McClellan Chart In Focus: Eurodollar COT Model Calls For Continued Rates Drop – By Tom McClellan

Chart In Focus

Short term interest rates have been falling, pushing the Federal Reserve to cut its own Fed Funds rate target.  This week’s chart says that there is still a lot further for rates to fall. 

I get a lot of data out of the CFTC’s weekly Commitment of Traders (COT) Report, and I review the relevant insights every Friday in my Daily Edition.  This week’s chart features data from the eurodollar futures contract, showing the “commercial” traders’ net position in that contract.  That is the red plot, and it is shifted forward by 10 months in the chart to reveal how those traders’ movements tend to show up again in the movements of 3-month T-Bill yields.  Those 3-month yields have started the big drop which this indicator has forecasted, and it says that there are still at least 10 more months of falling yields ahead.

This leading indication did not work so well from 2009-2015, when the Federal Reserve was employing a “zero interest rate policy” or ZIRP, thinking that the Fed’s experts knew better than the bond market what interest rates should be.  When the Fed finally let rates start to rise in late 2015, the path of T-Bill yields got itself back into sync with this model. 

What it does not tell us is exactly how far rates should fall.  This model is pretty good at getting the direction right (when the Fed does not put a thumb on the scale), but how far the T-Bill yields may go can vary.  What I have found, though, is that if you get the direction right, the magnitudes will take care of themselves. 

I used to use this eurodollar COT data as a 1-year leading indication for the movements of the stock market, and it was a really good one while it lasted.  It started to break down when the Fed started QE3.  For a while afterward, the model seemed to start working again, but the correlation is horrible lately. 

It is still working, though, for short term interest rates.

Tom McClellan
Editor, The McClellan Market Report


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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.