Friday 31 August 2007

COTs Bull the Nikkei, End 8-Month Bearish Signal

In another sign that the bull market is on solid ground, the latest Commitments of Traders report has flipped to bullish for the Nikkei Average. That's according to my trading system based solely on the COTs reports issued by the Commodity Futures Trading Commission.

The new signal puts an end to an eight-month bearish signal for the Japanese index. The trade is best executed with a five-week delay - i.e., for the open of trading the week of Oct. 8. [I published incorrect information in my original post Friday saying there was a one-week trade delay for this setup. Apologies.]

See my "Latest Signals" link to the right for the full details on this trading setup and other signals from Friday's COTs data. Also interesting: the report gives another renewed bearish signal for the Japanese yen. Oh yeah, and my COTs U.S. Composite Equity Indicator has jumped again, up to 0.78 from last week's 0.68 - giving its fourth consecutive bullish signal.

I'll be back after the long weekend with more thoughts on the latest COTs report. Hope you have a good holiday.

Wednesday 29 August 2007

Composite U.S. Equity Indicator Bullish

My U.S. Composite Equity Indicator gave a bullish signal based on last Friday's Commitments of Traders report, as I mentioned in my weekly update. This was the third consecutive weekly renewed bullish signal from this indicator, which combines four of my COTs-based U.S. equity trading setups. Click here to see my latest readings from this indicator. Note that the S&P 500 prices are for each week's open of trading.

Tuesday 28 August 2007

COTs Like Silver: Update On Precious Metals

You can now check my COTs take on the precious metals markets, just posted at Kitco.com. Also, Futures & Options Trader has published a story I did on my Russell 2000 trading setup based on the Commitments of Traders reports in its July issue. I'm still trying to get a version I can post here, but in the interim you can subscribe to the magazine for free here and download a spreadsheet for that setup here.

Monday 27 August 2007

Updates: New Signals Page, New Story

Just modified my "Trading Setups" page (see link above) to include columns for the latest signals. I'll update those as we go. Also, check the "Alex Roslin's articles" link for a story I did in today's Montreal Gazette newspaper: "Is the market shakeup over yet?"

Saturday 25 August 2007

COTs Flip to Bullish on 30-Year Treasury Bond, Rosier On Equities

Interesting signals from Friday's Commitments of Traders reports. The latest report has flipped to bullish for the 30-Year Treasury Bond. (In other words, bond yields to fall.)

I got this signal based on action in the futures and options markets by two groups of traders - the large speculators and commercial traders. My research suggests the large specs (large investment firms and hedge funds) are the "smart money" in this sector.

Yeah, I know what you're going to say. Trade with the hedge funds? Aren't these the same bright lights that brought us the Credit Crunch of 2007? In fact, in most other markets, you'd be right: The large specs are indeed the "dumb money," positioned the wrong way at key market turning points. But in the case of the 30-Year Treasury, I surprised myself by finding that we want to be in the same boat as these guys.

In the latest COTs report, the large specs dramatically reduced their net short percentage-of-open-interest position in Treasury Bond futures and options. They're now so barely bearish that their position has hit a historic extreme that, in the past, has tended to lead to trend changes in the bond market.

But that wasn't enough for me to declare a bullish signal for the bond. I get a signal in this market only when my setups for the large specs and commercial traders both concur. As it happens, the commercials first gave a bullish signal for the bond four weeks ago. In Friday's report, they gave a renewed bullish signal. (These signals are based on fading, or trading opposite to, the commercials - the "dumb money" in this sector. They've been reducing their net long percentage-of-open-interest position to historic extremes.)

So now both groups of traders do concur: The 30-Year Treasury Yield seems headed down. For more details on this setup and how I trade my system, check the "Trading Setups" and "How It Works" links above. For one thing, this setup calls for trades to be executed with zero time delay (i.e., on the open of trading, Monday, Aug. 27).

Other highlights of the latest report:

- Renewed bullish signals for the 10-Year Treasury and 13-Week T-Bill. Falling yields should help boost equities.

- A renewed bullish signal for silver. Is the precious metals bloodbath finally over?

- A renewed bearish signal for the Japanese yen. That could be more bullish news for equities: Maybe the carry trade is still alive?

- A third consecutive bullish signal for my COTs U.S. Equity Composite Indicator (a composite of the readings in my COTs setups for the S&P 500, Dow Jones industrials, NASDAQ 100 and Russell 2000). The reading rose to 0.68 from last week's 0.58. (A "1" or more would mean that, on average, all four setups have just given a buy signal to be executed for next week's open of trading.)

The indicator's latest 0.68 reading is nearly one standard deviation above its 156-week moving average, which gives me a renewed bullish signal for the S&P 500. (A signal comes when the indicator is 0.8 standard deviations or more from the moving average. See the "Trading Setups" link for more details.)

Overall, the COTs report seems to have a bullish tilt on the markets, with some exceptions. The S&P 500 small traders - whom I fade in my setup based on the S&P 500 COTs data - are still too bullish to change my bearish signal for this index.

But the latest data answers a large question that has hung over markets in recent days: Would Friday's COTs report tell us anything scary about how traders were positioned during and right after the worst of the market slap-down late the week of Aug. 13.

Would we get a slew of new bearish signals as we head into September, which the Stock Trader's Almanac folks say is the worst month of the year? Or would the latest COTs report continue in the same vein as previous weeks, suggesting the selloff hasn't been some kind of seismic 1987-like event after all, but just a regular correction within the five-year bull run?

The data seems to be stacking up mostly in the more optimistic camp. So far.

New Signals*
BULLISH
-30-Year Treasury Bond

BEARISH
None

Renewed Signals**
BULLISH
-U.S. Equity Composite Setup for the S&P 500
-10-Year Treasury Note
-13-Week Treasury Bill

-NASDAQ-100
-Silver

BEARISH
-Natural Gas***
-Semiconductor Index, SOX
-Japanese Yen

Existing signals (date of original signal in parentheses)****
BULLISH

-10-Year Treasury Note (31-Jul-07)
-13-Week Treasury Bill (27-Feb-07)
-S&P/TSX Composite (15-Aug-06)
-NASDAQ 100 (27-Mar-07)
-Dow Jones Industrial Average (20-Mar-07)
-Russell 2000 (1-Aug-06)
-S&P 400 Mid Cap (7-Aug-07)
-Silver (3-Jul-07)
-Gold (29-May-07)
-US Global Investors Funds US Gold Fund, USERX (12-Jun-07)
-S&P/TSE Canadian Gold iUnits ETF, XGD.TO (22-May-07)
-Gold Bugs Index, HUI (29-May-07)

BEARISH
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO (3-Apr-07)
-Oil Service Holders, OIH (3-Apr-07)
-S&P 500 (26-Jun-07)
-NASDAQ Composite (26-Dec-06)
-Semiconductor Index, SOX (20-Mar-07)
-Nikkei Average (19-Dec-06)
-Soybean Oil (11-Nov-06)
-Copper (10-Apr-07)
-Canadian Dollar (10-Apr-07)
-U.S. Dollar Index (3-Oct-06)
-Japanese Yen (2-May-06)

NEUTRAL
-30-Year Treasury Bond (31-Jul-07)
-Crude Oil, Light Sweet (3-Apr-07)***
-Natural Gas (27-Mar-07)***

Notes
* For an explanation of what I do after a new signal, click “How It Works” above.
** A “renewed” signal is when a market is already on a bullish or bearish signal, and traders again register an extreme net trading position in the same direction. I normally ignore renewed signals unless I don't already have a trade on in this market. I haven't studied the profitability of trading on renewed signals.
*** See my special caveats for my Crude Oil and Natural Gas setups (click “The Trading Setups” above and check the table footnotes).
**** The date in parentheses is the date of the COTs report that gave this signal - not the date my system called for the trade to be executed (which can be up to five weeks later). The existing signals are often several months old and are listed here as references, not trading recommendations.

Friday 24 August 2007

Blog Update and Clarification

I'll be busy this afternoon, so my weekly report on today's Commitments of Traders release will be a little delayed. It'll be here sometime this weekend.

Also, I got a message from a reader about my 3-month Treasury signal and wanted to clarify a misunderstanding that others may also share. My signal for all of my three Treasury setups is for the yield (not for the note or bond). This means I'm currently bearish for the 3-month yield and recently went to bearish for the 10-year yield and neutral on the 30-year yield.

Tuesday 21 August 2007

Filled: Bought Midcaps

Just bought the Canadian Midcap iUnits fund (symbol XMD in Toronto) on the move out of this morning's opening range. I had gotten a bullish signal for the S&P 400 Midcap index from the Aug. 10 Commitments of Traders report.

My setup for this index - based on the COTs data - calls for the trade to be executed with a one-week delay (i.e., for the open of trading on Aug. 20). But I had a few hesitations because the Midcap index COTs data has had a few interruptions in recent weeks, so I wasn't sure about the signal's reliability.

I decided to do the trade on technical grounds, using the TD Seq indicator I learned about at Stephen Vita's excellent AlchemyOfTrading.com website. The S&P 400 hit a TD Seq Countdown buy on the 60-minute chart a couple of days ago, but I wanted also to get confirmation from an opening range breakout. Looks like it happened a short while ago, but there's a bit of a throwback right now. We'll see how it resolves itself.

I used XMD because it has 99-percent correlation with the S&P 400 and gives me something to do with some of my loonies. I'll use a technical stop until enough COTs data kicks back in for me to revert to trading it just off the COTs.

In other news: I invite you to check out my COTs-inspired take on precious metals which was just posted at Kitco.

Monday 20 August 2007

COTs Overall Bullish Equities

Wondering if stocks are doomed? I sure am, especially after the absolutely stunning moves in the 3-Month T-Bill today and last week.

Believe it or not, Friday's Commitments of Traders report is overall bullish on equities. This, according to my COTs Composite U.S. Equity Indicator.

The latest reading for this indicator is 0.58, virtually unchanged from the previous week's 0.59. In fact, this indicator gave me a renewed bullish signal for the S&P 500, according to a trading setup I developed comparing the indicator's performance with the S&P 500.

A caveat: I devised this S&P 500 setup not to trade but merely to get a sense of when this indicator has hit specific historic extremes that have signaled a high probability of moves in the market. Think of it as a pulse of the broader market.

Personally, I'm still short the S&P 500 based on a different setup that relies on the Commitments of Traders combined futures-and-options data for the S&P 500.

My U.S. Composite Equity Indicator, on the other hand, combines the signals from four of my U.S. equity setups - the S&P 500, Dow Jones industrials, NASDAQ 100 and Russell 2000. A "1" means that on average all four setups just gave a bullish signal for the following weekly open of trading, while a "-1" means a bearish signal.

For details on both setups, check the "Trading Setups" link above.

Friday 17 August 2007

Fund Liquidations Don't Make Dent in COTs Data

Well, wasn't that fun. For once, the markets closed the week on a whimper. But good God, what a week it was. London's FTSE index and the Nikkei getting their backs broken. The bottom falling out of copper, silver and gold stocks. That violent move in the T-Bill was like watching the pits of hell open up underneath. Lordy.

So what were the big players in the markets doing in the middle of all this? you ask. That's why we have the Commitments of Traders reports. Let's see what the large investment funds, commodity producers and retail traders were doing.

Firstly, all the talk of hedge funds liquidating massive positions didn't make much of a dent in the data as reported by the Commodity Futures Trading Commission. (These are the guys who report trillions in futures and options holdings in 100 markets, including the major indexes, commodities and financials.)

In fact, Friday's report gave me no new signals to report. None. So my existing signals all remain valid, according to my trading system based on this data. A few renewed signals are listed in the table below. Here are some other highlights from today's COTs data:


- 10-Year Treasury: Small traders (the "smart money" in this market; yes, they sometimes don't get it wrong!) bumped up their net positions again, for a renewed bearish signal on the yield (bullish for the note).
- 3-Month T-Bill: Small traders (again the "smart money" here) again bullish; fourth consecutive bearish signal for the T-Bill rate.
- Crude Oil: Commercial traders slightly reducing bearish positioning but still significantly net short on a historic basis.
- Natural Gas: Large specs (the "smart money" in this market) still mega net short.
- S&P 500: Small traders (the "dumb money" here) still heavily bullish. Enough to remain bearish for the S&P 500, but not enough to trigger a bearish signal for the Toronto Stock Exchange composite in my system.
- NASDAQ 100: Large specs get even more ultra-bearish.
- Dow Jones industrials: Commercials retain bullish tilt but slowly reducing.
- Russell 2000: Large specs maintain bearish tilt but slowly reducing.
- S&P 400: No data this week. Less than 20 traders reporting.
- Nikkei: Large specs still have bullish tilt but slowly reducing.
- Silver: Small traders still historically bearish.
- Gold: Commercials get more net short but nowhere near historic extremes. Small traders steadily increasing bullish tilt but also far from historic levels.

Housekeeping note:
I didn't see a place to put on an S&P 400 position as called for - sort of - in last week's report, for this coming Monday's open. (This setup has a one-week delay, but this index has been missing from the COTs reports lately, so that made the signal a little suspect; see last Friday's update for more details.) I might do so next week if I see a good technical entry point.

New Signals*

BULLISH
None

BEARISH
None

Renewed Signals**
BULLISH
-S&P 500, with COTs U.S. Composite Equity Indicator setup
-NASDAQ 100

BEARISH
-Natural Gas***
-10-Year Treasury Yield
-13-Week Treasury Bill Yield
-Semiconductor Index, SOX
-Japanese Yen

Existing signals (date of original signal in parentheses)****
BULLISH

-S&P 500, with COTs U.S. Composite Equity Indicator setup (27-Mar-07)
-S&P/TSX Composite (15-Aug-06)
-NASDAQ 100 (27-Mar-07)
-Dow Jones Industrial Average (20-Mar-07)
-Russell 2000 (1-Aug-06)
-S&P 400 Midcap (7-Aug-07)
-Silver (3-Jul-07)
-Gold (29-May-07)
-US Global Investors Funds US Gold Fund, USERX (12-Jun-07)
-S&P/TSE Canadian Gold iUnits ETF, XGD.TO (22-May-07)
-Gold Bugs Index, HUI (29-May-07)

BEARISH
-10-Year Treasury Yield (31-Jul-07)
-13-Week Treasury Bill Yield (27-Feb-07)
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO (3-Apr-07)
-Oil Service Holders, OIH (3-Apr-07)
-S&P 500 (26-Jun-07)
-NASDAQ Composite (26-Dec-06)
-Semiconductor Index, SOX (20-Mar-07)
-Nikkei Average (19-Dec-06)
-Soybean Oil (11-Nov-06)
-Copper (10-Apr-07)
-Canadian Dollar (10-Apr-07)
-U.S. Dollar Index (3-Oct-06)
-Japanese Yen (2-May-06)

NEUTRAL
-30-Year Treasury Yield (31-Jul-07)
-Crude Oil, Light Sweet (3-Apr-07)***
-Natural Gas (27-Mar-07)***

Notes
* For an explanation of what I do after a new signal, click “How It Works” above.
** A “renewed” signal is when a market is already on a bullish or bearish signal, and traders again register an extreme net trading position in the same direction. I normally ignore renewed signals unless I don't already have a trade on in this market. I haven't studied the profitability of trading on renewed signals.
*** See my special caveats for my Crude Oil and Natural Gas setups (click “The Trading Setups” above and check the table footnotes).
**** The date in parentheses is the date of the COTs report that gave this signal - not the date my system called for the trade to be executed (which can be up to five weeks later). The existing signals are often several months old and are listed here as references, not trading recommendations.

Thursday 16 August 2007

Quants 'Splain Selves: Here's Why We Call Them the "Dumb Money"

More details about the whys behind the quant hedge-fund implosion. The Wall Street Journal has just published several letters to investors from funds explaining their losses - which range up to 57 percent in one case.

The most interesting came from Black Mesa Capital, which lost 7.5 percent in the first week of August. Its fund was levered 3.5 times going into July, when, starting on the 25th, it noticed an unusual pattern of liquidation in the markets.

It looked similar to the selling in Sept. 2006 when $9-billion hedge fund Amaranth needed to raise cash to meet margin calls in its disastrous natural-gas trades, which ultimately lost $6 billion, causing the firm's collapse.

Clearly, the same thing was happening again. The massive selling forced the whole market down. Quantitative strategies based on fundamentals, like Black Mesa's, failed as all stocks - well valued and not - went down at the same time.

When the selling started, it turned into a rout. "This isn't about models, this is about a strategy getting too crowded... and then suffering when too many try to get out the same door," says the letter from AQR Capital Management, which saw one fund lose 21 percent.

"We knew this was a riskfactor but, like most others, in hindsight, we underestimated the magnitude and the speed with which danger could strike."

The letters disclose that, once the "unprecedented" conditions were noticed, many funds started "delevering" - selling positions. ("Unprecedented," huh. What about Amaranth then?) Black Mesa's letter, dated Aug. 8, says the fund started selling on Aug. 6 and that its portfolio would be 50 to 100 percent cash by the time clients read it.

The company goes on to say it'll start buying again when its analyses show the liquidations have stopped for three days. How arbitrary is that! Why three days? Why not two days, or 3.14159265 days?! Some strategy. No wonder a lot of Commitments of Traders analysts call these guys the "dumb money." Now we know why the COTs data tells us to trade opposite to them in most markets.

"The question was, when will it end?" Black Mesa asks. "The answer is, we don't know. It could last two days, two weeks, two months, or two quarters.

Looks like it won't be today, in any case. VIX is above 33, my precious metals holdings are getting shot up, as are my long DJIA, Russell 2000 and TSX positions (bad calls, COTs!!), my DUG UltraShort Oil & Gas and SDS UltraShort S&P 500 ETFs are shining like diamonds (good ones, COTs), the Nikkei is going to hell and the 10-year Treasury note is up (more good calls, COTs), while the 3-Month T-Bill yield is down 17 percent, even after I tapped my computer screen (beautiful, COTs). Just checked the wires. Yup, down 17 percent!

Wednesday 15 August 2007

The Trouble With the Quants

First, we had the subprime mess. Now, the quants are getting chopped up by the market implosion. Quantitative funds, with their automated trading strategies, are responsible for a huge chunk of the $1.5-trillion hedge-fund industry. But many the the biggest and most prestigious saw their computer models fail in recent weeks.

Most notoriously, Goldman Sachs' $9-billion Global Alpha quant fund is down 27 percent so far this year, with more than half of those losses coming last week. Another $3.6-billion Goldman quant fund, the Global Equity Opportunities fund, lost more than 30 percent last week.

What went wrong? First, many of the funds rely on the same fundamentals-driven formulas based on stock valuation, piling into the same strategies and securities. Worked great on the way up, but the exit doors jammed on the way back down.

Second, the funds were leveraged by four times on average but in some cases reportedly up to 10 times. And third, as the assets in these funds exploded in recent years, they became market movers and couldn't exit without causing themselves - and other quant funds - greater damage.

I think a couple of the lessons are:

(1) Manage Your Risk. Some vet traders say risk management is the most important lesson they learned in their careers. We should listen to such advice. Regardless of whether you follow a mechanical system or trade off a chart, you've got to define your risk for each trade, put on a position that's appropriately sized for that risk and exit if the trade exceeds the loss you defined. No second-guessing on that last one. Just do it.

One common approach - the one I use in my trading - is the 2-percent rule: Don't risk more than 2 percent of your assets in any single trade. In other words, figure out where your exit would be, calculate the loss from your entry point, then put on a position that, in the event of such a loss, wouldn't cost you more than 2 percent of your total assets.

I have no idea what the geniuses at Goldman Sachs were up to, but some of the massive losses we've been reading about suggest excessive risk. Take a look at the past drawdowns in my setups (see the "Trading Setups" link above). Forget leverage. Based on those drawdowns, even my best setup has a maximum portfolio allocation of 25 percent.

I've no doubt that the brainiacs at some of these quant funds have come up with more profitable and less volatile setups than mine. But if we assume that's the case - and, thus, those setups had less historic risk that actually permitted such high use of leverage - then the trades should have been cut short just as soon as the recent losses exceeded those very small potential drawdowns.

Something clearly failed either in the conception or execution or, very possibly, both.

(2) Diversify and Learn. This means trying and testing new strategies and markets and always learning. I like using the Commitments of Traders data in my trading because it's completely independent of the price action and thus brings a fresh perspective that's not widely followed. At least not yet.

And I don't think that's likely to change, either. The COTs data, at least my reading of it, generates signals that work on a longer horizon than many investment funds are able to use. On the other hand, that's what makes it attractive for a long-term portfolio like that of many ordinary folks.

The COTs really are the great leveler - the people's friend in the markets!

At the same time, I think it's important for me to keep trying new strategies for this data and refining my existing ones.

For further reading on the quant mess, have a look at Rick Bookstaber's interesting piece at his blog: here

Other interesting articles: CASTrader Blog, Zero Beta and Abnormal Returns

Tuesday 14 August 2007

S&P 500 Bullish: Revised COTs Composite Numbers

Sheesh, what a nightmarish close for the bulls today. Perhaps we should have gone sailing after all, like that guy wrote in Forbes?

Perhaps not. I've just posted some revised data for my U.S. Composite Equity Indicator that suggests the Commitments of Traders are far more bullish than I had thought.

I was trying to see if my composite indicator gives profitable signals for the S&P 500 when I realized I made a mistake in how I originally calculated the indicator. The indicator is based on a composite of my setups for four U.S. equity indexes: the S&P 500, Dow Jones Industrial Average, Russell 2000 and NASDAQ 100. My apologies for the error.

When I checked the revised numbers against the S&P 500, I found they produced an interesting new trading setup for this index. Check out the signals and revised data here:

S&P 500/COTs Composite Equity Indicator

My deepest apologies for giving incorrect information for this indicator in past entries on this blog.

I had previously written that the indicator has lately been neutral or mildly bearish. In fact, it flipped to bullish for the S&P 500 on March 30 and has been generally bullish ever since. It even just gave a renewed bullish signal in last Friday's report. This trade is, incidentally, still in the money despite the ongoing market bloodbath.

The setup is based on trading the S&P 500 when the composite indicator is 0.8 standard deviations or more from its 156-week moving average. In other words, we get a buy when it hits 0.8 or more.

Click the "Trading Setups" link above to see how this new setup fared. It's actually my most statistically robust indicator for any equity index in terms of market-beating profitability, but there's a caveat: The data is somewhat limited. Unlike most of the COTs data, which goes back to 1995, the composite indicator's data starts just in 1997. That's because the COTs started to include data for the Dow Jones industrials only then. The setup's first signal came in 2000.

But wait a second, you say. Isn't the COTs data for the S&P 500 giving me a bearish signal? Yes, indeedy, it is. So which one is right? I compared the results of the two setups starting from the same time in 2000. The results were virtually identical in terms of profitability. The composite indicator had a somewhat higher past drawdown, but the S&P 500 COTs setup had slightly inferior results of statistical robustness.

In the end, I think I'll stick with my existing S&P 500 setup for the time being. (It's on a fairly profitable bearish signal at the moment.) The reason: It's based on a longer range of data that gives me more representative market conditions. But I will also add the new setup to my weekly updates. It may provide interesting insights about the direction of the broader market. I'll also compare the composite indicator to other indexes to see if I can find other tradable setups.

Monday 13 August 2007

Story: "Things Will Get Better, Not Worse - Probably"

I've just posted a new market story I did in today's Montreal Gazette newspaper, titled "Things Will Get Better, Not Worse - Probably." You can see it at the "Alex Roslin's Articles" link above. Also, click here to read my latest COTs report on the metals sector: COTs Metals Outlook

Friday 10 August 2007

COTs Flip to Bullish on S&P 400 Midcap (With An Asterix)

Phew - what a day. What a week. Friday was the perfect coda to all the week's mayhem. The Volatility Index back at the bear levels of early 2003. London's Financial Times Index with its head caved in. The three-month T-Bill rate crashing. Japan iShares crushed. You'd think a nuke had just gone off from the way the bears are dancing with glee.

One Forbes piece on Monday, titled The Crash of 2007, started out like this: "There is a really high probability that we are in the midst of a stock market crash, the first since 2002. This is a ridiculously dangerous prediction for a commentator to make." At least he got the second sentence right!

So do the wise little numbers in the Commitments of Traders reports agree it's a crash? Not quite. In fact, they just flipped to a bullish signal for the S&P 400 Midcap - my only new signal from Friday's report.

(See the "Trading Setups" link above for details about this setup and "How It Works" for how I trade my signals. For example, the S&P 400 setup has a trade delay of one week, meaning ordinarily I'd execute it for the open on Monday, Aug. 20. Also, see the table below for the full list of new and renewed signals.)

But there's an important caveat for this new signal that's making me interpret it with caution. The COTs reports failed to include data for the S&P 400 since the June 12 report because the number of traders reporting positions fell under 20. Thus, the data is missing for seven weeks.

Today's report shows the large speculators - the "dumb money" whom I fade (or trade opposite to) in my trading setup for the S&P 400 - dramatically slashing their net long futures and options position in this market as a percentage of the open interest. It's now at a low not seen since June 2005.

That, of course, is bullish. However, to get a bullish signal in my system, the large spec position must fall to a specific historically extreme point that in the past has shown statistically robust market-beating profitability. I calculate this point by backtesting numerous combinations of moving averages, standard deviations and trade delays and then subjecting them to tests of statistical validity.

The problem is if you're missing a bunch of data, those values get skewed. I think the super-low absolute net number is interesting, but as I've mentioned in the past there is virtually no correlation between the week-to-week COTs data and price action, so it's a bit weak to go on it alone. I may at some point consider a trade on technical grounds, though, until there is more S&P 400 data to even out the values in my spreadsheet.

Other developments from the latest COTs report:

- My composite U.S. equity indicator has fallen a tad from -0.10 to -0.12, maintaining the downer bias it's had since the May 22 report. This indicator is based on my setups for the four U.S. indexes in the COTs reports (the S&P 500, the Dow Jones industrials, NASDAQ 100 and Russell 2000). If we include the S&P 400, the reading jumps to 0.2, but as I've mentioned that figure is probably a little dubious.

A reading of 1 or -1 for this indicator would be a historic trading signal, meaning that, on average, all my setups just gave a buy or sell. The upshot is that, despite all the panicked crash talk, the COTs are advising us we're not at a major market turn here.

- Friday's data gives an 11th consecutive bearish signal for natural gas.

- We get an 11th consecutive bullish signal for the NASDAQ 100 index. This is the longest run of renewed signals for this market since the 17 bearish signals in a row between Nov. 2005 and March 2006, which predated the index's 17-percent tumble last year.

- A huge spike in large spec bullishness in the Japanese yen, which gave me a renewed bearish signal in this market.

Also, a note to self: My setup for the 10-year Treasury flipped to bearish for the yield with last week's COTs report. (That would be bullish for the note.) This setup calls for the signal to be executed with a one-week trade delay (that is, for the open Monday, Aug. 13).

Confused about all this? Before you write in with your questions, see my "Trading Setups" and "How It Works" links above for details on the COTs and how my system based on these magical reports works. You may find your answer already there. Thanks for tuning in, and good luck next week.

Next week: I'll try to find time to address the massive losses seen by some hedge funds that rely on quantitative computer models in recent weeks. What went wrong with those systems? Next week, I'll take a little look-see.

So far, it seems my COTs system has stood up not bad in its first major test to the downside, leaving me about even in Canadian-dollar terms since the selloff started. Mind you, I don't have trades on in every one of the markets for which I have signals at this point. That's partly because many of the signals predated the point when I developed these setups. At some point, I'll have to see how a portfolio based on following every signal would be faring.

New Signals*

BULLISH
-S&P 400 Midcap

BEARISH
None

Renewed Signals**
BULLISH
-NASDAQ-100

BEARISH
-13-Week Treasury Bill Yield
-Natural Gas***

-Semiconductor Index, SOX
-Japanese Yen

Existing signals (date of original signal in parentheses)****
BULLISH

-S&P/TSX Composite (15-Aug-06)
-NASDAQ 100 (27-Mar-07)
-Dow Jones Industrial Average (20-Mar-07)
-Russell 2000 (1-Aug-06)
-Silver (3-Jul-07)
-Gold (29-May-07)
-US Global Investors Funds US Gold Fund, USERX (12-Jun-07)
-S&P/TSE Canadian Gold iUnits ETF, XGD.TO (22-May-07)
-Gold Bugs Index, HUI (29-May-07)

BEARISH
-10-Year Treasury Yield (31-Jul-07)
-13-Week Treasury Bill Yield (27-Feb-07)
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO (3-Apr-07)
-Oil Service Holders, OIH (3-Apr-07)
-S&P 500 (26-Jun-07)
-NASDAQ Composite (26-Dec-06)
-Semiconductor Index, SOX (20-Mar-07)
-S&P 400 Mid Cap (3-Jan-07)
-Nikkei Average (19-Dec-06)
-Soybean Oil (11-Nov-06)
-Copper (10-Apr-07)
-Canadian Dollar (10-Apr-07)
-U.S. Dollar Index (3-Oct-06)
-Japanese Yen (2-May-06)

NEUTRAL
-30-Year Treasury Yield (31-Jul-07)
-Crude Oil, Light Sweet (3-Apr-07)***
-Natural Gas (27-Mar-07)***

Notes
* For an explanation of what I do after a new signal, click “How It Works” above.
** A “renewed” signal is when a market is already on a bullish or bearish signal, and traders again register an extreme net trading position in the same direction. I normally ignore renewed signals unless I don't already have a trade on in this market. I haven't studied the profitability of trading on renewed signals.
*** See my special caveats for my Crude Oil and Natural Gas setups (click “The Trading Setups” above and check the table footnotes).
**** The date in parentheses is the date of the COTs report that gave this signal - not the date my system called for the trade to be executed (which can be up to five weeks later). The existing signals are often several months old and are listed here as references, not trading recommendations.

Today's Report: Small Delay

Wondering what the Commitments of Traders reports have to say about the market madness? I sure am. Check back here this evening for my latest signals and a report based on this afternoon's data release. I normally like to post my updates right after the data comes out at 3:30 Eastern time, but it'll be a little delayed this week because of some other responsibilities.

But don't worry: I'm as eager as you to get the COTs take on all this turmoil.

Wednesday 8 August 2007

COTs Doubled Gold's Price Rise

Up and down, up and down. Pass the Gravol! The markets lately feel like training for the space program.

I've just updated a table showing my running results and signals for my gold trading setup based on the Commitments of Traders reports. Despite the recent turbulence, my setup still beat buying-and-holding gold by 99.5 percent (click link to see table):

COTs Two-Timed Gold

The latest results are based on gold's open on Monday, July 30. See Kitco.com for more details on my precious metals outlook built around the COTs reports, which are issued free each week by the Commodity Futures Trading Commission.

Friday 3 August 2007

COTs Flip to Bearish on 10-Yr Treasury Yield, Neutral on 30-Year Yield

Holy smokes - what a devastating close for the bulls! Hope you fared okay. Did my DUG UltraShort Oil & Gas position come back from the dead, or what? SDS UltraShort S&P 500, you're not looking too shabby, either, my friend.

Interesting new signals from today's Commitments of Traders report. My setup for the 10-year Treasury has flipped to bearish for the yield. (That would be bullish for the note.)

The setup is based on trading on the same side as the small traders when they hit certain historic extremes in their net futures and options positions in this market. In this case, the small traders are at a bullish extreme that in the past has led to good trading signals.

My setup calls for the signal to be executed with a one-week trade delay (that is, for the open Monday, Aug. 13).

As well, my setup for the 30-year Treasury has flipped to neutral, which means going to cash in this market. (Trade delay is zero, which means execution for Monday's open, Aug. 6.) This rather unique setup is based on following two groups of traders when their signals concur. In this market, I fade the commercial traders and trade the same side as the large speculators.

I know, I know, it sounds nutso. We're always told the commercials are the "smart money" while the large specs are the dumb-asses with the poor market intelligence. Well, surprise, surprise, do a little backtesting and system validation, and you'll find that's not true in all markets.

In this case, the commercial traders in the 30-year Treasury futures and options have just hit a bearish extreme that my system tells me has led to good bearish signals for the yield (i.e., bullish signals for the bond). Because the large specs are still on a bullish signal for the yield, this means the two setups don't concur. So we go to cash in this market.

In other COTs developments, I got another whack of bearish renewed signals for the oil and natural gas sectors. (See the table below.) And in equities, my composite U.S. equity indicator has improved ever so slightly from -0.18 last week to -0.1 this week. It's been hovering below zero, in fact, since May 25, with the exception of one week in mid-June.

This indicator is based on my setups for the four U.S. indexes in the COTs reports, not including the S&P 400, which for several weeks hasn't registered enough traders to get its data into the weekly COTs reports issued by the Commodity Futures Trading Commission. A reading of 1 or -1 means a historic trading signal and would mean that, on average, all my setups just gave a buy or sell.

So we're nowhere near such a cosmic positioning in the COTs data at this point, despite the market turmoil we're seeing.

Confused about all this? Before you write in with your questions, see my "Trading Setups" and "How It Works" links above for details on the COTs and how my system based on these magical reports works. It usually takes me a while to get back to everyone because of the volume of emails.

New Signals*

BULLISH
None

BEARISH
-10-Year Treasury Yield

NEUTRAL
-30-Year Treasury Yield

Renewed Signals**
BULLISH
-NASDAQ-100

BEARISH
-13-Week Treasury Bill Yield
-Natural Gas***

-Crude Oil, Light Sweet***
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO
-Oil Service Holders, OIH
-Semiconductor Index, SOX

Existing signals (date of original signal in parentheses)****
BULLISH

-30-Year Treasury Yield (3-Jan-07)
-10-Year Treasury Yield (17-Apr-07)
-S&P/TSX Composite (15-Aug-06)
-NASDAQ 100 (27-Mar-07)
-Dow Jones Industrial Average (20-Mar-07)
-Russell 2000 (1-Aug-06)
-Silver (3-Jul-07)
-Gold (29-May-07)
-US Global Investors Funds US Gold Fund, USERX (12-Jun-07)
-S&P/TSE Canadian Gold iUnits ETF, XGD.TO (22-May-07)
-Gold Bugs Index, HUI (29-May-07)

BEARISH
-13-Week Treasury Bill Yield (27-Feb-07)
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO (3-Apr-07)
-Oil Service Holders, OIH (3-Apr-07)
-S&P 500 (26-Jun-07)
-NASDAQ Composite (26-Dec-06)
-Semiconductor Index, SOX (20-Mar-07)
-S&P 400 Mid Cap (3-Jan-07)
-Nikkei Average (19-Dec-06)
-Soybean Oil (11-Nov-06)
-Copper (10-Apr-07)
-Canadian Dollar (10-Apr-07)
-U.S. Dollar Index (3-Oct-06)
-Japanese Yen (2-May-06)

NEUTRAL
-Crude Oil, Light Sweet (3-Apr-07)***
-Natural Gas (27-Mar-07)***

Notes
* For an explanation of what I do after a new signal, click “How It Works” above.
** A “renewed” signal is when a market is already on a bullish or bearish signal, and traders again register an extreme net trading position in the same direction. I normally ignore renewed signals unless I don't already have a trade on in this market. I haven't studied the profitability of trading on renewed signals.
*** See my special caveats for my Crude Oil and Natural Gas setups (click “The Trading Setups” above and check the table footnotes).
**** The date in parentheses is the date of the COTs report that gave this signal - not the date my system called for the trade to be executed (which can be up to five weeks later). The existing signals are often several months old and are listed here as references, not trading recommendations.