S&P 500 Index vs Eurodollar COT | Update

While the Nasdaq 100 already surged to a new all-time-high last Friday, the S&P 500 Index is still below the late January 2018 high. However, also the S&P 500 seems to follow the Eurodollar COT's Leading Indication towards a major high in stocks around March 23rd (± 2 weeks). See also HERE

S&P 500 Index vs Eurodollar COT | Forecast 2018

Here is another Tom McClellan approach to forecast the stock market one year ahead: In the above chart the blue line represents the Commercials' Position Net Long Position in the Eurodollar (COT Report available HERE) as % of Total Open Interest, set forward 54 Weeks. The projection seems to correlate best +/- 2 weeks. About the hows and whys of this indicator, Tom McClellan, the inventor, wrote back in August 2015: "The basic idea is that I take data from the weekly Commitment of Traders (COT) Report on the commercial traders’ net position in eurodollar futures, and then use that as a leading indication for the SP500.  In this case, the term Eurodollar (ED) refers not to a currency relationship, but rather to dollar-denominated time deposits in European banks. So it is an interest rate futures product [...] I do not know why it works to have the ED COT data shifted forward by a year to see what the SP500 will do. But after seeing that it has worked for several years, at some point we stop wondering about the “why” question, and start to accept that there really is something working here." (HERE) However, he later commented this was one of his "favorite indicators. But favorite does not mean perfect" (HERE).

Bund Spread Gives Permission for Bear Market | Tom McClellan

Tom McClellan (Sep 24, 2015) - [...] German government bonds are known in the industry as “Bunds”, a contraction of the prefix “bundes” which is German for “federal”.  At the major stock market tops in 2000 and 2007, we saw the peak in the 10-year Bund-Treasury spread appear well in advance of the final price tops for stocks.  So because that spread was still rising in April 2014, my supposition then was that the uptrend had more months to live. Now we see a different condition.

Credits: Tom McClellan HERE + HERE

The Bund-Treasury spread peaked at 1.81 percentage points back in March 2015, and has since been contracting. Meanwhile, the DJIA and SP500 kept on rising to incrementally higher price highs as the summer wore on, eventually breaking down with the August 2015 minicrash. 

[...] With a divergence now in place between the DJIA and the Bund-Treasury spread, we can have a reasonable expectation that a bear market for stock prices should ensue.  If it plays out like the last two, the bear market should last until the Bund-Treasury spread gets back down at least to parity, or preferably even lower. That could take a while; in the 2000 and 2007 examples, it took a couple of years. The eurodollar COT leading indication already tells us to expect a downward trend until April 2016, so that gives us at least several months to see how the Bund-Treasury spread behaves.

Eurodollar COT Signals Big Drop in Stocks Still Ahead | Tom McClellan

Credits: Tom McClellan

Major Market Peak in August - Bear Market into 2016 | Tom McClellan

Tom McClellan (06/19/2015) - It's a little bit of an exotic indicator but it's probably my favorite because it gives us the answers a year ahead of time. What I'm doing is I'm looking at the commitment of traders report that's published each week by the commodity futures trading commission (CFTC) and they give a report on what all of the futures contracts that they track and who's holding them: either the commercial traders, which is the big money; the non-commercial, which is kind of the hedge funds; and then the non-reportables, which is people with very small positions that are not even worth having reported individually. The commercials are the smart money so when you look at what the commercials are doing as a group in eurodollar futures—that's an interest rate product, not a currency product—that tells you what the stock market is going to do a year later.

The stock market tends to follow those same dance steps almost literally. It got into a little bit of trouble back in 2013 when those traders weren't anticipating the stimulus of QE3 and it didn't work back then but it's generally been working almost perfectly since about 1997 [see chart below]. It correctly forecasted the 2008 decline. It correctly forecasted the bear market in 2002 and 2003. It correctly forecasted most of the big up-move that we've had off the 2009 bottom and now it's telling us we have a top due in early August and a decline into early 2016.

Shifted Eurodollar COT points to SPX Major High in August | Tom McClellan

Tom McClellan (May 07, 2015): I do not know why it works to have the EuroDollars COT data shifted forward by a year to see what the SP500 will do.  But after seeing that it has worked for several years, at some point we stop wondering about the “why” question, and start to accept that there really is something working here.

I should emphasize that the relationship broke down during the Fed’s QE3, the $85 billion per month program of expanding the Fed’s balance sheet which started in September 2012 and then tapered down to nothing by October 2014.  During 2013 the once-nice leading indication seemed to be inverted for a while, and then the two plots got back into sync again starting in late 2013.  That was a frustrating time since I had come to trust its message so much when it was working well in 2011 and 2012. That just proves the point that no indicator is infallible, and one must continue to pay close attention to what is going on, just to make sure that everything is working as it is supposed to.

With the relationship back in sync now, it is appropriate to look ahead to a top due this summer, and some ugliness for stock prices this fall.  Ideally the top is due in early August, but there can be slight differences in the texture of the ED COT pattern and the actual behavior of the SP500. More HERE & HERE

Update - S&P 500 vs Commercial's Net Positions in Eurodollars 1 Year Ago

Tom McClellan discovered that commercial traders' net positions in Eurodollar futures shifted one year into the future are very likely to forecast the direction of the US stock markets (HERE).  CITs are (+/- 3 TD * ):

10/18/2012 high
11/08/2012 low
11/29/2012 high
12/13/2012 low
01/03/2013 high
02/14/2013 low

* COT-data  is  taken  from  the  close  of business  on  Tuesday  and  then released on the following Friday at 3:30 PM ET for futures only. It is also released twice a month or every other Monday for futures combined with the figures for options.

S&P 500 Today = Eurodollar COT 1 Year Ago | Tom McClellan

In May 2011 Tom McClellan unveiled a sensational discovery:

There are some jewels in the CFTC's weekly Commitment of Traders (COT) Report:  ... Commercial traders' net positions in eurodollar futures shifted forward by one year foretell the the stock market.
... 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 ... The term "eurodollars" should not be confused with the exchange rate between the dollar and the euro (HERE & HERE).

Projected CITs for the S&P 500 are (since COT data is weekly, CITs are +/-):

09/13/2012 high
09/20/2012 low
10/18/2012 high
11/08/2012 low
11/29/2012 HIGH of the Year
12/20/2012 low
01/03/2013 high
etc. 

Eurodollar COT Indications for Stock Market Tops | Tom McClellan

www.mcoscillator.com - 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. 

_____________________________________________

www.mcoscillator.com - 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.