Commercial traders in the 30yr Bond futures are a patient group. They clearly fall into the scale trading and mean reversion methodology. The further the market moves away from their perceived value area, the more contracts they tend to add on as they wait for the market to return to their predicted rate target. This places them in the, “often early but, rarely wrong,” category.
These characterizations placed in the context of the current market structure makes a couple of key points. You’re going to want to pull up this COT Bond chart for the next bit.
The bond market has traded down to solid support on the longer term charts since peaking in May. Therefore, it made sense that the market rallied sharply on the weaker than expected jobs number. At first blush this seems like the market is going to rally and yields will hold steady to lower as the net commercial position is fairly neutral. However, commercial trader momentum is decidedly negative. This is actually the most selling pressure the bond market has seen from commercial traders since the March – May selling, which preceded the May high. Furthermore, the spring selling moved the commercial position from +56k contracts to – 33K contracts. The current neutral position could easily see commercial traders moving to their recent short position of -33k or the net short total of -59k from December of 2012. Their biggest short position over the last 10 years was -93k in December of 2004.
The point is, rather than standing around waiting for the, “Bang” moment.
We can use the subtle nuances of deeper data analysis to put us on the lookout for short selling opportunities created by Friday’s rally in anticipation of the potentially much larger move lower, rather than chasing market higher on what will most likely be a dead cat bounce.
