Friday, 23 May 2008

Equities, Crude Rallies Not Over: Data

Is crude oil peaking? Are stocks in a bear rally that's poised to end? Not according to this afternoon's Commitments of Traders data. Trader positioning is giving me few bearish indications, at least if past patterns are any indication. (Of course, they often aren't!) I've just posted the latest info from my trading setups based on this data on my Latest Signals page.

Some highlights:

- My setup for the Russell 2000 has just flipped to bullish. That puts all five of my equities trading setups in the bullish column, since my setup for the BKX Bank Index is also calling for a long trade to be executed for the open of next week's trading.

The Russell 2000 setup is based on trading on the same side as the "smart money" commercial traders when their futures and options net position hits specific extreme points as a percentage of the total open interest. Their net position has actually gotten steadily more bearish since hitting a high point in mid-April, but it's more or less flattened out in today's data release. More importantly, it's gotten less extremely bearish in comparison to the moving average I use for that setup.

- My setup for crude oil remains steadfastly bullish, at least for now. This, despite the fact that my setup for heating oil, a market that's very highly correlated with crude, flipped to bearish with the May 6 COTs report (for execution June 23 because of the setup's six-week trade delay). But take a look at some of the figures I've posted on the statistical robustness of the two setups. (See the table on the Latest Signals page.) The confidence intervals for the crude setup are significantly higher than those for heating oil. These and other measures for robustness I use lead me to think the crude setup has a higher chance of being right. So the crude blow-off could have more room to blow off. Oh-oh. At least, any profit on that trade would help me fill my gas tank!

- Data on U.S. dollar index futures and options shows the "smart money" commercial traders getting steadily more bearish since an intermediate peak in mid-April.

- My setup for copper is saying to go short on next week's open of trading. This is based on a bearish signal back in March that takes effect only now because the setup uses an eight-week trade delay. This signal will mean that three of my six highly correlated commodities setups will be bearish Monday (gold, silver and copper) while three remain bullish (platinum, crude oil and heating oil). This means that even though I will sell my long base metals position based on the previous long copper signal, I won't go short. That's because of my new risk-control rule for trading highly correlated markets. See more on that here. So far, I'm really liking this new rule. It's kept me out of some trades that would have resulted in pain, while giving me more confidence when I do take a trade. That said, full testing on a portfolio scale is important for the rule, and that's on my to-do list. Hope you have a great weekend, and good luck next week!


dasein211 said...

i really like the risk idea. Not going short metals but just going out. The market is very fraught with uncertainty and it seems like the trades flip around like fish out of water. From following you blog for six months I think you are doing EXACTLY the right thing now.

Anonymous said...

Hi Alex,
Michael Masters gave a very interesting presentation this week before the Senate committee on homeland security regarding the impact of index speculators on the price of crude and agricultural commodities.
the presentation can be found at:

the reason i am bringing this up is the following: if mr. masters is correct, then there has been a sea-change going on at the Nymex with respect to "the commercials" look it up in the presentation, it is stated there.
That, in turn might significantly affect your setups and indicators for a variety of commodities.
just wanted to point it out to you as a flashing warning sign to not to rely too heavily on past data series when the market itself is changing

gl and keep up the good work


Alex Roslin said...

Hi there,

Thanks for your messages and kind words. Regarding the index speculators, I'm aware of these changes. I believe it's quite normal for market conditions to change in any number of ways over time. Another important change has been the explosion in derivatives trading volume in recent years.

The question is, How do these changes affect possible trading setups? I think the ideal setup strikes a good balance between fitting a diverse range of market conditions, while being responsive to shorter-term fluctuations within each market period. With that in mind, I believe the data I'm seeing for the robustness of the setups suggests that the performance of the best setups has been quite stable over the years, regardless of which traders are doing what.

As well, I think it's still far too early to evaluate the CFTC's new supplemental data series to see how it performs on its own or influences anything. We'd probably need at least 10 more years of data to do that.