Commercial traders of T-Bond futures have been increasing their net short position in a big way in recent weeks, and Friday’s COT Report showed a renewed upward acceleration. Normally I find that prices and the commercials’ net position are positively correlated. If prices rise, the smart money will short more. If prices fall, they’ll turn into buyers. OK, got it.
Bond prices topped weeks ago, but the commercials are continuing to ramp up their shorts at a rate that is just about as fast as we ever see them change positions. They seem to know something that prices are not yet saying. This is peculiar, and thus really interesting. I do not see this condition persisting, and instead the most likely outcome is a big down move for T-Bonds.
COT Report data are broken down into three categories of traders. The “commercial” traders are the big money and thus usually the smart money. They are traders who are "...engaged in business activities hedged by the use of the futures or option markets." A “non-commercial” trader is a big trader who does not meet that definition. Think hedge funds. A “non-reportable” trader is one whose positions are so small that the CFTC figures they are not worth being reported individually.
That last category is the small money, and thus usually the hot money. When they get to a big skewed position, it is usually the best strategy to bet the other way.
But the commercial traders tend to be right, eventually. And at the moment, they seem to be pretty firmly committed to the idea that T-Bond prices are headed downward.
The curious point about this is that we are also seeing sentiment indications for the stock market showing a topping condition. Stock and bond prices usually move in opposition, so it would be weird to have them both go down together. Not unprecedented, but weird.
Tom McClellan
The McClellan Market Report
www.mcoscillator.com
