Wednesday, 16 January 2008

Gloom 'n Doom for Stocks 'n Agriculture

What a difference a couple of days has made in the market mood since my post last Friday. In fact, what a difference a couple of hours has made since the open this morning! Commodities still getting chopped up, but equities are rebounding. So what does the Commitments of Traders data tell us about this mess. Here are some highlights based on the latest report issued Friday by the Commodity Futures Trading Commission:

- As I reported last week, my S&P 500 trading setup has flipped from cash to bearish based on the slope of the 50-week moving average of the index prices. The slope, which I use to define whether the index is in an up or downtrend, turned down based on the weekly open price last week. Monday's weekly open price still has the index in a downtrend.

- Gloomy news also from my COTs U.S. Composite Equity Index. It flipped to bearish with the Dec. 18 COTs report and has now given four straight bearish signals. What's more, the index now stands at -1.23, up slightly from last week's -1.59, but still well below the -1 reading that means all four of my U.S. equity trading setups making up this index are giving a bearish signal, on average, for execution on next week's open of trading. Not so good.

- The Treasuries markets seem to be reflecting this gloom. My setup for the 30-day Federal Funds contract is bullish (meaning it's calling for the Fed Funds rate to fall). Back in the happy days of December - ah, yes, remember how good things looked back then? - this setup actually got very near to the point where it flipped to bearish (meaning it thought the Fed would go back to hiking rates). That was based on the large specs building a large net short position in the contract. How things have changed. Since then, the large specs have rebuilt a huge net long position, giving a renewed bearish signal for the Fed Funds contract. They're in fact 47 percent above the signal line for this setup, meaning the "smart money" is making a gigantic bet rates will continue to drop.

- My Russell 2000 setup flipped to bullish mode with the Dec. 24 COTs report, but take a good look at the table on my Latest Signals page. The trade delay for this setup is seven weeks, meaning execution for the open Feb. 18. Will be interesting to see how the other equity setups line up around that time. But that's a looong way away when you're trading markets like these!

- In crude oil, the "dumb money" small traders are steadily building up a net long futures and options position and now approach the signal line of excessive bullishness that would trigger a bearish signal. They stand at 89 percent of that line, meaning not quite there but close.

- Agriculture has been ripping this fall, with the PowerShares Agriculture Fund (DBA) shooting up 50 percent since last August. Is it all over but the crying? Since flipping to bearish with the Dec. 24 COTs report, my COTs Agriculture Composite Index has now fallen to a miserable -1.92 from last week's -1.73. Last Friday makes four straight bearish signals. (Like with my equity index, a -1 reading for the ag index means all four component setups for wheat, corn, soybeans and sugar are giving a bearish signal.) My ag index has, in fact, never been this low in relative terms (in relation to the recent data), and it hasn't been this low in absolute terms since May 2000, just before the Dow Jones Agriculture Subindex tottered over and collapsed over 30 percent to its 2001-02 lows.

- For my take on bullion and the U.S. dollar, check out my post this week at Good luck this week, and see you back here after the next COTs report Friday afternoon.


Carsten R. said...

I really appreciate this kind of overview. It helps me to spot the crucial numbers.

Thanks for all your work from Germany.

PS: Why is there nothing for us european ? Maybe the EURO/$ ?

Alex Roslin said...

Hi Carsten,

Thanks for your comment. A Euro setup is on my to-do list, but unfortunately, it hasn't been around long enough to get a good distribution of data and get a reliable setup. There is, however, the British pound, and the Swiss franc is also something I'd like to look at closely soon.


fred said...

hi Alex
regarding the US dollar index, do you fade the commercials or trade with them?
also, if dollar if bearish do you short the dollar vs the rest of the members of the index?


Alex Roslin said...

Hi Fred,

That setup trades the same side as the commercials. Trade possibilities could also include going long a commodity that trades inverse to the dollar or an inverse dollar fund.


Johnabi said...

Thank you for the time you put into this work. I also appreciate the overview, quite helpful.
PS on USO (crude).
3.5 month up down cycle, would go along with your, getting pretty close to the time to short

Anonymous said...

Hi Alex

ags have been my favourite for years, but as you pointed out in an other way, the DBA charts gives me acrophobia (Im invested in a similar ETF but it quotes on the Amsterdam stock market).

however i doubt that the bull market in ags is over. the ETF didn't do so well in most of 2007 because the cotango in the bull market limited the profits. I assume that there must have been a change and spot prices catched up with long term future prices.
A reverse could send the ETF downward.

Anyway I'll sell today.