Indecision, fear and uncertainty continue to strengthen their grip on the markets as we head towards the Federal Open Market Committee’s FOMC meeting beginning today as well as a possible Greek default by the end of the month. Faced with the possibility of correctly forecasting the actual events of the FOMC and the Greeks versus trading the reality of the markets’ collective reactions, investors are taking chips off the table. Here’s a brief look at why chips are stacked a bit differently than they have been since the ’08 economic collapse and the one pocket of the interest rate sector that could benefit substantially should indecision, turmoil and volatility be the effects of this month’s economic announcements.
Historically, money travels between interest rates and equities based on equity risk and return versus the expected safety of the bond markets in exchange for smaller returns. However, the FOMC has thrown a wrench into the usual pattern as it faces the decision to raise rates for the first time in years. The potential of higher interest rates makes bonds less valuable. The effect of higher rates on the equity markets is tougher to predict as it faces the prospects of higher borrowing costs eating into profits versus the FOMC’s assertion that the economy is improving, which would be beneficial to many individual stocks.
The sell off in the interest rate sector ahead of this week’s meeting has been substantial and according to our metrics, overblown in both the 30-year Treasury Bonds as well as the Eurodollar market. Given the 30-year Treasury Bonds’ inflation sensitivity, we’ll focus on the trading opportunity at the other end of the spectrum, the September 2015 Eurodollar contract.
Looking at the chart below, you can see that this market has also sold off over the last year in times of uncertainty but nowhere near as significantly as longer term Treasury instruments have. In fact, the rapid commercial trader purchases look very similar to their actions prior to the March FOMC meeting, which generated the last Commitment of Traders buy signal.Commercial buying during the sell off of the last two weeks has created another classic COT buy signal. We sent out a buy signal last night in the September 2015 Eurodollar along with a protective sell stop to be placed at 99.545. We’ll side with the commercial traders who are frequently right, and ahead of the retail curve in this market.
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