Saturday, 15 December 2007

COTs Predict Santa Coming, Dollar to Sink

Is Santa coming this year, kids? Sure looks like it. My COTs U.S. Equity Index is giving its fourth straight renewed bullish signal, based on the latest Commitments of Traders data issued Friday. This index is based on my trading setups for the S&P 500, NASDAQ 100, Dow Jones industrials and Russell 2000 - all built around the COTs reports, which report how major traders are positioned in the markets.

My U.S. equity index has been on a bullish signal since last March. It now stands at a super-bullish 0.97, up from last week's reading of 0.88. Regular readers will recall that a "1" reading means all four setups are effectively giving a bullish signal on average, for execution on next week's open of trading. So I'd say this is happy news for equity bulls. (See the table on my "Latest Signals" page for all the signals from my setups based on the COTs reports.)

In other developments, the latest data portends still more horrors for the greenback. The commercials are dumping their U.S. dollars faster than you can say "Gisela Bundchen." It's been 12 straight weeks of steadily lower net long futures positions for the "smart money" crowd. My U.S. dollar index setup is now giving its third straight renewed bearish signal. Oh-oh.

The other interesting developments are taking place in the ag sector. My COTs Agriculture Index, based on my setups for wheat, corn, soybeans and sugar, has fallen to -0.44, down substantially from last week's 0.12. This setup provides me signals for the DBA Agriculture ETF. The index now stands not far from flipping to bearish for DBA.

Looking at some of the specific sectors, corn small traders have lowered their net short position in futures and options to a bullish extreme, flipping my setup for corn to bearish. The small traders are now 180 percent above the signal line I use for this setup. (See the explanatory links in the navigation bar to learn more about how my COTs Timer trading system works.) Note that the trade delay for this setup is three weeks.

As well, the sugar commercial traders have suddenly put on a huge net short position. After only a two-week bullish signal, this setup has now flipped back to bearish. Note that my setup for sugar is a little special. It works by going long on the bullish signals and going to cash on bearish signals (not going short).

I'm still on vacation this coming week, but I'll be back next week with more regular posts. Good luck.


Anonymous said...

Regarding S&P500.

You ever think maybe they are masking hedging activities by purchasing ETFs instead of futures? Look at the overwhelming volume on SDS vs SSO.

Also, the commercials were mind-bogglingly long right up to the top, and look how it's been responding since. Shows Large Specs were the ones in control with their ultra short bias.

GY said...

Normally if $USD is bullish, then Gold should be bearish. Today your indicator shows $USD is bearish, but from your table, gold is also bearish. I can not understand. Please explain.

Anonymous said...

I'll try one more time. Have you thought about commercials masking their positions through ETFs, say QID, SSO, etc. Since the gigantic net long positions in commercials, on say S&P500 did not predict any of the large 10% drawdowns, and large specs were massively short the whole time. Something is wrong with the traditional interpretation.

Alex Roslin said...

Hi GY,

Thanks for your question. While you're right about there's usually a negative correlation between the US$ and gold, the two setups are based on how traders in those two markets are acting. Also, the setups operate on somewhat different time horizons.

What the setups do is give signals for a high-probability trade over the life of the signal. Gold has indeed corrected since the bearish signal in that market first came, and now the US$ setup may be suggesting the gold selloff was only a temporary correction, not an end to the larger run-up.


Alex Roslin said...

In answer to the comment about the SP500 commercials masking their positions, I'm fading the small traders in this market and, so, yes, I agree there's something wrong with the traditional interpretation of the COTs data, which tends to rely on the commercial traders exclusively.


gy said...

Thanks, Alex.
Thanks for the reply, I appreciate it very much!
Actually GOLD and GDX are gone up about 5 to 10% after we discussed.
Here I have another question: your U.S. equity index has been on a bullish signal since last March. It now stands at a super-bullish 0.97, up from last week's reading of 0.88.
However, since last March Dow went from 12000 and reached 14200. But it corrected and reaches 13600 today. Why your indicators did not predict this late down turn? Many famous (if not all) newsletters and economists are very negative on the US stock markets and predicted that we are in a recession and the markets will go down a lot. They warned to get out the market as soon as we can, except to stay in precious metals and oil. I am really puzzled and little bit hesitate to use your bullish signal and invest heavily in US markets. Could you give examples that showed when everyone was negative but you could get a bullish signal and the real world followed your signal.
GY Zhao

Alex Roslin said...

Hi Gy,

Thanks for your message. My U.S. composite index sank quite a bit just before the recent correction, as it did last summer, but it didn't flip to a bearish signal as you point out. I think this is because the data didn't suggest we were about to experience a longer-term trend change.

A final point: ever heard of the Hulbert newsletter indexes? They suggest that newsletters are actually wrong most of the time.