Commercial Hedgers Bet Big on Rebound

What a crazy day to cap a nutso week. Feels like we're back in the dog days of early last year. So many people are sitting in front of computers with their finger on the nuclear button. But new data from the Commitments of Traders report today suggests my series of bullish signals from last week are still on track. I've updated my latest signals table based on the new figures released this afternoon. A few highlights:

- S&P 500: You have to go back to Sept. 2007 to find a time when the "smart money" commercial hedgers have been this bullish. As you'll see on that latest signals table, these guys are in heavy-duty extreme territory in their bullish net positioning. Meanwhile, the wrong-way small traders have gotten even more super-sizedly bearish. This is setting up very nicely for my long bullish trade starting on the open of trading on Feb. 22. Note that, as I explained in a special post yesterday, such big moves in trader positioning don't necessarily take effect right away. On average, in the S&P 500 data, the commercial and small trader signals were best traded with a three-week delay in my backtesting.

- U.S. banks: My second week of being bullish in this market. The data is still looking pretty hot, even if it's a hair less bullish this week.

- Crude oil: My setup remains in cash, but the data has given me a new bullish signal with a four-week delay. It's to take effect March 8, I guess somewhat in sync with the yearly seasonal trade.

- Gold: Bullion remains also bullish. The data, which correlates strongly with bullion prices, has also gotten a little more bullish Friday.

- Natural gas: My trading setup for gas is bullish a second week and will remain so next week, then cash out.

Hope you did okay last week. Please check back in early next week for an update of my portfolio page. Good luck next week!

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Market Tanks! Was the Smart Money Wrong?

The market is caving in today, and that prompted a trader friend to express frustration about the commercial hedgers in the Commitments of Traders data. You'll recall from my post last Friday that they got uber-bullish last week. So what gives? Are they wrong? He also noted that commercials used to have a better record a few years back.

It made me wonder if there were types of markets when the correlation has worked differently. So I checked out the numbers. Check these correlations out. Overall, contrary to conventional wisdom, the "smart money" commercial trader net position as a percentage of the total open interest has had a negative -25-percent correlation with S&P 500 weekly open prices a week later.

That's right - a negative correlation. So trading alongside the commercials week to week would have lost you piles of money. That actually makes sense, in a way. These guys accumulate positions as markets decline and vice versa. It's only when they hit extremes of positioning that I've found you can trade alongside them. And then, only if their signal happens to agree with that of another group of traders. That's why I use two signals in my own S&P 500 setup and only trade when both agree. And on top of that, the signal tends to work most reliably not right away - but with a delay of about three weeks on average.

Here's something else I found. Here are historic correlations in certain time periods between the commercial net position and S&P 500 prices a week later:

- March 1995-Nov. 1997: -71%

- Dec. 1997-Dec. 1999: +14%

- Dec. 1999-March 2003: 0%

- March 2003-June 2008: +34%

- March 2003-today: +53%

- June 2008-today: +63%

- March 1995-today: -25%

So clearly, the COT data has changed quite a bit over the various periods in how it interacts with market prices. Trading just off this information would have been a fairly random exercise. That's again why I think the data needs to be filtered with some more complex trading system. Good luck the rest of this week!

Woah... Bullish Freight Train

In the market's grimmest hour, when all are ablaze with talk of doom, one lone voice calls out bullishly: the Commitments of Traders data. Yes, Friday's report on trader positioning is about as sunny as you can get if you're a bull. The data, which tells us weekly what the biggest trading institutions are packing in major global markets, has given me a broadside of new bullish signals for my trading setups based on this data.

This week's COT report appears to consolidate an important trend change in the data that started to appear two weeks ago, as I mentioned in this post. To get the full gist, you really have to check out the whack of new green signals all over my newly updated latest signals table. Some highlights:

- S&P 500: My trading setup for the S&P 500 has suddenly flipped to bullish after 13 weeks being bearish. The "smart money" commercial hedgers have made a dramatic move to reduce their net short futures and options position as a percentage of the total open interest. Meanwhile, the wrong-way small traders have also reversed course almost as massively - getting super-bearish on the market (which is actually a bullish development). Both groups of traders have given new signals at the same time. Historically, such a move has led to higher S&P 500 prices. Usually. Not always, but usually. Note that the setup works with a three-week trade delay, so my long position will take effect on the open of trading on Monday, Feb. 22.

- U.S. banks: My setup for the BKX U.S. Bank Index, a basket of the major financials, has also made the move into the bullish column after two weeks in cash. This new signal takes effect on next week's open of trading, Monday, Feb. 1.

- Gold: Large speculators in bullion futures and options - the wrong-way crowd in this market, who are usually poorly positioned at market turns - have finally capitulated. They've had enough of the losses, and in the last COT report they cut back on their total open interest big-time. Historically, that's meant gold tends to go up. (Not always, of course! That's why I use risk control techniques to limit potential losses when these signals are wrong - as they often are.) My bullish bullion signal also takes effect on Monday's open.

- Natural gas: My gassy setup goes from bearish the past three weeks to bullish as of next week's open. Never a dull moment in the natural gas market, that's for sure. One of my favourites.

- 30-year Treasury bond: The bond setup has been bullish for three weeks but goes to cash next week as the signals that make it up no longer agree.

Hope you did okay last week. It was a pretty grim one. See you back here early next week with an update of my portfolio page. Apologies for not updating that as often as I would have liked recently and for my somewhat curtailed posts lately. I've been otherwise heavily occupied, but I hope to return to my usual more garrulous ways. Good luck next week!

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Nikkei Data Goes Bearish

Newly updated data and signals are now up on my latest signals page. New signal: bearish for the Nikkei. Many apologies for the late post! Hope you had a good weekend. I'll be back here later with some thoughts on Friday's Commitments of Traders data release and a portfolio update. Good luck this week!

Bullish Sea Change in Bank Data

Huge shift in some of the markets last week in the Commitments of Traders data. As you can see from my latest signals table, the data for my trading setup for the BKX U.S. Bank Index has moved dramatically to a bullish outlook. The two-week trade delay for one of the signals is the only reason the setup has moved to cash, rather than outright bullish. However, the jumps in the large spec and small trader total open interest are quite bullish as that data is well correlated with next-week BKX prices.

In the S&P 500 data, the small traders, the wrong-way money in this market, are a tiny hair away from getting so bearish that it would push their signal into the bullish column. Like the COT data for U.S. financials, there's some kind of sea change happening in this market, too. The "smart money" commercial hedgers are also gradually shifting positions to more bullish territory, though they're still a little dubious about being overly long.

Also a big shift taking place in the 30-year U.S. Treasury bond COT data, where the small trader total open interest has shot up. I fade this positioning, so this is actually potentially a bearish development for the bond. In gold, the large spec total open interest has made a dramatic move to the upside - again, a bearish turn of events. Meanwhile, in crude oil, the commercial traders, whom I trade alongside, have gotten mega-bearish. That setup has just gone to cash, which makes five of my setups in cash (out of seven). A lot of indecision out there, but it feels like some kind of major shift is partially under way. Good luck the rest of this week!

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

New Signals: Banks to Cash

Newly updated signals and data just up now on my latest signals table. Most notable: U.S. financials go to cash. I'll be back a little later for a full post on the new Commitments of Traders numbers. Sorry for the tardy update. Good luck today!

Gas Smells, Bond Bubbles, Gold Goes

Interesting new developments in the latest Commitments of Traders report released Friday. See my newly updated latest signals table for all the details. New signals for gold (cash), natural gas (bearish) and the 30-year Treasury bond (bullish). A few other highlights:

- S&P 500: Trader positioning has just made a major course change in S&P 500 futures and options, as that table of mine shows. Commercial hedgers (the smart money) are getting substantially less bearish, while small traders (the not-so-smart) are suddenly much more negatory. This, of course, overall could prove to be bullish. But not yet. My signal is still a leap and a jump away from flipping course and this week remains bearish. In fact, it can often be during this kind of trader repositioning that a big moves come.

- U.S. financials: The data still looks sad for the banks, although the large spec and small trader total open interest are both seriously less bearish this week. My setup is still bearish.

- Gold: My setup for bullion has suddenly had a major change of heart. It's going to cash after two weeks being bearish. The large spec (dumb money) net percentage of total open interest has seriously plummeted in the latest report. In fact, it has more or less steadily dropped for the past three months, but it's only this week that the signal based on this positioning has finally switched to bullish. (I fade the large speculators in this market.) It's a big move as this signal has been bearish since the beginning of August. The setup overall now goes to cash since both signals have to agree for me to take a position in this market.

But if the large spec net position signal remains bullish for three more weeks, which is very likely considering the long-term nature of that signal (it's based on a 33-week moving average), the setup will go bullish at that point.

Good luck this week, and be sure to tune back in within a day or two for an update of my portfolio page.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Setups Still Bearish for Financials, Gold and Crude

Mixed news this week from the holiday-delayed Commitments of Traders report, which was just released Monday afternoon. I've updated my latest signals table with the new data and market calls for my seven trading setups based on the COT reports. Here are some highlights:

- S&P 500: This setup remains bearish for a 10th consecutive week. However, as noted previously, my short position was stopped out on Dec. 23 after the index went against that signal in a way that indicated a powerful trend that went against historic norms. In the latest report, the "smart money" commercial hedgers have gotten more net short for the second week in a row, while ironically the "dumb money" small traders have also gotten more bearish. A bit of a mixed bag I guess.

- U.S. financials: My setup for the BKX U.S. Bank Index, based on the COT data for the three-month Eurodollar contract, is now bearish for a second week. The latest data is again somewhat mixed, however, with the large spec total open interest falling a smidgen while the small trader total open interest has risen. Both are strongly correlated with next week's BKX price.

- Gold: Also a second week of being bearish for my gold trading setup. As the latest signals table shows, the data is looking slightly gloomier this week for gold.

- Natural gas: My only new signal this week comes for natural gas: bearish, with a one-week delay. To be executed on the open Monday, Jan. 11.

- Crude oil: This setup is entering its 12th week being bearish. It will stay bearish this week and next and then go to cash on the open Monday, Jan. 18. The commercial hedgers still have a bearish tilt in this market, but the small traders, whom I also trade alongside in crude oil, got decisively bullish as of the Nov. 17 COT report, which pushed their signal into the long column. Unless both signals agree, the setup will remain in cash.

I hope you had a great holiday and New Year's celebration. Best wishes to all readers for a healthy and happy 2010. For those who follow the old calendar, Merry Christmas on Jan. 7, and Happy New Year on Jan. 14.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Data Frowns on Banks and Bullion

Two new signals this week on my latest signals table, which I've just updated with the data based on the holiday-delayed Commitments of Traders report released Monday afternoon. My trading setups for the BKX U.S. Bank Index and gold bullion have just gone bearish for this week's open of trading. I'll execute the trades as of Tuesday's open. Check the signals table to see the new data for those and the other markets I'm following. Some other highlights:

- Banks: The data for this market is looking positively unholiday-like. The large spec and small trader open interest in three-month Eurodollars, which give me signals for U.S. financials, has fallen into the eggnog, as you can see from my signals table. The open interest data is highly correlated with next week's BKX price, so this could spell post-holiday trouble for the markets.

- Gold: My gold setup has gone bearish again, potentially for up to five weeks depending on how the two signals align that make up the setup. The large spec net position has really stumbled in the latest COT report; that positioning correlates strongly with bullion prices the next week.

- S&P 500: Commercial hedgers are still stubbornly bearish in S&P 500 futures and options. However, as I noted Wednesday, my bearish signal for the S&P 500 got stopped out last week. At the same time, small traders, the usually wrong-way money who have been actually correct in their bullish positioning recently in this market, have started to get more antsy, as witnessed by their sharply reduced net long position this week. What can it mean? The setup remains officially bearish, despite me being stopped out, and it shows no signs of going bullish any time soon.

I hope you're having a great holiday. Check in tomorrow for an update of my portfolio page. Apologies for the missed updates during my time off this month. Please note that the next COT report will again be delayed and is due out Jan. 4. Good luck this week, and best wishes in 2010!

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Bond Setup to Cash

I'm going to cash on this morning's open of trading in my 30-year Treasury bond setup, which has been bearish for the past week. As I noted in my last weekly signals update, this bearish trade was to last just a week. The latest Commitments of Traders report is delayed until this afternoon, so check back in here later for an update of my setups based on the new data. Hope you had a restful holiday, and good luck today.