Wednesday, 5 September 2007

Nikkei Flips to Bullish, NASDAQ-100 Gives 14th Straight Buy

Last Friday's Commitments of Traders report showed some really interesting shifts in trader futures and options positions. Here are some highlights from the latest weekly data issued by the U.S. Commodity Futures Trading Commission, which chronicles trillions of dollars in derivatives positions in 100-odd markets:

- 30-Yr Treasury: Large speculators have dramatically reduced their net short percentage-of-open-interest position in the last two weeks. They are now more relatively bullish on the bond than at any time since July 2002, after which episode the 30-year yield fell from 5.3 to just above 4 percent over the ensuing year.

Meanwhile, the commercial trader net long position has pretty much collapsed since the highs of June. Commercials are now more bearish than at any time since Jan. 2004.

In my trading setup for the bond, I fade - or trade opposite to - the commercials and trade the same side as the large specs. (I know, it sounds strange. I'm always surprised this is the case, but that's what my testing has shown works best in this market.) So the combined signal from both groups of traders gives a renewed buy for the bond (meaning the yield will continue to fall).

- 13-Wk T-Bill: Small traders are the smart money in T-Bills (surprise!). They've taken in their net short position big-time, enough to give their sixth consecutive bullish signal (meaning the T-Bill rate falls).

- Crude oil: Large specs - whom I fade here - have been reducing their net long percentage-of-open-interest position for four weeks and have now adopted a fairly bearish tilt when compared to recent historic data. They're still not extreme enough to reverse my existing bearish signal, but perhaps soon...

As well, the commercials - whom I follow for Oil Services Holders and the Canadian energy ETF XEG - are leaning more and more bullish, though again not enough yet to reverse my short signal here.

- COTs U.S. Composite Equity Indicator: This indicator - based on the Dow Jones industrials, NASDAQ-100, S&P 500 and Russell 2000 COTs data - rose to 0.78 last week, the fifth week it's gone up. A fourth consecutive bullish signal here. (A "1" means, on average, all four equity setups just gave a bullish signal for execution on next week's open.)

- S&P 500: Small traders - whom I fade here - slowly unwinding their net longs, but still maintaining a fairly bullish tilt.

- NASDAQ-100: Large specs - whom I fade in this market - increasing net shorts again, giving their 14th consecutive bullish signal. They haven't been this bearish since the end of March 2006, after which the NASDAQ-100 rose about 20 percent over the next year.

- S&P 400 Midcap: No data again this time.

- Nikkei:
Large specs - whom I fade here - put on a huge net short position, flipping this market to a new bullish signal. The Nikkei had been on a bearish signal (profitable so far) since mid-Dec. 2006, with the trade taking effect at the end of January. Note the trade delay for this setup is five weeks, which means the new trade takes effect on the open the week of Oct. 8.

- Yen: Large specs - whom I fade - have gone to a net long percentage-of-open-interest position, the first time since June 2006. Their bullishness is at a historic extreme, giving the fourth consecutive bearish signal.

For my take on the metals markets and the U.S. dollar, read my story at, titled "Will Gold Break Out?" For an explanation of how I trade my system, click "How It Works" in the navigation box above, and for details on my setups, see "Latest Signals & Results."

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