Banks Get Boost in Latest Data Report; Crude and Gold Too

Well, so much for resolving things. Equities this week generally remained flat; at least those in the U.S. market did. Meanwhile, what to make of the explosion in commodities, emerging markets and Treasury yields? The reflation trade is starting to kick in, but how far can things go with the anemic action in U.S. financials and real estate? 

There's some good news from today's Commitments of Traders data. See my newly revised latest signals table for a breakdown of this data in key markets and which way my trading setups are leaning right now. 

My setup for the BKX U.S. Bank Index remains bullish for a second week next week. Also, my gold setup turns bullish again after a week in cash. And crude oil remains bullish, while my S&P 500 setup goes to cash.

I'll be back here early next week with a more detailed look at the data. In the interim, I invite you to check out the numbers on the latest signals table, which tell an interesting story themselves. Also early next, check in to see my latest portfolio numbers. Have a great weekend.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, Nikkei, crude oil, 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 

Delay

I've got to hit the road for an unexpected work trip and won't have time for my promised note giving more details on last Friday's Commitments of Traders numbers. Sorry about that. I invite you to check out the data on my newly improved latest signals table, which breaks down how the various trader groups are positioned in the markets I'm trading with this data. See you back here Friday, and apologies again.

Go, Go, Go for U.S. Banks and Crude Oil

What to make of such a week? Still no real hoped-for resolution to the question: Are we going up or down? Precious metals look like they've broken out, while natural gas has really gotten chainsawed. No time this afternoon to write up a detailed report on what the latest Commitments of Traders from today says about all this, but I have just updated my newly revamped latest signals page based on the new COT report.

Very interesting stuff, with plenty of new signals to keep me busy on next week's open: bullish for the BKX U.S. Bank Index and crude oil, cash for gold and for my brand new setup for Japan's Nikkei Average. I've also included breakdowns on that page of how the new numbers are lining up, so you can get more insights. 

I'll say right now the BKX bullish signal is of special interest because it comes from a setup that uses three different groups of traders to confirm the trades. Because of that, it's in cash three-quarters of the time. In fact, this setup has been in cash for 12 weeks, since March 2.

As for that new Nikkei setup, it outperformed the market in backtesting by 980 percent since 1995, including a 18.6-percent gain in 2008 (when the Nikkei crashed 43.5 percent). Sweet! The setup has just flipped from a bearish signal that ran all of one week to cash for next week's open of trading. It'll stay in cash for two weeks, then go back to bullish. I'll provide a more detailed post on all these hot new numbers early next week, plus the usual portfolio update. I'll also update my backtesting results table early next week with more details on the new Nikkei setup.

Hope you have a beautiful weekend - it's sure gotten nice and warm up here in Quebec's Eastern Townships all of a sudden, and none too soon - and to U.S. readers a fantastic long weekend.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, Nikkei, crude oil, 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 

"Dumb Money" Traders Hit Brakes on Rally, Bank Index Almost Flips to Bullish

Is it a pause or the end of this sweet little rally? I wish I knew. It certainly looks suspect, especially when you check out some of the weekly charts. There, many of the indices have bumped up against Tom DeMark Setup Trend resistance lines and bounced back down. (Read more on DeMark's interesting system here and here.) All will hopefully be a little clearer next week. Or the week after. Or sometime before the Apocalypse. But until then, we've got the Commitments of Traders to think about. I've updated my new latest signals table with the way my trading setups see things based on this weekly data.

That table is where I'm now going to include many of the details I used to write about in these posts about changes in trader positioning. I thought this would makes things easier for everyone to see what I'm talking about and let me include more useful info. The numbers should speak for themselves. Let me know if something's not clear. (I hope to include some charts eventually too.) I'll limit my Friday posts to a few highlights that elaborate on the data - and anything especially surprising or interesting that jumps out.

- S&P 500: As you'll see from the new numbers, the "dumb money" small traders have really hit the brakes in their derivatives positioning in the S&P 500. They appear certain that we've hit a top and want out. That's actually given me a bullish signal from fading these folks - which takes effect on the open June 2. On the other hand, you'll notice the commercial traders remain quite bearish this week once again. As a caveat, they have reduced their solidly net short positioning for four weeks running. But they are still seriously surly about this rally. So the overall setup will be going to cash on June 2 since the two trader groups don't agree.

- BKX Bank Index: This setup just about went bullish for next week's open. Two of the three signals in this triple-combination trading setup are now bullish. And the third - based on the large speculator total open interest - has moved up very close to flipping to bullish. Maybe the rally has legs after all, based on this setup at least.

- Gold: One more week for the current bullish signal for this setup, then it goes either to cash or bearish for a single week starting Monday, May 25, before likely returning to bullish the following week. The wild card here is the large speculator positioning in the coming weeks. If they suddenly all turn into massive gold bugs, that kind of excessive exuberance would spell trouble for any sustained bullion rally. For the moment, there's no hint of that. As the numbers show in my table, the large specs are only moderately bullish as compared to recent data. They'd have to increase their net long position by an incredible 30 percent as a percentage of the total open interest in order to flip their signal to bearish - and a move of that size would be quite historic.

- Crude oil: My crude setup goes to cash for a single week this coming Monday, May 18, then goes back to the bullish column on the open of Monday, May 25, and will remain there for at least four weels in total - the farthest the setup's trade delays allow me to try to guess into the future.

Have a great weekend, and to Canadian readers a beautiful long spring weekend. See you here early next week with a portfolio update.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, crude oil, 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 

Check Out My New Latest Signals Table

I've just rejigged my latest signals and results table to break out the information into two separate tables. I wanted to be able to give more information on the weekly Commitments of Traders data, but my table was getting quite large and unwieldy. Surf over to my latest signals and results page and check out the brand new signals table. It includes a breakdown of the positioning of traders each week and lots more new information. Hope this makes things more handy for you all. I've also increased the font size a little on the backtested results table's notes for readability purposes. See you back here after tomorrow's new COT release. Good luck for the remainder of this whacky week. Your thoughts on the new format are welcome.

Bearish Commercial Traders Refuse to Give In to Rally

Yay, the bear market is over! Phew. I survived. So did you. We're all fine. Never thought I loved bulls so much as right now. I love them so much you hate them compared to how much I love them. (If you have kids, you probably know the reference.) What's that? It might not be over yet? Oh. Great... Man, you just have to know there's a monster selloff coming here. My stops are tight, but I'm still trying to cash in on this rally. But what I know. How about the people who matter? What word from the Commitments of Traders reports? 

For you newbies, these are the Commodity Futures Trading Commission's weekly reports on derivatives positions in 100-odd markets, from the S&P 500 to the Canadian loonie, gold and frozen H1N1 bellies. I've just updated my latest signals table with the calls from my trading setups based on this data this week. Some highlights from this Friday afternoon's data update:

- S&P 500: What in God's name are the commercial hedgers up to? The smart money folks - who tend to be correctly positioned at key market junctures - still loath this rally, friends. It's just bizarre. And spooky. Today's data has them reducing their net short position somewhat, but nowhere near enough to matter in the broader scheme. They're still stuck at a depressive 0.73 standard deviations below my moving average. Yes, that's up from the previous week's 1.45 below average, but not by a lot. As I explained in a mid-week post, my currently under-water bearish signal - based in part on the commercial net short posture - is now close to hitting its stop level, which is 935.74 (for a 7.77-percent loss). I'm not in that trade because I adopted this new setup only after the signal took effect on April 20. Next week could prove critical once we get up to that level - which also coincides with the next major resistance at the January highs.

Another twist: as you'll notice from my latest signals table, my S&P 500 setup has gone to cash, to be executed in three weeks' time. This is based on the "dumb money" small traders, whom my setup fades with a three-week delay. They've gone and heavily cut back their net long position as a portion of the total open interest. They're now 1.25 standard deviations below average, down from 0.02 standard deviations above average last week. This drop is more than enough to trigger a bullish signal from the small traders. And since the two signals that make up my setup now won't be in agreement in three week's time, the setup goes to cash.

BKX Bank Index: You'll see a new setup added to my latest signals table for U.S. banks. It easily outperformed the index - including a 36.2-percent gain in 2008, when banks lost 50 percent - while being in the market just one-quarter of the time. The setup is especially robust from a statistical viewpoint in part because it combines three different groups of traders. This is the first market where I've found the most reliable results to come from a triple signal. (In other markets, three signals tends to degrade the results.) You'll see all the details on the latest signals table (including parameter values in the notes). Note that there's no data for the bank index in the COT reports. My setup is based on following traders in the three-month Eurodollars contract (not the currency, but rather a contract that follows interbank lending rates - an important measure of global liquidity.)

What's the setup saying now? It's been in cash since Dec. 8. The small trader signal (based on trading on the same side as the small trader total open interest when it hits certain extremes of volume) is now bullish. The other two signals in the setup remain bearish, but they could be showing some of those "green shoots" of life we keep hearing about. The large spec net position, which I'm also trading alongside, is now just a hair from flipping to bullish. And the large spec total open interest, which I'm trading on the same side as too, has shot up in each of the past two weeks. It's now 0.6 standard deviations above the mean, up from 0.39 last week. It needs to hit 1.25 above for that signal to go bullish.

- Crude oil: [NOTE: This section is corrected from my original post Friday. The following information applies to the crude oil COT data, not to gold as I had written in haste in my original post. Very sorry for the mix-up, and thanks to an alert reader for bringing this to my attention.] Little change in the crude oil data since last week. The commercials are still strongly bullish - though down in their positioning to 1.23 standard deviations above average, from 1.64 the week before. That's not a major change. They need to fall to 0.2 standard deviations above for my signal to go bearish. Meanwhile, the small traders, whom I also trade on the same side as in my crude oil setup, have jumped back into bullish territory this week. Their net percentage-of-open-interest position is up to 0.59 standard deviations above the average - up from 1.08 standard deviations below last week. I should note, however, that my crude setup will be going to cash next week, for a single week, before returning to bullish. That's because the commercial crude traders got quite bearish the week of March 24. With a four-week trade delay, that change in positioning will take effect next Monday's open of trading.

Sorry to run out of time before I got to my gold setup. Not much to report in that market anyway this week. I should also note that for my gold setup, I've gone back to using my previous parameter values, as you'll see from my updates notes on my latest signals table. Sorry for switching things back and forth like this, but results from some extra testing of setups using signals from three groups of traders caused some changes in the order of my best setups. Have a great weekend and a Happy Mother's Day! Tune in early next week for a portfolio page update.

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, 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 

Derivatives Data May Point to Rally Targets

Ah, lovely days to be long. The last thing I'd want to be doing right now is standing in front of this powerhouse rally. So I'm heavily long in my discretionary trading (albeit with tight stops!) But I've also been thinking about the bearish signal from my new S&P 500 trading setup based on the Commitments of Traders data. (Update Friday morning: I closed most of my long positions during yesterday's selloff, but went long natural gas.)

The S&P 500 signal took effect on the open of April 20, with a price of 868.27, and it's now 5.03 percent under water as of this morning. (I'm not in this trade because I started using this new S&P 500 setup only after the current signal took effect.) The trade is down, but it has yet to hit my stop level - a 7.77-percent loss. That stop is based on the average trade profit in backtesting minus two standard deviations. That stop would be triggered if the S&P 500 were to rise to 935.74. If that were to happen, it would effectively mean the market has gone against the typical trend that's happened in the historic data. So that could actually be an upside target for this rally. On the chart, this is around the next resistance level from the January highs. 

There's also a second, higher level I'm keeping an eye on, too - 980.01. A rally to here would mean this bearish signal has lost more than the maximum past drawdown seen in my backtesting - 12.87 percent. That would trigger my Black Swan risk-control rule - which means not trading the S&P 500 setup for four weeks. (Read more about that and my other risk-management rules here.) That 980.01 level is, incidentally, close to the next resistance level on the chart, going back to the highs in November.

Commercial Traders Love Crude - But Still Fading the Equities Rally

Another tiring week. How long have I been saying that? I should just create a short-cut key to write it faster. The market rally seems to be still intact, but who really knows. One thing is very clear: The commercial hedgers in S&P 500 futures and options - the so-called "smart money" -aren't jumping on board. They haven't reduced their net short position at all, despite this week's apparent breakouts on the charts in some areas. So that's not too good. On the other hand, thy seem to love crude oil. So if that's a tell for the direction of the market, maybe things aren't too bad. Check out my latest signals table for the word from my trading setups based on the weekly Commitments of Traders reports, which tell us how trillions of dollars in derivatives are being sloshed around in 100-plus markets. Some highlights from this afternoon's COT data:

- S&P 500: My setup for the S&P 500 remains bearish for a third week in a row. The signal seemed pretty mistaken mid-week as things took off - and I even traded the long side with some short-term discretionary plays - but as the week ended, it didn't seem so nutso after all. This week, the commercial traders have just slightly cut their relative net short positioning as a percentage of the total open interest. They're now 1.45 standard deviations below the average I use for this signal, up a little from 1.63 standard deviations below the previous week. Meanwhile, the wrong-way small traders are getting more bullish - also bad. They went from 0.1 standard deviations below average to 0.2 above. Not a big move, but not very reassuring either. They need to get a lot less net long to flip their signal to bullish.

- Crude oil: My new crude oil setup goes to bullish with execution on Monday's open of trading. This is based on a combination of super-bullish positioning by the commercial hedgers and small trader crowd (both of whom appear to be the "smart money" in this market, at least according to the timeframes I'm using to view them). In today's data, the commercials cut their net short positioning dramatically. They went from 0.57 standard deviations above average to 1.64 above - a big move. On the other hand, the small traders have suddenly slammed on the brakes, going from 1.89 standard deviations above the average down to 1.08 below it (just a hair above the signal line that would take their signal bearish, which is -1.1 standard deviations). But my setup for crude oil has trade delays for both signals (see my latest signals table for more details) - so these latest changes in positioning won't affect anything until mid-May. This bullish signal will last two weeks.

- Gold: My setup for gold remains bullish for a second week. However, an important move this week took place in the large speculator total open interest. These wrong-way folks are suddenly buying up bullion like crazy - not a bullish sign down the line. Their positioning went from 0.51 standard deviations below average to 1.49 above this week - flipping their signal to bearish. That signal works with a seven-week trade delay, so it doesn't affect anything for a little while. Just a warning sign that any coming rally might get overbought real fast.

Have a beautiful weekend and see you back here early next week with a portfolio update and, with hope, that promised BKX Bank Index trading setup. (It got delayed this week as I went back to review my existing setups a little more, including checking out the possibility of combining signals from three groups of traders to further improve reliability. Stay tuned.)

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, 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