Sunday, 12 July 2009
Banks, Energy, Nikkei Could Bounce
Looks like some major breakdowns in the markets this past week. Seems almost predestined that we're headed for a retest of the March lows - and maybe lower. But behold the news from Friday afternoon's Commitments of Traders report. It's actually quite bullish on some fronts. Crude oil and gold still look under pressure for now, but the banks, natural gas and, to some extent, the S&P 500 data are looking up. And in crude, my trading setup has turned bullish for mid-August.
Here are a few highlights from the data that I've just updated on my latest signals table.
- S&P 500: 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. They haven't been this bullish compared to the past data since the end of Sept. 2007. The latest COT report shows them at their 12th most bullish positioning since the beginning of the data in 1995.
That's positive for the bulls. The caveat is that the folks I'm fading in this market, the wrong-way S&P 500 small traders, hit an extreme of bullishness the previous week - oops, bad timing, guys! - and they have yet to work off their excessive net long positioning this week. They've got to do that first before my setup can turn bullish in this market.
- Natural gas: This setup is bullish as of Monday's open and will remain so for at least two weeks. Nice timing, what with the massacre last week. People ask about the trade delays built into my trading setups based on the COT data. Both signals in this setup - based on fading the large spec net position and their total open interest - turned bullish on me the Friday before last. But there are trade delays for both signals. If I had acted on those signals this past week, I'd have been toast. The backtesting shows there's sometimes good reason to wait before acting on major moves in the COT data. I think the fact that markets don't react to the data right away - or don't do so right away in the expected direction - leads to confusion about the usefulness of the data. This last week in this market was a good real-time example. Thanks, backtesting.
- U.S. banks: My trading setup for the BKX U.S. Bank Index - based on the three-month Eurodollar contract (the interest rate, not the currency) - has gone bullish for Monday's open.
- Nikkei: This setup is still long - its sixth straight week - and now finds the small traders - whom I trade alongside in this market; no, they're not always the "dumb money" contrary to popular wisdom - boosting their net long position to an astonishing 4.08 standard deviations above the mean as a percentage of the total open interest. That's by far the most relatively bullish they've ever been. Wow. Something big could be brewing in this market over the coming weeks. Note the small traders operate with an eight-week trade delay in my Nikkei setup. So their extreme of positioning could take a little time to make itself felt. But when it happens, it could be a surprise.
-Crude oil: This setup has gone bullish, but not right away. Execution will be on the open of trading Monday, Aug. 10. See more details on the latest signals table.
Be sure to check in for an update of my portfolio page Monday. Good luck this week!