Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Shorting IEF Again

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Generally speaking, I think interest rates are going to be heading higher. I therefore have large short positions in XLU and IEF. The latter is described as follows: "The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays Capital U.S. 7-10 Year Treasury Bond Index. The fund generally invests at least 90% of assets in the bonds of the underlying index and at least 95% of assets in U.S. government."

A conservative stop on this would be 94.27, a somewhat looser stop would be 94.41, and the Fibonacci retracement level is at 94.54.

0111-ief

Weekly Commitment of Traders Report – Week Ending 12/28

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For about six months now I have been downloading the weekly CFTC report and crunching the numbers into an Excel spreadsheet.  It's been more educational in terms of how certain markets work but as I understand these reports more I am realizing there is a lot of good data to be had.  For those new to the COT report, traders are categorized into three categories Commercial, Non Commercial, Non Reporting. Commercial traders for example would be Starbucks buying coffee for delivery through the futures market.  These are the traders that know what's going on and the ones where the most can be gained by studying their positions.

So the charts below focus solely on the commercial traders and their net position (long minus short).

Chart 1:  S&P 500 Versus Copper Commercial Positions.

For sake of comparison, I often invert an axis as I did on the left side which represents the net position). The prior week registered the highest short position of commercial week and this week we see them finally to have reduced that position.  It's not definitive enough at this point to declare an overall change in copper price action but considering the strength in copper, why would commercial traders drop their net short position.  Commercial traders short into strength and go long into weakness.

Screen shot 2011-01-05 at 4.09.06 PM

Chart 2:  S&P 500 Versus Copper.  

I show this chart for the simple fact of showing how tightly correlated the two have been.  The past 6-8 weeks they have traded with almost perfect correlation.  Copper has begun to rollover the past few days.  It's worth noting price action over the next few days to see if the slide continues or not.  

Screen shot 2011-01-05 at 4.09.36 PM

Chart 3:  S&P 500 Versus S&P 500 Consolidated Commercial Positions

Notice the relatively strong correlation the past year.  It's not as tightly correlated as Chart 2. Notice the April high (peak on the SPX – orange line) and how it was trading higher than the green line until it reverted.  Notice what's been happening the past few weeks as the two have once again diverged. Would imply the SPX is due to correct as it did in April 2010.

Screen shot 2011-01-05 at 4.12.05 PM

Chart 4:  S&P 500 Versus 30 Year Treasury Commercial Positions

Similar to Chart 3, notice how the net position has begun rolling over while the SPX has continued to diverge?  

Screen shot 2011-01-05 at 4.14.25 PM

Chart 5:  30 Year Treasury Yield Versus 30 Year Treasury Commercial Positions

Notice how the commercial traders have been increasing their short position (axis on the right inverted for comparison) while the 30 year yield has diverged.  This would imply the 30 year is close to a bottom in price (high in yield) and due to begin catching a bid which based on correlations would put pressure on the SPX (see chart 6).

Screen shot 2011-01-05 at 4.16.46 PM

Chart 6:  S&P 500 Versus 30 Year Treasury Yield

Screen shot 2011-01-05 at 4.41.13 PM

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Treasury Bond Short

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With the exception of a couple of days ago, I typically have had good success trading Treasury-bond fund symbol TLT. In spite of getting stung badly on Tuesday, I went long TLT early on Wednesday and enjoyed a good portion of the run-up in price.

As the day neared the close, I decided to reverse my position and short TLT based on a couple of things. First, the surge upward was pushing it back up to an appropriate level for a "lower high" based on the past few weeks of trading, and two, I believe the longer-term prospects for interest rates is higher (and bonds, thus, lower).

As I'm typing this, the bond futures are down nearly half a percent and TLT is down even more. Below is the @ZB chart (which I'm using since TLT isn't open yet), and I've marked with an arrow my short entry point.

1229-shortbonds

What is particularly intriguing to me is that the bonds are down in spite of the Euro being strong. Recently, the correlation between dollar's weakness (and thus the Euro's strength) has been very tight with bonds. But look at how they're parting ways this morning:

1229-eurospread

This suggests to me that bonds are so weak that even a surging Euro isn't helping them, thus amplifying my bearish disposition toward bonds.

As a closing note, Slope is going to continue to be very quiet until January 3rd. I'm on "vacation" (inasmuch as that means for me), trading has gone from light to almost non-existence, and New Year's is upon us. Suffice it to say posts will continue to be few and far between until next Monday, so thank you for understanding.