Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Winston Churchill

Unfortunately not. Not that is if the COT index number is accurate this week. The last two or three weeks have seen the accuracy of the number start to re-establish itself. I am regaining confidence in the number, or the traders that constitute the number.

The number is [-13.1%] which is a big turnaround from the previous three weeks where COT buying has blunted the sell-off and provided long the bounce opportunities.

Part of what is remarkable this week is the net figure, which is a mere +4,115, compared to last week which was +68,236. That is some drop off. It is the % number combined with the sheer drop in net contracts that argues against the rally continuing this week.


The technicals also align with the COT index number. We have a falling VWAP, which, unless price can trade above, re-test, and stay above, argues that this rally was really only a short covering rally. We also have the ‘lower low, and lower high’, the definition of trend. The trend is down.

On the 5-day chart, the trend is up. This is due to the current bounce. On the 10-day chart, the trend is still down. The 5-day chart also has a top in place and the trade will be towards support, which is at $158.81. With a bullish COT, that’s where I would look to get long. Any strength to the open on Monday, I would look to get short, certainly around the $162.20 area.

Federal Reserve

Well Bernanke really looks to have created the monster with his in retrospect, ill-advised comments with regard to the withdrawal of QE purchases. Various Fed talking heads have been back-pedaling Bernanke’s statement all week. It has resulted in a rally, but until proven otherwise, confidence has evaporated from the markets.

Treasury Paper.

I follow the 10 year. Not for any particular reason. The yield has moved higher, but it was more the speed that it moved higher that is the problem. Bonds are trickier to trade quickly depending whether they are the on-the-run issue, or off the run and less liquid. Less liquid means it takes a little longer to open/close positions. Time, when yields start to crash higher, can become an issue. Again, the bonds traded lower [yields] which of course helped stocks, bonds are leading the markets, to trade higher.

Gross and Gundlach have all stated that yields will drop as the Fed again targets the various Treasury issues and flatten the curve. I think that they are probably right in some time frame, which no-one actually currently has any clue about. That is the problem. There have been some big sellers. Who are they? Are they finished? Neither of these questions were addressed nor answered by our bond gurus.

China has had issues, to put it nicely this past week. With an inverted SHIBOR curve, any short sellers at the short end of the curve, which are always banks, came under some serious stress last week. When that type of liquidity event occurs and margin calls go out, you sell whatever you can, and as fast as you can, to realise cash to make the margin calls. Of course the difference is that the Chinese banks are already State owned. Any liquidity crisis originates from the Chinese central bank refusing to finance short term paper.

The crash in the Treasury market looked like a Chinese margin call. The dollar values that sold out were not insignificant when you would have had the POMO of the Fed involved at some point on the other side buying Treasury paper, or not, as the case maybe.

While this drama plays out, I am particularly happy with the market neutral posture that I have held just prior to the sell-off. I will maintain this market neutral posture as I lose nothing, and stand to gain everything, whichever way the market trades.

There is no trade this week as there are no credit spreads available that look particularly attractive.

Until next week,
jog on