb and usd, “the new norm”.

Great chapter on the current relationship, so in theory no perfect storm means no more rising USD.

The USD has to either range or creep lower to allow the CRB to rise, then we avoid all the doomsday stuff.

There does seem to a desire for a lower USD, the problem really is the weak Euro and not much sign of good news on that front, anyways happy reading.

Hi BB,

rookie pretty summed up the important points, Mike made some good points to give extra details. I also try to summarize my view:

Just like rookie said, I also like critics because it is essential to come further on. As you said, the thread might look a bit chaotic, although it is actually organized. I do believe it does not seem like that in the first week, but it is. As the guys said here is our weekly plan:

  1. Weekend: discuss our findings in COT report about currencies.

  2. Match weak vs. strong currencies

  3. Discuss which pairs do we trade and maybe possible entries

  4. During the week we discuss how we progress and what is changing in market sentiment

  5. Discuss the fundamentals and how our trades were going, what are the changes in our bias

  6. It is weekend again

If we are looking from your point of you, I do agree, COT does only take some part of our analysis, we discuss it on the weekend only. If you wish we can also extend it for during the week. To better understand how we see this thread here are some points that you should know:

  1. Besides Peter, we do not have years of experience. As rookie said, we started some months ago. We cannot become experts in a very short time period. We do a lot of work here but it still takes time. We are motivated but realistic.

  2. Our trades are based on the COT report. Even if you find many other discussions, we do trade in the direction of our COT findings. For this reason is our analysis very important on the weekend. We started COT index and our COT index signals startegy some weeks ago. We do not have too much accumulated stats yet. (Philip makes the tests, Mike has the results)

  3. We want to be successful. For this reason we do analyse fundamentals and technical entries/exits. As you said, this might not be the main topic here but we try to help each other in all parts of the progress.

  4. We are interested in how the market works. This point is very important. Technical analysts are not interested. We also want to know what is going on. For this reason you do see many posts which you might not know why is it in this thread. And as Mike said, after all COT is not the only sentiment factor in the business. Ebola, Hongkong, concerns about growing etc. they all belong to market sentiment.

  5. Peter tells us many new things, stuff that we have never heard off. Lately we are interested a lot in intermarket analysis and we are trying to understand it to give us more edge for fx trading.

  6. Last but not least, there is a reason why all members showed interest on your arrival. As I also posted earlier, your experience in the field (if you stay with us) can help us to increase the quality of our analysis and „get there” earlier.

FE

Hi Peter,

I just wanted to summarize briefly what I think about your analysis, posts, and how good I find your input. The best way to say what is think is:

THANKS!

One final little piece on deflation, I was asked why should the market and governments view deflation so negatively, why should deflation have impacted on the Euro or any other currency.

It was argued that falling prices should be a good thing, if retail prices fall then would not more shoppers come out and business would thrive.

The reality is that business and consumers actually buy less when prices fall, business lower stock levels simply because that stock will fall in value, consumers put off buying that bargain, they know they may get it even cheaper later.

One example today, a colleague usually purchases his home heating oil this month, today he decided to ‘wait a while’ since oil prices are falling.

On a side note, I wonder if the Fed wanted to stem any further USD rise what could they do?.

Just read a little piece tonight, “hint of a slow down on the taper by the Fed” - rumour or fact - I’ve no idea.

Hey guys.
Thursday’s results.

GBP: +7 -0 0///+3 -0 0
CAD: +5 -1 1///+3 -1 1
USD: +3 -1 3///+2 -0 1
EUR: +3 -2 2///+2 -1 0
CHF: +3 -2 2///+2 -1 0
NZD: +0 -5 2///+4 -0 1
JPY : +0 -5 2///+0 -1 2
AUD: +0 -5 2///+0 -1 2

Majors took this. +6

A bit of a diversion with the Comms. CAD put up some good numbers. Down against GBP and even against USD.
Interesting about the weakest 3. They all were getting beat up by everyone else. And even against each other.
Here’s the 00 GMT shot. It shows the weakest three.


See you guys in the am.

Mike

Just as you have predicted Mike, kiwi came down at the bottom.

back to market correlations, there is a relationship I like but I’m not sure if it is mentioned in the book. Which is SPX500 and VIX. The great thing about this is that VIX can act as a leading indicator for finding SPX bottoms(it doesn’t work for SPX market tops.)

Using www.tradingview.com charts you can see that clearly in 2008. VIX formed a top in the week of August 20 2008. SPX found its bottom in March 2009 and started moving up. Then when you go back to VIX you’ll see another top in May 2010, and surely enough found a bottom in July 2010 as well.

So how can we use such info? I suggest inserting a 200 MA for VIX on the weekly chart. When ever a VIX weekly closes above the 200 MA, then a bottom in SPX is close at hand. We then switch to a daily chart of SPX with a 200 MA. The index should be below the 200 MA. We buy at the first daily close above the 200 moving average (with mental stops if candle closes below the 200 MA) we keep trading it that way until we finally get the rally (that’s in case we don’t get the rally from the first time.)

This method also tells you when and how I’m looking to buy the dollar (especially usdjpy) in such difficult market conditions.

I do have a question for Peterma. I have been looking at some forex correlations on Investing.com. On the daily 300, I noticed that GBP/NZD correlates with USDJPY and GBP/CAD correlates with USDCAD (although to a lesser extent.) Also when you look at the reaction of GBP pairs to US news, you see a correlation there. Do you see a case building up of buying GBP with USD or am I over emphasizing these observations?

Great analysis on intermarket correlation [B]Peter[/B]! as always.

You mentioned quote " stocks have been merrily rising, regardless of the lowering prices on commodities", but shouldn’t stocks rise on falling commodity prices - now that the costs of doing businesses have decreased due to decline in commodity prices shouldn’t their profit margin be slightly higher if not by much than if commodity prices were higher ?

Is it safe to say that the rally in bond market and decline in stocks S&P all stemmed from a fear of deflation ? So now everyone’s on US earnings report. If public companies report better earning for this quarter stocks market will correct back up and rally and conversely bond market will be back down to its range.

An acquaintance of mine who trades stocks said that she trades/invests on earnings report and reviews her portfolio every quarter - a fundamental trader. It all makes sense now. Sounded so foreign to me then.

I was on bloomberg the other day and one asset manager was talking about de inflation - saying thats pretty much what we’re in now where there’s no inflationary pressure. He was probably referring to US, I was thinking what happens to correlation between different asset classes in the case of de inflation ? When there isn’t neither of these pressure ? inflation & deflation.

I assume we have to view ‘correlation’ it in the context of global economy not heavily focusing on single country. But I do feel US is very much focused, take US 10T, S&P 500 and US earnings report.

The perfect storm - I do believe it’s on the way and boy! are we in for one heck of an economic winter. Yes - you too, I’m sorry to have to tell you.

Many commentators use population data to predict a repeat of 1929, to occur real soon now. It’s something to do with the bulges and troughs in the age profile for most Western countries.

I think a ton of people are just about to retire (which they say will reduce spending in the economy as they downsize); and the age range that normally spends more (e.g. 35-45 year olds, say, getting a bigger house as the number of their children increases, and they get bigger jobs) is in a trough.

So these commentators say that you can predict the booms and busts in the stock market to come if you have the birth data for this year and just project it forward until the dates when they’ll be: (a) in college; (b) starting a family; © paying for their kids college; (d) retiring.

Each phase of their life, given the size of that particular cohort, will have a particular cumulative effect on the economy when you add in those born last year, those born the year before, and so on back, to get an overall idea of the age profile of all people alive today and how many fit into each age range.

Apparently you can also use this sort of data to predict potato chip sales too!

So what happens in a perfect storm? Well look at Japan for the past 25 years - they’re stuck in stagflation. There’s no life in the economy. Men in suits live in tents in public parks because so many were laid off when the deflation hit.

We are entering that phase now. Prices across the board drop - stock prices, rents, food, commodities, everything drops in price.

That sounds like a good thing, but its a major marker that we’ve moved into deflationary times - times of a moribund and sluggish economy. People put off making purchases as they expect the price to be lower tomorrow or next month and so the major driver of our economy at the moment, consumer spending, dries up.

And I think it took 15 years to get out of the slump following 1929 - so it will be a prolonged economic winter. A time when all the economic excesses of late can be reset, before we set off on the next cycle upwards.

Some commentators are recommending home-owners to sell their houses now and rent, because in a year or two they’ll be able to buy the same place for peanuts.

And there are 2 main ways to profit from a crash in the stock market - buy the inverse S&P 500 etf (ticker:SH) or call options on it, as it should go up as the stock market tanks; or buy Puts on the SPY etf (S&P 500), as Puts go up as the underlying SPY goes down.

The inflation figure for the UK has just been released and it was unexpectedly lower than anticipated (about 1.2% I think). You might think people should be happy with this, but no - it could indicate that the British economy is heading for deflation, and an economic winter.

Amazingly inflation figures throughout Europe are around 0.3% at the highest, and prices of goods in many Italian towns have started falling - sounds like a deflationary story has already hit there, doesn’t it?

Japan is still in its stagflation in this 25th year - throwing tons of Yen into the economy (copying QE from the USA) is a desperate, last ditch attempt to kick-start the almost dead economy - they’re timing couldn’t be worse, as all stock markets globally are showing signs of faltering (most have cut their long term 2009-2014 trend lines; and most have hit their 200 day moving averages from the upside), and most commodities are falling in price.

So while I do applaud your efforts to find a unifying theory to connect various markets together, I fear this storm will lead to a protracted winter, and in the short to medium term the prices of most everything will fall. There are tough times ahead.

Usually when the US stock market falls, it is said that the US dollar strengthens - I wonder if any of you can guess what will happen to any particular currency if prices for all things worldwide take a nose-dive?

If someone tells you that “all currencies must fall”, then presumably that is impossible, as at least one currency must rise in response to the fall in (all) most of the others.

Can you imagine a scenario when all currencies fall? An interesting conundrum - is it an impossibility?

Sorry to be so gloomy - but I didn’t want you to get so carried away with your research that you maybe overlooked the dreadful impact the coming perfect storm is going to have, as we trudge through a prolonged economic winter.

I’d be happy to throw in observations on stock market and bond inter-activity: the short point there is that when equities drop and investors get frightened, there’s a “flight to quality” which, in the past, was bonds (e.g. TLT - 20 year Treasury etf). With interest rates at such low levels, “flight to quality” is a bit overblown - its effectively “flight to cash”.

This could be dangerous if interest rates rise, as that must force bond prices lower. For example, if in the past a 10 year bond was issued with the price at 100 and pays 10% interest, then you get a $10 payment every year.

If interest rates are set at 1% (like they are now) then the price of that bond must go to $1,000. (You still get the $10 a year payment, but you have to pay $1000 for the bond so that $10 = 1% interest).

If interest rates double to 2%, then the price you will now get for that same bond will have to go to $500 - so interest rate doubled and your bond price halved.

Further, people with mortgages who can only just make the payments when the interest rate is 1%, will have real difficulty when its doubled to 2%, so presumably there’ll be more defaults.

Note how the interest rate that is set, has a direct arithmetic effect on the price of the Treasury bond. And that’s why people who own Treasuries are fearful of even a gradual interest rate rise.

And some say the only way to avoid the dreaded deflation is to slowly raise interest rates.

So with the stock market tanking, is it sensible to have a “flight to quality” (to bonds) if the price of those bonds must go down if interest rates go up? Another interesting conundrum - and something very new to the economic landscape that you are trying to map.

Good luck with the project - I’ll help where I can.

Kind regards,
Lagoonboy

Hey lagoonboy!

I tend to think you can never be too sure given the complex nature of this business. Except for Peter most of us are noobs, we’re very new to all this. But I suppose if you’ve got years of experience coupled with insight and extensive knowledge you might be able to speak with such confidence. And you seem like one. Had to read your post twice. I’m wondering how you found us - our thread ?

Thanks for explaining perfect storm by the way! We are aware that Japan is in a decade long well more than deflationary cycle and have been pumping cash into the system with little to no success. I was unfamiliar with afew things that you have discussed for instance inverse S&P 500 etf, you buy inverse etf when stock market tanks - this sounds more like an investment strategy/hedging than speculation. When stock market crashes I was thinking as a speculator shouldn’t I go short ? Not saying one or the other is wrong. I’m just curious… and if bond market is no longer considered a safe haven should interest rates rise inverse S&P500 etfs could attract plenty of attention no ? and how should one go about trading inverse S&P500 etf ? Can one even speculate or is it just an investment vehicle ?

And on UK inflation coming out at five year low of 1.2% BoE governer himself regarded it as a ‘benign deflationary’ period and blamed plunging oil price for imposing downward pressure on inflation - well everyone is at the moment. After reading your post however I’m starting to have doubts as to how true his statement was, really.

If we go into a deflationary period where stock crashes and bond is no longer a safe haven from investors point of view wouldn’t they want to place their assests/cash in a country where they offer the highest interest rate with AAA creding ratings , Australia ? So therefore AUD might rise in comparison to others decline. I’m not sure how risk aversion will play out in that scenario it could be the opposite though yen or franc might rise.

All in all that was a brilliant post lagoonboy! Stay with us, you have found the right place!
Have you got any books to recommend on the subject of intermarket analysis or economy? I’ve already ordered Intermarket analysis by Gayed and I’m also thinking of getting John Murphy’s version on the same subject.

Here’s what earning report looks like almost half are still missing but majority have reported net earnings

US Earnings: Company Earnings Calendar - Yahoo! Finance

Hey guys.
Up early, so here goes the 0700 shot.


Philip, the influence you speak of is probably resulting from the intraday correlation on EUR/USD and GBP/USD.

It is a very valid correlation in that the UK economy is very dependent on the Eurozone. It is a borderless zone for the UK from a commercial prospective. In the UK when reporting commercial transaction from UK to EZ we are not permitted to call them ‘exports’, they are referred to as ‘dispatches’.

Paperwork is minimal and there are no duties or vat (value added tax) on such dispatches.

The market often takes the view then that what is bad for the EZ is bad for the UK or the reverse.

Example the just past Asian session, two hours ago you can see this in action.

One more.
0940


Good morning fellas.
Well it’s Friday now, almost to the open of US. It might be a little late, but just look at the JPY. …FE…
Also you can see it on my shots lately. Today will be a take profit day against JPY. And it is still showing.
I’m in on the AUD/JPY at 93.39. Also looking like a strong AUD today, (Rookie). So, I just hope this will continue with US coming on board.
We’ll see.

Mike

Hey guys.
This is a good article. Interesting.
Monetary policy: Tight, loose, irrelevant | The Economist
I bought a years subscription to the economist a couple weeks ago. What a good magazine.

Mike

Ok guys. One more.
Maybe we should be paying attention to the bond market in relation to the commodities.
Buttonwood: Bears, but no picnic | The Economist

Mike

Thanks for sharing Mike! It was a good read! I especially liked the second article.

Oil price could plunge even lower : Saudi Arabia tests US ties with oil price - FT.com --> leads me to think deflationary times may be looming over.

U.S. Seen as Biggest Oil Producer After Overtaking Saudi Arabia - Bloomberg

OPEC is set to meet on 27th Nov’14

Philip, thks re the VIX, good info.

Lagoon, solid analysis.

If I google “perfect storm economy” I see a news report maybe about 11 hours ago on same, didn’t read it, but there were others in June 2011 Bloomberg, July 2011 on CNBC, or Sept 2012, or Jan/Feb 2014.

The analysis on population growth was written about in 2009 ( or maybe earlier) by the IEMA in telling it’s members in how to prepare for the perfect storm, in think possibly in 2020.

Are they all wrong?, maybe they are, maybe not, I really have no idea.

The important thing for me is whether there is a immediate threat of this storm or not. Imo not.

My reasoning is that the recent turmoil in the stock market is simply a correction, one that was triggered by a sudden rise in USD, itself caused the prospect of higher interest rates. A bandwagon began to roll, one that there seemed to be no stopping.

Reality is that the FED have now gained some experience of such bandwagons and how to pull them up.

It was, again imo, that it was not accidental that noises came from the Fed about interest rate rises being put on hold - immediate effect was to slow the USD rise and stall the CRB freefall.

In 2009 similar case, USD on the rise, CRB falling, the dollar peaked and up came the CRB - again 2010 it happened all over again.

So the question in my mind is if I am going to trade USD, which way would the Fed like things to go, having reached some sort of analysis on that then as the guys on this thread say, I don’t want to trade against the Central Bank.

LOL, told you FE’s thread is being watched, this from Reuters an hour ago:

Markets are in correction, perhaps over-reacting - IMF’s Lagarde | Reuters