Monday, 14 July 2008

Bernanke Will Not Hike, Crude Bubble Not Done: Data

I've just updated my portfolio page with results from my COTs Timer trading system as of this morning, including a few new trades based on my latest trading signals. (See Friday's post and the table linked at my latest signals page for more details on those.) As promised, here are some more market highlights based on Friday's Commitments of Traders report. For you newbies, this is the free weekly report issued by the U.S. Commodity Futures Trading Commission that outlines trillions of dollars in futures and options positions in 100-plus markets, everything from gold to crude oil, the Dow Jones industrials and Japan's Nikkei Stock Average. My system trades these markets when the traders hit certain extremes of bullishness and bearishness that in past data have reliably led to high-probability, market-beating trades. And now for those highlights:

- Is crude oil topping? Not according to my data. The "dumb money" large speculators (these are the big investment firms and hedge funds, who are generally wrongly positioned in most markets) are far from any bullish extreme that would signal an end to the crude boom. In fact, the large specs have steadily reduced their net long position in crude oil futures and options since the end of April as a percentage of the total open interest. (See my glossary page and introduction page if you don't have a clue about what I'm talking about. I know this stuff can be confusing.) The large specs are now 1.5 standard deviations below the longer-term moving average I use for this setup. Definitely, no speculative froth here.

- Will the Federal Reserve Board keep lowering rates to relieve shattered markets or hike because of inflation fears? The COT data is unequivocal: The Fed will not hike and will probably keep cutting interest rates. The large speculators in 30-day Fed Funds contracts, who have in the past reliably predicted the course of rates, have hit multi-year extremes of bullishness in their futures and options positions (meaning they are betting rates will fall). They have been well over two standard deviations above the longer-term moving average I use for this trading setup since the end of May.

- Strange divergence between my silver and gold data. In silver, the "smart money" commercial traders have really hit the brakes, increasing their net short position to a one-year high. In fact, they haven't been this bearish in relation to past data since Dec. 2006. Meanwhile, the large speculators in gold, with whom I trade alongside, are blithely bullish - more than one standard deviation above the moving average for this setup. As a whole, four of my six highly correlated commodities setups are bullish, so I ignored my short silver signal for July 7. But the bearishness of the silver setup could mean some short-term volatility is in store.

Tune back in later today to read my update about my new Russell 2000 trading setup and to see what signal it's giving now. Good luck this week!

TAGS: COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, S&P 500, Russell 2000, Bernanke, Fed, interest rates, gold, silver, crude, NASDAQ 100, NDX


Ray said...


I'm wondering if the silver commercials are wary of the fact that seasonally, silver tends to peak around now and decline through August, per this chart:

The same is not true of gold, which tends to stay somewhat flat now before rising strongly into the fall.


Anonymous said...

Hi Alex,

Also similar to the above question:

Does the interpreted data account for seasonal effects into Natural gas, as it gets weak around June/July into August?


Alex Roslin said...

Hi Pete,

The setups I use don't specifically revolve around anything other than the past extreme trader positioning levels that have most reliably signaled good trades. As it happens, in the last few years, the setup did go short during portions of those times, but most people who study seasonality advise that it shouldn't be traded on its own, in any case. A seasonally favourable period should generally be traded in conjunction with technicals and/or fundamental analyses, in my opinion.


hotwater said...

On July 8, you posted that you would sell Silver. That's not completely ignoring the short signal!

Alex Roslin said...

Hi Hotwater,

Thanks for your comment. The idea is to ignore the opposite trade that the setup calls for in the other direction.


David Phillips said...

Frankly at times like these it is very difficult to know what the Fed will do next.

Investors are running to precious metals, and gold in particular, because they fear the almost inevitable inflationary impact of the loose monetary stance of the Fed in the face of a collapsing US dollar and serious systemic problems in the financial markets .

Fundamentals suggest that crude oil and the precious metals, indeed most commodity prices, are heading upwards worldwide.

With food inventories at 60 year lows, Argentinian farmers in dispute with their Government's export tax, and crude oil supplies not able to match demand despite Saudi Arabia promising to increase daily output, the medium term outlook is for commodities prices to continue rising.

Of course technical analysis may show short term weakness and retracement, but overall the price action is up.

Just consider this. Let's say all technical analysis systems say go short gold today, and then on Tuesday Israel attacks an Iranian nuclear installation.

What do you think happens to the spot gold price on Wednesday?