Data Depressing for Bulls, Nikkei Single Bright Spot

What a crappy week if you were a bull. Next week could be all-important for whether the rally's long-anticipated swan dive begins. Or will all the perma-bears out there end up out of luck? On balance, I have to say things don't look good, according to this afternoon's Commitments of Traders data - with one exception: the Nikkei, which just got a bullish signal for Monday's open. I've just updated my latest signals table for the reading pleasure of any masochists out there. You'll recall that the COT reports are the free weekly data from the U.S. Commodity Futures Trading Commission that detail trillions in derivatives positions in 100-plus major markets. Here are those grim highlights:

- S&P 500: My trading setup for the S&P 500 is going bearish on the open of trading Monday, Nov. 2, based on two things: massive - and growing - bearishness in the net positioning of the "smart money" commercial hedgers and the super-bullishness of the wrong-way small traders. During most of the rally since March, it's often been said that the market has climbed a wall of worry, with the retail crowd far too skittish to jump in big-time. Those fears seem to have disappeared now that the seasonal trade is upon us. The new story is that the small traders are highly bullish, and they remain so in Friday's data. Meanwhile, the commercials are even more negatory than last week, as the data on my table shows.

- U.S. financials: The data is looking fairly bearish this week for U.S. financials. I watch the three-month Eurodollar data to get signals for the benchmark BKX U.S. Bank Index. One of the key series of data here is the large speculator total open interest, which has a 61-percent correlation with next week's BKX value. The open interest took a tumble last week, and there's more of a drop again this week. That's somewhat offset by the fact that the small trader total open interest - which has a weaker but still moderate 41-percent correlation with BKX the next week - has risen this week. Either way, my setup for this market remains in cash - the 12th week in a row.

- Gold: Major new discovery for me, folks. Gold has a 77-percent correlation with the previous week's large speculator total open interest in gold. That's the highest correlation I've yet to find in any of the COT data, which mostly doesn't enjoy very strong relationships with market prices (hence, my somewhat convoluted system of buying and selling when COT positioning hits relatively extreme levels). Gold's strong correlation with COT fluctuations is also significant for another reason: Gold has lately moved in the same direction as equities, part of the reflation trade. This week, bad news: Large spec total open interest has taken a serious tumble. Confirming that sorry development, the large spec net position as a percentage of the total open interest - which itself has a pretty decent 60-percent correlation with gold's price the following week - has also drooped.

- Natural gas: After thinking my bearish natural gas signal was quite the bizarro trade at the beginning of the week, it turned out surprisingly okay today. Nice going, COT data. My setup goes back to cash on Monday's open, Oct. 26.

- Nikkei: Amid all the gloom, Japan's Nikkei Average has suddenly perked back to life after a six-week hiatus of being in cash. It's now going bullish for Monday's open, Oct. 26. That's based on highly bullish positioning by the small traders and large speculators - who are both the "smart money" in this market, with the parameter set and trade delay I use. Doesn't that contradict the bearish data in the other markets? It seems to. But the Nikkei actually has virtually no historic correlation with North American equities - and even a negative correlation in some cases. (Of all the markets I've checked, if you really want to know, its strongest correlations are with coffee and cotton. Weird!) The Nikkei setup will remain in bullish mode five weeks, then goes to cash.

Hope you have a great weekend, and see you back here early next week when I update my portfolio page.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing