« January 2018 »

IVolatility Trading Digest™

Volume 18 Issue 2
US Dollar Index [Charts]

US Dollar Index [Charts] - IVolatility Trading Digest™

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While most people are aware that macro events affect the markets, it was a Citi Research note in September 2016 that quantified it at about 75% of US equity market variance is explained by macro variables, such as exchange rates, bond prices, etc. Recent activity suggests it may now be even higher as DXY really drives the macro bus. We look at the US Dollar Index (DX) & (DXY) after a brief market comment including the VIX Futures Premium followed by a WTI Crude Oil (CL) update from the perspective of the CFTC Commitment of Traders Report.

Review NotesS&P 500 Index (SPX) 2786.24 advanced 43.09 points or +1.57% last week making four new intraday and closing highs. The first support is the upward sloping trendline, USTL at 2650 and then the 50-day moving average at 2649.59. Investors Intelligence reports the Bull/Bear ratio at 4.77 approaches highs made in 1987.

VIXCBOE Volatility Index® (VIX) 10.16 added .94 points or +10.20% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, now 7.99 was up .96 points or +13.66%.


VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With 2 trading days until January expiration, the day-weighted premium between January and February allocated 10% to January and 90% to February for a 13.88% premium near the lower part of green zone.


The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. With just two remaining trade days the premium will be gone Tuesday. At the extremes, declines below 10 and advances above 30 are both unstable.

US Dollar Index Drives the Macro Bus

US Dollar Index (DX) & DXY, $USD

During the Fall of 2016 Euro weakness propelled the US Dollar Index higher reaching an intraday high of 103.42 on January 4, 2017. Since then the decline has been dramatic with a few minor counter trend rallies it reached 90.99 on September 8 and then turned higher. Digest Issue 49 "Rapid Rotation [Charts]" included a chart raising the possibility that the four point counter trend rally underway since the September low could fail and set off a Head & Shoulders Top.


The pattern set off came December 28 when it closed at 92.30, and below the neckline, NL above. Once below the NL the measuring objective can be determined by taking the distance from the NL to the Head and subtracting it from the NL to get 90 marked MO above.

While currency trends last a long time, there is a chance 90 could be the low for this cycle. Keep it on your focus list.

Of course, the almost exact inverse image is Euro strength as CurrencyShares Euro Trust (FXE) gapped up at the opening Friday closing at 117.40 up 1.50 points or +1.29%.

So despite rising growth expectations in the US along with rising interest rates and rising equity prices the Euro has been advancing against the US Dollar, all good for US big cap multinationals, emerging markets, and commodities especially crude oil.

Crude Oil

WTI Crude Oil (CL) 64.30 +.50 or +.78 basis February. For the week +2.86 points or +4.65%.


From the Disaggregated Commitments of Traders - Options and Futures Combined report as of January 9, "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, increased their long position adding 36,988 contracts while decreasing their shorts +4,401 contracts for a net position increase of +41,389 contracts representing 13.04 % of the open interest up from 12.78% for the week ending January 2 and up from 5.00% for the week ending August 29, 2017at the last pivot.


"Managed Money" now has 473,103 long contracts vs.147,303 contracts or 5.00% of the open interest at the last pivot for the week ending August 29,2017.

On the other side "Swap Dealers" increased their short position 40,424 contracts to a net short position of 704,870 contracts or 21% of the open interest selling to "Managed Money" complicating the analysis since they could represent "speculative traders, like hedge funds, or traditional commercial clients that are managing risk arising from their dealings in the physical commodity." With rising prices producer commercial client hedging is the most likely source of selling.


Typically Producer/Merchant/Processor/User, (Commercials ) or "PMP" are net short contracts as producers hedge production by selling futures contracts and then delivering crude against their shorts at expiration or if the price declined, buying back short contracts for a gain and buying cash crude for delivery. However, since processors and users are also included in this category their buying partially offsets producer selling resulting in a net short position.

Shown as a percentage of open interest the chart below shows a declining net short position since peaking at 12.03% on April 19, 2016 when cash crude was 40.91.


"PMP" net short, the lowest in our records back to April 2014 at .27% of the open interest or -8,936 vs. .84% or -26,603 week ending January 2.

With rising prices increasing "Swap Dealers" short interest while net PMP short interest declines suggests producers are increasingly using "Swap Dealers" for hedging.

The U.S. Energy Administration, EIA claims "Swap Dealers" represent producer hedging along with PMP. When combined their net short position as a % of the open interest looks less dramatic than "PMP" declining or "Swap Dealers" increasing net short positions.


"Swap Dealers" and "PMP" combined now 21.26% vs. 21.77% week ending January 2 or -713,806 contracts vs. -691,049 contracts January 2 and -465,956 contracts or 21.03% on June 10, 2014 when WTI was 106.85.


In conclusion both "Managed Money" and "PMP" (Commercial Processors /Users) were buyers and "Swap Dealers" were sellers on behalf of "PMP" (Producers) as total open interest of 3.4 million contracts remains near the recent high. With the Futures term structure in backwardation by 6.59%, February 18 to February 19, as long as "Managed Money" continues buying, prices will continue higher. In the meanwhile watch for Key Reversals and the upward sloping trendline, USTL as well as the US Dollar Index as the advance since December 21, appears to reflect dollar weakness.

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IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

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