Wednesday, 4 July 2007

COTs Composite Equity Indicator: Neutral

Hope you're enjoying this slow market week and got some time off. I said I'd be back early this week with some thoughts on the latest Commitments of Traders readings. Sorry I didn't get to it as soon as planned.

Friday's COTs report - based on the previous Tuesday's data - has really moved into strange territory for the equity indexes - a true jumble of bullish and bearish signals. The "dumb money" small traders have struck a historically extreme net long position in S&P 500 futures and options. This gave me a new bearish signal on Friday.

Of the six equity markets in the report, three are now bearish - the S&P 500, Nikkei and S&P 400 Midcap. Meanwhile, the other three - the Dow Jones industrial average, NASDAQ-100 and Russell 2000 - are not only not bearish, they gave renewed bullish signals in the last report.

What can it all possibly mean? To make matters more complicated, my two most robust equity setups in terms of their market-beating profitability confidence levels - the Russell 2000 and the S&P 500 - don't agree with each other.

I think one reason for the discrepancies is probably genuine market uncertainty. So in order to give me a better idea, I created a composite indicator based on the five U.S. equity indexes in the COTs report. It's an average of the standard deviation values of these setups - in other words, how bullish or bearish they all are as a whole. Click here to see the table and chart of this composite indicator going back to 1995:

A reading of 1 or more means all five indexes are on average at the historic extremes of bullishness that trigger bullish signals across the board. A reading of 1 or less means the same bearish extremes.

You'll notice the indicator is pretty much neutral at the moment, following a couple of seesaw swings in recent months. It'll be interesting to see how the indicator acts as we move toward the fall.

You'll also see we're maybe not in such strange territory after all. It looks from a casual glance that the five COTs signals don't often swing into the same extremes of bullishness or bearishness. (At least, not based on the signal lines at 1 and -1.)

When the setups did agree, however, they seem to have made righteous calls about historic market junctures. New signals happened three times - a buy in April 1997, a sell in April 1999 and a buy in Jan. 2003. I think this will be an interesting new dataset to fine tune and possibly base setups around. Similar indicators can be created around other sectors of COTs data like energy and the metals. I'll let you know what I find. Stay tuned.

Meanwhile, I invite you to surf over to to read my regular weekly COTs precious metals report.


Alex W said...

Dear Alex,

Thank you very much for the interesting and profitable system!

I just found your blog and read it entirely.

I am curious: did you notice whether your system detected any anomalies in the followed markets before any major corrections and crashes? I did not ask about tradeable signals but rather "anomalies" or "extremes".

Have you noticed anything of value?

Thank you in advance,

Alex Roslin said...

Hi Alex,

Thanks for your interest. Good question. I haven't studied it, but I've been meaning to look at the futures-only data more closely to see what can be found about the 1987 crash. I'll report back here if I find something interesting.

Take care,