Technically Speaking: COT – Dollar & Rates Issue A Warning

As discussed in Bull Mania, the signs of market exuberance did not diminish during the recent correction. With the market well ahead of fundamentals, as money continues to chase performance, the “risk” remains elevated.

In this past weekend’s newsletter, “Wall Street Wins Again,” I stated:

“[The expected rally] was indeed the case as the markets successfully tested and held the 50-dma (red dashed line.) Despite the fact money flows remained weak, as shown in the chart below, the market did manage to regain previous highs.”

(Click on image to enlarge)

COT Dollar Rates Warning, Technically Speaking: COT – Dollar & Rates Issue A Warning

“While the money flow ‘buy signal’ will likely trigger next week, the market is already trading 2-standard deviations above the 40-dma. Such suggests that the upside may be more limited over the next couple of weeks.”

The more critical point in the newsletter concerning the market was the breakdown in correlations between the market and its underlying constituents. To wit:

“Currently, the number of stocks outperforming the market is dropping sharply. Such is notable because the correlation among stocks in the S&P 500 plunged to the lowest level in over a year.’ – Sentimentrader

(Click on image to enlarge)

COT Dollar Rates Warning, Technically Speaking: COT – Dollar & Rates Issue A Warning

“What is also notable is that these periods of low correlations typically align themselves with previous market tops. Topping process can take some. Generally, it is long enough for investors to dismiss the warning as ‘wrong this time.’ The subsequent correction can range from mild to more extreme.”

What we know is that markets move based on sentiment and positioning. Such makes sense considering that prices are affected by buyer’s and sellers’ actions at any given time. Most importantly, when prices, or positioning, become too “one-sided,” a reversion always occurs.

As Bob Farrell’s Rule #9 states:

“When all experts agree, something else is bound to happen.” 

So, how are traders positioning themselves currently?

Positioning Review

The COT (Commitment Of Traders) data, which is exceptionally important, is the sole source of the actual holdings of the three critical commodity-trading groups, namely:

  • Commercial Traders: this group consists of traders that use futures contracts for hedging purposes. Their positions exceed the reporting levels of the CFTC. These traders are usually involved with the production and processing of the underlying commodity.
  • Non-Commercial Traders: this group consists of traders that don’t use futures contracts for hedging and whose positions exceed the CFTC reporting levels. They are typically large traders such as clearinghouses, futures commission merchants, foreign brokers, etc.
  • Small Traders: the positions of these traders do not exceed the CFTC reporting levels, and as the name implies, these are usually small traders.

The data we are interested in is the second group of Non-Commercial Traders (NCTs.)

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Monica Kingsley 3 weeks ago Contributor's comment

Indeed, it's risk on amid precious few warning signs. Solid market breadth still.