Monday, July 6, 2009
Oh-Oh... Wrong-Way Crowd Way Too Bullish
My coming S&P 500 bullish signal will be short-lived, according to the latest numbers from the weekly Commitments of Traders reports released this afternoon. You might recall that the "smart money" commercial hedgers had put on some very bullish positioning in their S&P 500 futures and options holdings last time around. (See my post from a week ago Friday for all the fascinating details.)
It turns out that bullish signal - which is to be executed on the open of Monday, July 20 - is far from being an all-clear for the market. The latest COT report shows the wrong-way small trader crowd putting on a huge net long derivatives position. So much so, in fact, that their signal in my S&P 500 trading setup has just flipped to bearish.
The small traders - that's the unfortunate little guys, who tend to get it wrong at key market turns and give all their money away to the commercial folks - bumped up their net long position as a percentage of the total open interest to 1.8 standard deviations above the moving average I use to gauge their sentiment. That's higher than any time since mid-Dec. 2008 - right before the big post-New Year bust.
Mind you, things aren't all that bad right now. The commercial traders are still big believers in the market - enough so to keep my S&P 500 setup from going all the way over to bearish. The setup will go back to cash after a week in the bullish column, as you can see from my newly updated latest signals table.
- Financials: My trading setup for the BKX U.S. Bank Index isn't quite bullish, but the data has gotten nearly so. This last week, the large speculators - whom my setup for BKX trades alongside - significantly increased their total open interest, as you'll see on that latest signals table. Their signal has now gone to the bullish side. But this setup works with three different groups of traders, who all have to be aligned to get a trading call. And aligned in the same timeframe.
As it happens, all three signals are presently bullish. But the setup hasn't gone bullish because of a trade delay of two weeks for the signal based on the small trader total open interest. Two weeks ago, these guys were giving a bearish signal. If the other two signals can hold on to their bullishness for just a week longer, the overall setup will go long. But in these times, that's a big if.
- Natural Gas: After four weeks in cash, my setup for natural gas will go bullish on next Monday's open, July 13. The large specs have ratcheted up their total open interest big-time. My other signal in this setup - based on trading alongside the small trader total open interest - has been bullish four weeks. But thankfully, I don't just use a single signal for this or my other setups. My testing has found that often just hasn't been too reliable, statistically speaking. Natgas has gotten destroyed in the past couple of weeks, so I'm glad I booked a little profit and went to cash.
Good luck the rest of this week. See you back here Friday for more. And check out my portfolio page with an update on my single position's results.