A few months ago, when reviewing our trades on US Treasury futures, I was so delighted, I drafted a bragging article titled “How we knew yields would collapse?” summarizing the results of our trading. That performance was entirely generated by my I-System model, first built in 1999. I still find myself awestruck that this works… We generated profitable trades through both the bear and the bull market in bonds, literally without needing to know a single thing about the market fundamentals. The trades were strictly based on the knowledge framework built into the system more than 20 years ago (by the way, our strategies are still generating excellent signals in those same markets).
But I revisit this experience for another, perhaps more interesting reason. A series of recent reports from JP Morgan, Bloomberg and Nomura showed that some of their leading analysts, including Marko Kolanović and Masanari Takada, started paying closer attention to the activities of CTAs.
CTA stands for Commodities Trading Advisor. But their importance here has less to do with commodities and more to do with the fact that most CTAs use systematic trend-following strategies to trade in a broad spectrum of markets, including stocks and bonds. Because all these strategies tend to be similar, when CTAs start taking (or closing) positions in some market, they often do so collectively and can trigger significant price moves.
Thus Nomura hypothesized last month that CTAs played the leading role behind the sharp 2019 moves in yields (precisely the subject of the article I posted in September). The explanation is that CTAs are more technically minded and qucker to act than other funds. In support of their hypothesis, Nomura produced this chart:
As the chart clearly shows, large-scale CTA buying or selling of US treasuries seems to precede trending moves in the treasuries. As Nomura’s Takada suggested, on each occasion this year, CTA net buying “has been something like an opening gambit” of major market moves. Takada also noted that the steady accumulation of long positions in US equity futures (S&P500, Nasdaq, DJIA) by CTAs has been one of the factors behind the strength of the US equity markets. The following chart illustrates the relationship:
In this case however, it seems to me that CTA positioning slightly follows, rather than leads the S&P500 price trajectory (I’ve written about what I believe is the key driver of stock prices here). Nonetheless, there clearly is a relationship which is apparent also in the following chart produced by J. P. Morgan:
It follows that, not only are CTAs viable and relevant, they are viewed by some as “the main driver behind the main driver” of recent stock market moves. As Tyler Durden most recently commented on ZeroHedge, “in absence of definitive macro trends, traders will be looking at the next best, and most important thing: what CTAs will do…” Nomura equally advises clients to continue targeting momentum (prevailing trends) until CTAs show their cards…
Read CTAs in real time!
For investors and traders who want to read “CTA cards” in real time, without waiting for JPM or Nomura reports, they can subscribe to our TrendCompass reports. What is true for major equity indices and treasury futures is likely also true for markets like Oil, Gold, Silver, Copper, Coffee, Sugar and all other liquid markets in which CTAs actively trade. If you are an industry hedger, this type of decision support could be disproportionately valuable (here’s a 3-min YouTube clip explaining why). We cover over 150 such markets and can generate daily reports based on dozens of trend-following strategies typically used by leading CTAs. This is how we “knew” that yields would collapse in 2019.
What you get:
(1) Summary page
(2) Detailed strategy page per each market covered
Alex Krainer is a CTA trader and author based in Monaco. He’s wrote the book “Mastering Uncertainty in Commodities Trading”