Friday, 23 October 2009

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.

14 comments:

In Debt We Trust said...

Gold is a total fad. Shorting the dollar on a carry trade has been the trade of the year. But an elevated equities market on virtually any timeframe you can consider means the resurgence of gold's eternal enemy - government debt or bonds.

We have a big treasury auction next week and even though there is a lot of supply in the pipeline, even a modestly successful auction is potentially bullish. Also, when was the last time you heard of a treasury auction failing? Those things are rigged to always produce bids via the primary dealer infrastructure.

carl said...

Hi Alex, please check "latest signals", it is not updated I think.
Greetings, Appi

Alex Roslin said...

Hi Appi,

Thanks for your message. The data and signals were all updated - just not the dates in the headers of the table. Sorry about that! It's now corrected.

Regards,
Alex

Joseph said...

Alex, are you sure or still holding your SnP LONG, after this reaction today. What would mk you get out of your long signal?

Market is breaking down, SPY, OIL etc... Would like your insight

Thanks
Joe

Alex Roslin said...

Hi Joseph,

Please see my FAQs page, where I've already addressed this:

http://cotstimerfaq.wordpress.com/

Regards,
Alex

Alex Roslin said...

Incidentally, I am short crude oil.

Regards,
Alex

Joseph said...

Hi Alex I know your long on your work sheet. However my question is what would make you bail from your work sheet position i.e Long on SnP till Nov 2nd is a risky play. You may be right and we finish strong into the end of this week. Essentially, no matter what you stick with your work sheet regardless of whats going on around you, breaking support etc...

Interested about your feedback

Thanks
Joseph

Alex Roslin said...

Hi Joseph,

That's right. Please see specifically the first two Q&As on the FAQs page, which specifically address the very question you ask. I don't actually know if this week will finish strongly or not. I hope it does, but it doesn't really affect how I play these signals. That said, I actually think this week has a good chance of not finishing strongly. Please see my post from Friday for more on that.

Regards,
Alex

Anonymous said...

hi alex, i wanted to know if you have looked at ERY as an energy short. following your dtae to short up 12%. thanks tony

Alex Roslin said...

Hi Tony,

Nice. It's not a pure crude oil play, and company stocks can sometimes go in a different direction than the commodity they're involved with. I find the ideal trade is the one that's closest to the underlying market. Otherwise, the volatility and hence the stops and position sizes would be different - and probably also robustness. That said, I might consider something like that as a discretionary trade alongside the COT trade. Again, not a recommendation!

Regards,
Alex

Joseph said...

Hi Alex, not sure on how you can stay in a trade when what is currently happening on the DOW/SnP hitting the Fib levels. Why stay in a trade just because your data said to when what is currently happening is hurting you. The point of my question is to learn from you due to I respect your work and use it WIN/Loose.

Any feedback would be appreciated

Thanks
Joe

Alex Roslin said...

Hi Joseph,

Thanks for your message. There are a few different answers to your question. Firstly, a trading strategy is useful is you don't follow its signals with 110% discipline. All your work developing it goes right into the crapper. A trader need to have to have confidence it will work or go back to the drawing board and improve it so you do - or give up and do something else. When we start second-guessing ourselves, that's when the big mistakes and losses start piling up.

I don't care at all what the price is doing right now. I don't really even care that much if this or another trade wins or loses money. All systems lose money some of the time. The key is winning over the long-term and cutting losses with stops and position sizing.

Secondly, I don't use Fib levels. They might work for other people. They're not for me. Some people who have tried to study them have found they worked. I have yet to see a statistically rigorous study of them myself. If you've seen one, let me know. A lot of common technical analysis tools out there are actually useless.

Thirdly, the SPX has yet to violate the TDST support line I'm watching on my daily chart.

Regards,
Alex

DavidDT said...

"Thirdly, the SPX has yet to violate the TDST support line I'm watching on my daily chart."
Which of 2 concurrent TDSetup Sell are you referring to? Chart is always nice. Thank you

Alex Roslin said...

Hi David,

There are TDST daily support lines at 1050 and 1019 for SPX.

Regards,
Alex