Friday, October 16, 2009
Bad News for Banks, Stocks and Energy
Woah, rough day and a rough close today. But the market's long-awaited plunge of the cliff hasn't happened. Folks seem to be really, finally starting to believe in this rally in a big way. Oh-oh.
The S&P 500 small traders have boosted up their net long positioning in futures and options to extreme levels in the past two weeks, according to the Commitments of Traders data released weekly by the Commodity Futures Trading Commission.
That's not a good thing for bulls. The small traders tend to hit extremes in their net positioning just as the market is about to go in the other direction. As you can see on my newly updated latest signals table, the wrong-way small trader positioning put them over my signal line on Oct. 9 - way, way over - taking their signal bearish. That same week, the "smart money" commercial hedgers got ultra-bearish in their positioning. My testing has found that it's worked best to wait three weeks before acting on such new signals in this market. Hence, my bearish trade to be executed Nov. 2. Today's COT data didn't give any reason for optimism, as the numbers on that table indicate. The commercial traders have gotten even more bearish. Not good at all. Some other highlights from the latest data:
- U.S. financials: Also not good this week is the major turnaround in the data that I use to trade the BKX U.S. Bank Index. The large speculator total open interest in the three-month Eurodollar (the liquidity measure, not the currency) has declined significantly in the past week, as you can see from the latest signals table. That data has a very strong 61-percent correlation with next week's BKX values historically. Dovetailing with this ominous development is the fact that the small trader total open interest, which has a 41-percent correlation with the BKX the following week, has also dropped a fair deal - so much so, in fact, that my small trader signal has gone bearish. My trading setup for the BKX remains in cash, however. It requires all three signals to agree, and that hasn't happened in quite some time now.
- Crude oil: My trading setup for crude goes to bearish on Monday's open of trading. Kind of odd, seeing as how crude had a huge breakout this week technically speaking, rising above key resistance. But I don't second-guess mechanical signals. (I use risk-control rules, including stops and appropriate position sizes, in case I'm wrong, which is inevitable. See more on those rules at my How It Works page.) The crude setup will remain bearish for at least five weeks and maybe more.
- Gold: My trading setup for gold goes to cash on Monday's open of trading. It will remain so for at least two weeks, then could go back to bearish unless the large speculators suddenly get much more bearish. At present, they have been at elevated levels of bullishness since early August - a warning sign.
- Natural gas: This setup goes back to bearish on Monday's open, too. That signal will last for only one week because of how the two groups of traders don't line up correctly after that.
Have a good weekend, and good luck next week. Tune back into my portfolio page early next week for an update.