About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.

Using The Metal Markets to Forecast The Direction of Interest Rates

In a recent podcast interview with Tim Ferriss, Adam Robinson mentioned an interesting observation about interest rates. Adam is the co-founder of The Princeton Review, a chess master and  an advisor to several hedge funds and investment managers.

Adam mentioned that one of the tools he uses to evaluate the fixed income market is the relationship between copper and gold. With a very high correlation to the 10-year Treasury yield, when the ratio between these two metals is rising, often are interest rates. The chart below shows the current 90-day correl is 0.98.

Knowing that the ratio between copper and gold is highly correlated to interest rates, we can apply a degree of analysis to gold and copper and make a forecast for where the ratio may be headed and thus, the direction interest rates may be moving.

One method we can use is looking at the Commitment of Traders data. Below is the COT report for gold. In the bottom panel we can see the three category breakdown of each trader group. The Commercial trader (often considered the ‘smart money’ has been working off their large net-short position in gold, which hit its largest point in June when gold put in a short-term high. Since then, Commercial traders have been moving their net-position to near neutral, a positive sign for gold bulls.

Turning our focus to copper, the COT report shows us that the Commercial traders have been betting against copper, holding one of their largest net-short positions.

So from these two data sets we know that Commercial traders appear to be becoming more bullish on gold and are bearish on copper. That would imply that the ratio of copper vs. gold could be heading lower, and in turn interest rates declining as well.

This is all good but how are traders position in the actual bond market? we can look at COT data to evaluate the fixed income market. Below is the COT report for the 10-year Treasury Bond. We can see that Commercial traders have been adding to their net-long position in the 10-yr bond, putting their position at one of the most bullish levels in quite a while.

In summary, as Adam pointed out, copper and gold have a high correlation to interest rates, and based on the COT data it appears we could be seeing a shift lower in the ratio between these to metals, a bearish move for Treasury yield. Based on the COT chart for bonds themselves, it appears the ‘smart money’ is using both hands to buy up this dip in bond prices.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

What Momentum of A Unique Relationship Says About The Volatility Index

One of the great things about being a technician is the ability to constantly explore new charts and looking at markets from all angles. The Volatility Index (VIX) has gotten a lot of attention lately as it gets to historically low levels. Charlie Bilello, CMT pointed out that the VIX earlier this month was down 48% in the prior 5 weeks, marking the 2nd largest five-week decline in history. Today I want to look at, what I believe to be, a unique ratio chart – the S&P 500 and the VVIX (Volatility of the VIX).

What this ratio does is compare the relative performance of the S&P 500 equity market to the Volatility of the Volatility Index. What I’m most interested in is how momentum of this ratio acts and the timing of moves for the VIX itself. . And that’s exactly what I’m looking for in this ratio chart below. When the two-week Relative Strength Index (RSI) for the S&P 500-VVIX ratio as show in the bottom panel moves above 70 (becoming ‘overbought’) and then declines as the VIX itself is declining, has marked some interesting turning points for the Volatility Index and has often marked the eventual low (or close to it) for the VIX.

This is a setup that’s taking place right now as the VIX drops under 12. It’s possible we see the VIX go higher from here, but over what time frame we do not know. As of the time of this writing the VIX is up pre-market, we’ll see if that continues as we finish out the year.

spx-vvix

Merry Christmas.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Best Investors In The World Aren’t Special And Neither Are You

One of the great things about investing is the many ways that people approach it. Throughout history it’s been shown that hundreds (if not more) ways have been used to turn a profit within the stock market…. Whether you use fundamentals, technicals, astrology, or hire a monkey to throw a dart. However, one commonality among those that have risen to the top of our field have had one thing in common: They follow a process. The Market Wizard series by Jack Schwager has countless examples of this, with many of the investors echoing each other in their adherence to following a defined discipline.

I came across another great example of this while reading a Bloomberg article on Renaissance Technologies, which likely holds the title for being the best performing hedge fund in history. Ren Tec has produced 40% annual returns (after fees!), compare that to what Warren Buffett who has produced 20% annualized returns and is considered one of the greatest investors of our time. They now only manage employee assets in their Medallion Fund and employ 90+ Ph.Ds with expertise in astrophysics and string theory.

A firm that produces double-digit returns year in and year out would likely elicit some confidence from those within, creating an ethos of investing elitism with magic flowing through their fingers into their trades, right? Nope. They just follow their process. They don’t shoot from the hip. They don’t rely on an instinct to sniff out profits. They don’t override their system because they think they know better. Their trading just before the eye of the 2008 Financial Crisis storm provides a great example of this….

In August 2007, rising mortgage defaults sent several of the largest quant hedge funds, including a $30 billion giant run by Goldman Sachs, into a tailspin. Managers at these firms were forced to cut positions, worsening the carnage. Insiders say the rout cost Medallion almost $1 billion—around one-fifth of the fund—in a matter of days. Renaissance executives, wary that continued chaos would wipe out their own fund, braced to turn down their own risk dial and begin selling positions. They were on the verge of capitulating when the market rebounded; over the remainder of the year, Medallion made up the losses and more, ending 2007 with an 85.9 percent gain. The Renaissance executives had learned an important lesson: Don’t mess with the models.

A firm that employs some of the brightest minds in fields that expand beyond financial markets, having produced returns unmatched by any competitor still had the obedience and humility to trust their process and follow their models. They know they aren’t special. They know magic doesn’t flow from their fingertips. They believe in the scientific method and apply that method to trading and creating models that work.

So what’s it tell you when one of the best, if not the best, investment firm in the world knows they can’t outsmart their investment process or allow their own emotions to take over? It’s the overwhelming importance for the average and professional investor alike to have a system, to have a strategy, to have some kind of method they can rely on when times get tough and chaos flows down Wall Street that can be followed and trusted, leaving emotion at the door.

Source: Inside a Moneymaking Machine Like No Other (Bloomberg)
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.