Wednesday, April 4, 2012

Tom McClellan: EURUSD COT Indications for Stock Market Tops - February 03, 2012 

... For almost a year, we have known that a top was due to arrive in February 2012.  And sure enough, stock prices have been rising nicely in recent weeks as fulfillment of that expectation.

Now this leading indication says that things are going to get less fun for investors for a while. The next 3 months show a sideways to downward structure in the eurodollar COT data, and the implication is that the steep price advance that we have been seeing should transition to a more sideways market ...

Eurodollar futures COT chart (from last year) sees the S&P 500 correcting until June, but then rallying hard. The next major inflection point is due in early June, when this leading indication says that a big multi-month rally is due to begin

_____________________________________________ - May 05, 2011 

There are some informational jewels in the CFTC’s weekly Commitment of Traders (COT) Report, and sometimes in ways that most people would not imagine. This week’s chart looks at data on commercial traders’ net positions in eurodollar futures, but with a twist: that data is shifted forward by one year to reveal that it actually leads the movements of the stock market. 

... The term “eurodollars” should not be confused with the exchange rate between the dollar and the euro.  It refers to dollar denominated time deposits in European banks, and the term predates the creation of the euro currency.  Eurodollar deposits typically follow the LIBOR interest rates.

... I am taking data from the eurodollar market, and applying it to an analysis of the US stock market.  The key discovery that I made a few years ago is that the movements of the SP500 tend to echo what the commercial eurodollar traders were doing previously.  I played around with alignments to get the best fit, and found that a one-year lead time gave the best correlation.

Let’s pause a minute to let that deep point sink in.  Commercial eurodollar traders seem to “know” a year in advance what the stock market is going to do.  It is not a perfect correlation, but it is a darned good one.  I’m not sure what makes this work, but I have seen that it has worked great since about 1997.  It may help to understand that the commercial traders of eurodollar futures are typically the big banks, who are using these futures contracts to manage their assets and fund flows.  So what we are seeing in their futures trading are responses to immediate banking liquidity conditions, and those actions give us a glimpse of future liquidity conditions for the stock market.  These liquidity conditions are revealed first in the banking system, and then the liquidity waves travel through the stock market a year later.  But even if we cannot identify exactly what makes something work, after a few years of seeing that it does work we can learn to accept it.