Friday, 17 July 2009

All Systems Go, Market Ready to Bounce

What a sweet bounce this week in the markets. Looks like good chances of more of the same next week, if my trading setups based on the Commitments of Traders reports are an indication. I've just updated my latest signals table with my readings and signals based on this Friday's latest data release from the Commodity Futures Trading Commission. A few highlights:
- S&P 500: My trading setup for SPX goes bullish on Monday's open of trading, after seven weeks in cash. It'll be a short-lived trade, lasting just one week before the setup goes to cash.

- BKX U.S. Bank Index: U.S. financials had a great ol' time this past week, and the good times look like they're still on - at least according to the data today for the three-month Eurodollar contract. (That would be the interest rate, not the currency.) That data, which gave great signals in backtesting for the U.S. Bank Index, remains bullish this coming week and has actually gotten even more so on balance, as you'll see from the figures on my latest signals table.

- Natural gas: Another long position of mine - in natural gas, based on a new trading setup I recently introduced - also did nicely last week. It remains in bullish mode this coming week, too. Large speculator and small trader total open interest remains very buoyant and shows no signs of breaking down.

- Crude oil: Derivatives positioning in black gold remains on track for a prolonged bullish period starting in mid-August (by "prolonged," I mean at least two weeks and counting). I've got a coming bullish signal for the open of Aug. 10.

- Nikkei: Small trader net positioning in Nikkei futures and options remains ridiculously elevated - actually, a bullish sign in this market. (The small traders are usually seen as the "dumb money"; in fact, that view is not based on any kind of actual testing I've ever seen and is not always correct.) Astute readers will recall that last week these folks hit an astounding 4.08 standard deviations above the moving average for their signal - an all-time record.

This week, they're down to a slightly more reasonable 2.91 standard deviations above the average - which is, nonetheless, still super-high. As you'll see on my results and signals tables, these guys operate with an eight-week trade delay, on balance, before the data has a reliable impact in Nikkei prices. So brace yourself for the possibility of some crazy action the week of Sept. 7.

What will be especially interesting is to see how the large spec net position evolves next week. That signal works with a six-week trade delay - so next week's positioning will take effect that same week in September. Wonder what will happen.

Have a good weekend, and be sure to tune in early next week for a portfolio update.


Anonymous said...

Alex, Did the standard deviation for the S & P drop this week meaning less bullish?? From last week the "smart money" commercial hedgers have shot up to 2.43 standard deviations above the moving average in their net futures and options positioning as a portion of the total open interest. Last week COT report shows them at their 12th most bullish positioning since the beginning of the data in 1995.

Thanks, Eric

Alex Roslin said...

Hi Eric,

Thanks for your message. No, I don't believe the drop from the previous week is bearish. The correlation between COT net positioning and the next week's prices tends to be weak to non-existent.

In the case of commercial hedgers in SPX, it is actually slightly inverse: -0.37. Note that this actually completely contradicts the usual wisdom out there about the COT data.

A correlation study is one of the first and easiest things anyone can do with the data.

Mind you, in a few rare cases, there is a decent correlation. I was just poking around again in some of my data and found a 76-percent correlation between the large spec total open interest in 3-month Eurodollars and the BKX U.S. Bank Index. I've been looking at total open interest only more recently (thanks to the suggestion of a smart reader), so I'd never compared it with price changes before.

That's by far the highest correlation I've ever seen between COT positioning and near-day prices - and the only strong one.

A caveat is that there is zero correlation between week-to-week changes in the 3-month Eurodollar large spec total open interest and BKX.

Still, it would be interesting to explore possible strategies around trading this phenomenon - for example, long if the total open interest has increased from the last week and short if it's gone down. Or one based on the slope of a moving average of the total open interest.

I'll get back to you on that.

Take care,

In Debt We Trust said...

In retrospect, that was a great call. So, now we have a pullback right?

Today was ominous b/c vix didn't really sink as stocks rose.

Alex Roslin said...

Hi In Debt...,

Yeah, my SPX setup goes back to cash on Monday's open. We'll see about BKX. Nikkei is still bullish, so that could mean just a little selloff. Can't say. A VIX setup would be good!

Btw, a lot of the major indices completed a TD Sequential Sell Setup today, which could be bearish or neutralish near-term.

But having taken out some TD Setup Trend lines too, that's bullish through a few weeks out, in that we can hope those indices will go on to complete TD Seq Coutdowns - i.e. 13 closes higher than the close two days before.


In Debt We Trust said...

I am also curious about your interpretation of grains - the black box traders went net short again at the end of last week while the index funds went long.

Today, the quants got squeezed hard especially on sugar and corn.

Alex Roslin said...

Hi In Debt...,

I can't really comment on the COT data without having any kind of testing through which to interpret it. I have been watching DBA pretty closely though for a possible trade.