October 25, 2021

Eurodollars closed into new 18 month lows on Friday…The markets CONTINUE to raise short term rates AHEAD of the Fed…

I have often said that my opinion is only about 15% of the equation in being successful in the futures markets…that it’s more about the numbers…and the mechanics of trading…And what follows below is just another indication of that.

Back in 1996, I devised a totally mechanical trading system, using “crossovers” between two moving averages to generate buy & sell signals in the commodity futures contracts…Just about as simple and basic as it gets. I back-tested the system on every commodity market we trade…and came up with ONE market that showed incredibly profitable hypothetical results going back to when the contract was first introduced in 1984, that market being the same Eurodollar contract that I am currently shorting.

Long story short, with 12 years of data, with every one of those years showing hypothetical profits (not to be confused with actual trading), I sold the idea of trading the system in Eurodollars to a number of clients…and then watched it have its first losing year ever…such that everyone consequently abandoned it, with the exception of one individual, who then went on to quadruple his money during the next year or so…even when I had also given up on the system.

Nevertheless, I have tracked it ever since, but somewhat stupidly, have not used it…

That “bad year” proved that the system is obviously not infallible…no approach ever is. And it is not uncommon for moving average crossover systems to suffer losses, in choppy sideways markets…BUT…what this system has always done, and will do, is be there for any extended move or trend in the Eurodollar market. Straight up, by the nature of its design, and the NUMBERS, THIS SYSTEM WILL NOT MISS ANY LONG TERM MOVE IN SHORT TERM INTEREST RATES. But just to be clear, it does NOT predict the markets. It simply presents you with a mathematical confirmation that a trend may be beginning…and then keeps you on it if that actually is the case.

There are two reasons why this “works”…The first being that the two moving averages (of the closes) are specifically far enough apart that the approach does not “overproduce” buy or sell signals due to minor retracements in a long term move…And the second reason is due to the nature of how short term interest rates have forever tended to move…As always, nothing is absolute in the markets, but when short term interest rates DO BEGIN a move either lower or higher, they have historically done so in phases/trends that last for several years. In other words, what you don’t get is the Fed deciding to raise rates for a month or two, then lower them, then raise them, and so on…the point being, once rates START in a direction they tend to KEEP GOING for a long time…that is, they DO TREND…and the system you’ll see below is designed to get you in when the trend HAS started…and keep you in.

Here is the June 2022 contract, with hypothetical buys and sells, going back to just before the pandemic began…

Here is the same contract and the same system, but using weekly closes for the moving averages…Do note that Eurodollars ROUTINELY make 100-200 point swings…Also that less than 3 years ago, this contract was at 97.00, reflecting a 3.0% LIBOR.

I CONTINUE TO BELIEVE THAT RATES HAVE ALREADY BEGUN MOVING HIGHER…AND WILL CONTINUE TO DO SO FOR AT LEAST THE 12-18 MONTHS…AND THEREFORE RECOMMEND BUYING PUTS OUT IN MID TO LATE 2022.

The Fed usually meets about every 6 weeks, but occasionally does have emergency meetings…And while it does not mean it has to happen this way again, in the past, when they have been in either Easing or Tightening modes, there has been a very definite pattern of lowering or raising the Fed Funds Rate at each successive meeting…AND…at times, as a result of recent “surprising” data, they have called emergency meetings to speed up the process…AND, there have been occasions when “surprising” data led them to act more aggressively, in which case they upped their action to moving in bigger increments…from 1/4 to 1/2% for example…My point is that there will be at least 6 Fed meetings between now and next June…and that when they DO start raising (which I believe can come ANY time now), 6 x 1/4 (the least they will do) would move rates up by 1.5%...or 150 points in Eurodollar futures…That being said, seeing the market 75 or 100 points from here by next June DOES look easy to me…

And one more time…The Bigger Picture…and what might be expected as Covid recedes and we return to normal…

Here is an option I like at current levels…

I keep saying it…Undoubtedly I might be dead wrong about all this, which can mean losing everything you invest, but I see this as having monster leverage and a TON of time to see it work…And absolutely believe it will…

If you think I’m right, I hope you’ll pick up the phone and do something with it…

Thanks,

Bill

770-425-7241

866-578-1001

All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars