Tuesday, May 17, 2011


There was a comment posted yesterday about the Fed and whether or not they have admitted they are actually buying futures contracts or not. Since I have recently been picking up quite a few new readers I will revisit my logic from old posts that are a needle in a haystack to find. It would be easier if I titled them something less sarcastic I suppose, but that is my style, born a smart ass and I remain one to this day.

For those who have not studied the concept of the PPT and it's workings, you can just google it and find enough to get the general idea. It was formed under Ronald Reagan's watch to ensure stability in times of crisis. The intent was basically to have the group involved stabilize crisis periods with interventions. As to the merits of whether we should be doing this or not, who knows. I am more of a free market guy, so I always say no to drugs like this but drug addicts need help at times. Regardless of whether we agree or not, our opinions are not considered in this process so it really does not matter. The ironic part of all of this, and the brilliance of it at it's conception is the FED is not a government body, hence they do not have to open their books. This enables them to keep their workings secret.

There is pressure building now for them to open up their books to the public, but you all saw how far that went when FOX sued for that and were told to piss off basically. One thing about Barry and his little posse that you almost have to like is that they just do whatever they want, ignore the law and challenge anyone to stop them. It is the ultimate "Scoreboard" attitude. I won so I am going to do what I want etc.. As a result, I have no idea if we will get to see what the FED is doing, but if we do it won't be under his watch.

The COT report is a good way of observing who is doing what out there in terms of positions in the marketplace. In general the Large Specs are the trend drivers who buy on a scale up basis and sell on a scale down basis. You can see that in general on the chart where I marked it off. However, what jumps out off the page on this chart is the completely unusual activity of the Large Specs during the recent market sell off. You can see that they became scale down buyers. If you notice where I have indicated, which is not even the whole run, some or a group of Large Specs lost over $1.5 Trillion dollars when they puked out and sold during the last leg down. It was actually over $2 Trillion by the time the selling ended at the lows.

The rules for classification in this report are basically the Commercials are hedgers, they actually own and produce the commodities themselves. As a result they are given unlimited position size limits to hedge their production with. The Large Specs are funds, and have size limitations. The Small Specs are me and you basically. Now with all this in mind you have to ask yourself who in the world could possibly as a Fund afford to lose $2 Trillion dollars? The answer is pretty obvious in my mind. There were losses reported and Funds that shut down during the decline, but nothing of this magnitude. Here is the other thing I left out just to make this simple, the Large Specs were actually net short almost 50,000 contracts at the highs. This means that they really bought double the amount I stated above, so the real losses were close to 4 Trillion dollars. I just measured the number on the chart from zero to keep it simple.

It is true we have no conclusive proof that the FED or the US Government was this buyer, but if it was not them, who could it possibly have been? Since they are not hedgers, their contracts would have to be covered in the Large Spec category. There is some degree of arbitrage that goes on with the stock indexes now so that could explain "I suppose" some portion of this but it does not change the basic premise. There was some "unkown" buyer trying to stabilize this market to the tune of trillions of dollars as it fell. It is my contention that regardless of what anyone says, this had to be the FED. The only other possibility is that it was a foreign government, but that makes no sense to me at all, does it to you? Why would some other country want to lose trillions stabilizing our stock market? There is not an individual fund or group of them with the amount of money to lose trillions like this. The fact that they ultimately capitulated at the lows means these losses were realized somewhere, yet this somewhere was not reported, hmmmmm.......

I will let new readers do their own research on this. I have stated this just so that everyone has an idea of where this premise I often refer to comes from, and that I am not some loony conspiracy theorist. We do see conspiracies all over the place in life, so they do exist, but they do not explain everything that happens that we do not understand. I do think they explain this, but that is just one man's opinion. As to the daily activities, I think even the biggest doubting Thomas out there has to wonder where these end of the day saves in the futures markets come from, when we go from down 150 to unchanged in the last 30 minutes of a trading session. Some clearly are just natural market forces playing out, but when we see this many of these take place, there is nothing natural at all about that.

Meanwhile back at the ranch, we do have a sell off playing out quietly here. It appears I made a blunder in exiting my shorts in the Bernanke's too soon. Thinking will just kill you in the markets sometimes. I looked at a projection from my software program showing no matter how I ran it a sharp rally over the next 2 weeks. I also looked at my indicators and saw they were turning up it appeared, so I exited on weakness booking some profits. However, I missed the bigger part of the move. Logic can kill you trading. Such is life. However, it was a decision I made and had I still been in my stop would be above yesterday's high. If that were to be hit, it would be a higher price than where I actually did exit and my decision would be validated. No matter, it is over regardless, time to move on.

I have tried buying into this a bit on weakness in a few ETF's just to experiment with this idea of buying weakness above the 200 day moving average. I will show the trades once they are done. The problem I always have with doing this is not trading with any stops and legging in on weakness. On a percentage basis it is very high win to loss ratio trading, but there are large hits you take. I am still working on how to balance it out and do not have any answers yet.

Here is a short I put on in the Japanese Yen last night. Basically we had a trend break with the Commercials displayed selling the recent rally against the recent highs. It has already bounced quite a bit so maybe the trade sucks, we shall see. In the mean time I am still looking for the Bernanke's to stabilize here and bounce for a couple of weeks based on the projection I showed yesterday.

Good trading to everyone


John M said...

Hi, Chris, enjoying your posts as always.

I have a question, though. After Reagan certifiably broke the law in Central America, Bush blatantly went anti-Constitution after 9/11 and broke the law, and even Clinton lied to a grand jury which is, after all, law-breaking, why do so many traders buy the right-wing position that somehow Obama is the one who is breaking laws and doing horrible things?

Reagan got the Fed involved with the PPT, and the Fed has never opened its books under any former president of either party. But somehow it's all Obama's fault and he's some kind of dictatorial lunatic. ( I think W was way moreso, but whatever.)

Even the bailouts are laid at Obama's feet, when in fact he simply continued the policy laid down by the previous administration--an administration that is never demonized anymore for starting the bailout ball rolling.

I'm not a big fan of Obama by any means, but this continuous warping of recent history and the idea that the Fed just does this particular White House's evil bidding (a linkage started at least as far back as Reagan, likely further) seems to be not only unfair, but also says more about the collective, somewhat robotic mindset of the free market, right-leaning trading community.

Explain, if you will. I would like to understand how this continues, especially from some very intelligent folks. Thanks.

Anonymous said...


Commercial hedgers flipping from long to short seems to coincide with the last major US dollar rallies and it seems to be happening again.

Chris Johnston said...

Well barry does not own the franchise on lying that is true. He certainly has the highest on base percentage though having lied more already than any prseident in history.

As to traders taking the right wing view, that happens because we are all capialists not socialists. However, the PPT was formed under Reagan and regardless of who had been in office during this time the same marekt manipulation would be going on. The PPT is not party based.

I make these off handed political remarks which I probably should not but it is my blog so I pop off I guess when I feel like it. I won't get into political discussions here because it is just a waste of time. I think all politicians are crooks regardless of what side of the fence they are on.

Barry is no more guilty of protecting the PPT than anybody else has been, the heat is on him now because the word is out now, just bad timing for him.

Konrad Sherinian said...

Chris - I never would have guessed you were a capitalist from your blog:) In any event, another interesting post. I'm not sure how much you figure economics into your trading, but the Austrian explanation of the business cycle (i.e., forced credit expansion bad) pretty much calls the long-term trend dead on. More pertinent to the subject matter...George Reisman's treatment on economics (called Capitalism - the PDF is available for free at mises.org) hits the nail on the head when he states in the introduction that any economist who actually cares about the standard of living of people must believe that capitalism is the ultimate social structure. All that aside, I am back to being long again - bean oil and copper presently, but I am looking to get into a number of other trades before the weak is out. I took the Yen short as well, but zapped it at the close for lunch money. I agree with the premise behind it (they will likely conduct a QE that will make the Bernanke blush), but it was acting a bit squirrelly, and I'm a light sleeper when I'm not 100% behind a trade. And of course, good luck and good trading.

John M said...

Chris, that was a well put and very decent response. I'm in full agreement with you on this, all politicians are dangerous and have repeatedly proven it for generations.

Throw the political comments in all you want, like you say, it's your blog! And I understand your context better now, so now more longwinded blah blah from me, sorry about going on like that.