Tuesday, 16 October 2007

Small Traders Mega-Bearish on S&P 500

I'm back with some highlights from the latest Commitments of Traders report issued Oct. 12 by the U.S. Commodity Futures Trading Commission:

- The "dumb money" small traders seem to be expecting some kind of crash again. What else is new. In S&P 500 futures and options, they now have a larger net short position as a percentage of the open interest than at any time since Aug. 1995. With their position now standing at two standard deviations below its 17-week moving average, I get another bullish signal - the third in a row - for my S&P 500 setup, which relies on fading these unfortunately not very market-savvy individuals. Smarten up, folks. You're getting ripped off.

- Meanwhile, the "dumb money" large speculators are going mental in NASDAQ 100 futures and options, flipping to a large net long position and, this week, hitting that magic point that switches my setup from bullish to bearish. Just a few weeks ago, in late August and early September, as markets were shooting up, these guys were super-gloomy. Now, they've suddenly become hugely pumped on the markets. Oh-oh.

- Generally, though, a fairly bullish tone emerges from the last COTs report, with renewed bullish signals in the Semiconductors, NASDAQ composite index, Dow Jones industrials and Nikkei. Likewise, as mentioned Friday, my COTs U.S. Composite Equity Indicator gives overall benediction to the markets with a fairly bullish 0.58 reading, though that's down a fair bit from last week's 0.98. (A "1" means the four equity setups that make up this indicator are all on average giving a bullish signal to be executed on next week's open.)

- Astute readers will notice that my setups for the Semiconductors and NASDAQ 100 seem to contradict each other; the former trades with the large specs while the latter fades them. Oddly enough, they both have proven historically profitable and statistically viable in my testing. That's because they work on very different horizons as reflected in the values I use for the moving averages and standard deviations.

- For my take on the precious metals, check my piece at Kitco.com. Good luck this week.


wolfgangvonhelsing said...

Is the proper interpretation of your COT analysis that the S&P 500 will rise while the Nasdaq 100 falls? And that the semis will rise as the Nasdaq 100 falls? And that the Nasdaq Composite will rise as the Nasdaq 100 falls? If so, that is a seemingly incompatible series of projections. It is not impossible, but given the composition of the Nasdaq 100 index several very high cap stocks would have to get killed as the rest of the market prospers. I appreciate your analysis, and if my interpretation is wrong I welcome a clarification. Thanks.

About Alex Roslin said...

Hi Wolfgang,

Thanks for your comment. That's close, but not exactly right. The better interpretation is that the setups suggest there is a good probability - a tradable one at that - of these outcomes occurring during the life of the respective signals. I get a sense of the specific likelihood of those outcomes from my confidence levels for each setup.

Take a look at the Semis chart versus that for the NASDAQ 100 or comp., and you'll see some marked differences in the past six months.

In order to get a better sense of such contradictory signals and the health of the broader market, I created my COTs U.S. Composite Equity Indicator based on four of my equity setups. I report on that setup regularly, and you can see the results in the "Latest Signals" page. As well, that page has a link to a separate table that shows that indicator's historic values since it started, alongside the S&P 500 prices.