Tuesday, 5 February 2008

Of the T-Bill, Nikkei, Crude, Bullion & More

I'm back with some more highlights from last Friday's Commitments of Traders report. Here's how my trading setups based on these reports saw the world this week:

- After a short-lived two-week bearish signal for the 13-week T-Bill, my setup has now flipped back to bullish. This setup is based on trading on the same side as the small traders in 3-month Eurodollar futures and options when they hit specific extremes of bullishness and bearishness. Well, they've been a little over the map in recent weeks. And now, they've built up a tidy little net long position as a percentage of the total open interest, pushing them back into the bullish column (meaning the yield would fall).

- Despite the heavy-duty volatility of late, the "dumb money" large speculators in Nikkei futures and options maintain their near-record net short position as a percentage of the total open interest. They've held on at these super-bearish levels since mid-September. Their position, while a tad less net short than last week, is still 189 percent below the signal line I use for this setup to trigger a buy signal. So me, I'm still long Japanese equities in my own portfolio. Not every one of these signals is going to make me money, but the point is to trade enough of them and keep the faith so that, overall, the portfolio does.

- The stars seem to be lining up for the crude complex. With energy stocks flipping to bullish two weeks ago (for execution Feb. 18, using a three-week trade delay), my crude oil setup is also flashing a bunch of renewed bullish signals. The latter is based on fading the "dumb money" large specs, who have dropped to their smallest net long position since last June. Crude watchers may recall that's just before oil exploded upward from a two-month trading range. More importantly to my own thinking, the large spec position has fallen to 2.19 standard deviations below the moving average I use for this setup. These guys haven't been this negatory since Jan. 2007. Hey, isn't that when crude ended a six-month downdraft and the current rise in prices began? Sweet. I'm long!

- The misery continues for agriculture, at least according to trader positioning in wheat, corn, sugar and soybeans. My COTs Agriculture Composite Index, based on my setups for all four commodities, has sunk back down this week. It's now at -1.79, off from last week's -1.62. Seven straight bearish signals. Not pretty.

- Meanwhile, happy times still here for gold stocks and silver. My setup for the HUI Gold Bugs Index and XGD iShares Canadian Gold Fund, based on fading the small traders, remains on its bullish call. The dumb money folks got a fair bit more bullish this week, boosting their net long position to 0.45 standard deviations above the moving average I use for this setup. But that's still a long shot from flipping me to bearish. I'm still long this one. Same for silver. My silver setup works by trading the same side as the commercials. Sure, they're really net short, but they're always really net short. The trick is to figure out when they're really, really, really net short - or not. And right now, they're moderately bullish, according to my setup. Still long here, too.

- Interestingly, the gold large specs significantly bumped up their net long position as a percentage of the total open interest this week. They're now more net long in absolute terms than they've been since last September and October, when my gold setup flipped to bearish. But these things are all relative. I think it's more important to look at the net position relative to the recent data. And in those terms, the growing large spec net long position, while worrisome from the bullish perspective, is still quite far from giving me a renewed bearish signal.

I don't have a trade on for the gold signal since I'm already heavily exposed to the sector through my XGD and SLV positions. But I note all this to gauge whether bullion might be topping out here or just selling off a little. As I pointed out in this post, gold is in a kind of statistical fat-tail phase that exceeds past trading data - unpredictable new territory. That makes it harder to guess what will happen. Still, it looks to me like there may be more buying than selling pressure for bullion.

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