Banks Keep on Trucking, S&P 500 Misses Going Long by a Hair

The wrong-way small traders were selling this rally in the past two weeks, and that's probably a good thing for market bulls. But they didn't sell them quite enough to help resolve the market's near-term direction. That's one of the revelations from the latest weekly Commitments of Traders reports issued this afternoon by the Commodity Futures Trading Commission. I've just updated my latest signals table with my read of the data via the prism of my trading setups based on these mysterious and magical numbers. Some highlights:

- S&P 500: The small traders got bearish in Friday afternoon's data, but still not quite enough to trigger my S&P 500 trading setup to go bullish. (It's now in cash.) Astute readers may recall the retail crowd got supremely net long in its futures and options positioning as a portion of the total open interest at the end of July. That flipped their signal over to bearish. But the commercial hedgers, the so-called smart money in this market, have been ridiculously bullish since early July. And they remain so this week, too, as you'll see from the updated numbers on my signals table. So the setup remains in cash.

- BKX U.S. Bank Index: My trading setup for U.S. banks remains long for the fourth consecutive week. That's no easy feat considering it's based on three different groups of traders, all of whom must be positioned in the same direction in the same timeframe for me to take a trade in this market. The setup has been in cash 74 percent of the time since 1995, and the last time it was in the market for four weeks was four years ago. Ride the lightning.

None of the traders in the setup are even close to the signal lines that would reverse the trade. This week, the large speculators in three-month Eurodollars, whom I'm trading alongside in this market, have gotten a bit less net long, but not nearly enough to put my setup back in cash. Their net position as a percentage of the total open interest this week is 5.5. But they've got to boost that back up above about 5.7 next week in order for their signal not to go short.

- Natural gas: It's been a wild ride, and it's coming to an end at next week's open of trading. With all the ups and downs, it sure seems like a lot more than three weeks, but hey, that's what it's like to try to hang on in one of the most volatile markets under the sun. It's one of the reasons for my smaller position size in this market. The setup goes to cash next week after three weeks bullish.

- Crude: All on track for this setup to stay bullish for at least four weeks, starting the open of trading Monday, Aug. 10. The varying trade delays of the two signals in this setup mean it will remain long four weeks minimum... and counting. The commercials and small traders - both of whom I'd trading alongside in this market - remain comfortably far from their signal lines to reverse the trade.

- Nikkei: My setup for Japan's stock average goes briefly to cash the week of Aug. 10, then back to bullish for four weeks, and now, based on today's data, back to cash after that. The large speculators, whom I trade alongside in this market, have suddenly hit the brakes in their Nikkei futures and options positioning, flipping their signal to the short side. That move won't take effect, however, for six more weeks.

Hope you did okay this week. Please tune in early next week for a portfolio update. Have a fine weekend, and for Canadian readers, a hopefully-not-rain-soaked long weekend.

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

Mixed News Next Week: Banks Still Have Fire, S&P 500 Out of Gas

New results and signals are now up on my latest signals table. The S&P 500 is going back to cash on Monday's open, and natural gas, after a nice little run, is sadly going to cash on the following Monday's open, Aug. 3. Crude is still on track for a bullish run, now to last three weeks at least, starting Aug. 10.

The BKX U.S. Bank Index is still on fire and looking hotly bullish for a third week in a row. And more bullish news for the Nikkei, too. Oh yes, and the 30-year Treasury data is starting to line up quite bullishly (meaning the yield to decline), though not ready to move yet. But another disappointing week for gold bugs: My setup has been in cash for a while, and now the data's gotten even less bullish. See you early next week with more, including a portfolio update. That should be fun! Hope you have a great weekend.

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

All Systems Go, Market Ready to Bounce

What a sweet bounce this week in the markets. Looks like good chances of more of the same next week, if my trading setups based on the Commitments of Traders reports are an indication. I've just updated my latest signals table with my readings and signals based on this Friday's latest data release from the Commodity Futures Trading Commission. A few highlights:

- S&P 500: My trading setup for SPX goes bullish on Monday's open of trading, after seven weeks in cash. It'll be a short-lived trade, lasting just one week before the setup goes to cash.

- BKX U.S. Bank Index: U.S. financials had a great ol' time this past week, and the good times look like they're still on - at least according to the data today for the three-month Eurodollar contract. (That would be the interest rate, not the currency.) That data, which gave great signals in backtesting for the U.S. Bank Index, remains bullish this coming week and has actually gotten even more so on balance, as you'll see from the figures on my latest signals table.

- Natural gas: Another long position of mine - in natural gas, based on a new trading setup I recently introduced - also did nicely last week. It remains in bullish mode this coming week, too. Large speculator and small trader total open interest remains very buoyant and shows no signs of breaking down.

- Crude oil: Derivatives positioning in black gold remains on track for a prolonged bullish period starting in mid-August (by "prolonged," I mean at least two weeks and counting). I've got a coming bullish signal for the open of Aug. 10.

- Nikkei: Small trader net positioning in Nikkei futures and options remains ridiculously elevated - actually, a bullish sign in this market. (The small traders are usually seen as the "dumb money"; in fact, that view is not based on any kind of actual testing I've ever seen and is not always correct.) Astute readers will recall that last week these folks hit an astounding 4.08 standard deviations above the moving average for their signal - an all-time record.

This week, they're down to a slightly more reasonable 2.91 standard deviations above the average - which is, nonetheless, still super-high. As you'll see on my results and signals tables, these guys operate with an eight-week trade delay, on balance, before the data has a reliable impact in Nikkei prices. So brace yourself for the possibility of some crazy action the week of Sept. 7.

What will be especially interesting is to see how the large spec net position evolves next week. That signal works with a six-week trade delay - so next week's positioning will take effect that same week in September. Wonder what will happen.

Have a good weekend, and be sure to tune in early next week for a portfolio update.

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

Banks, Energy, Nikkei Could Bounce

Looks like some major breakdowns in the markets this past week. Seems almost predestined that we're headed for a retest of the March lows - and maybe lower. But behold the news from Friday afternoon's Commitments of Traders report. It's actually quite bullish on some fronts. Crude oil and gold still look under pressure for now, but the banks, natural gas and, to some extent, the S&P 500 data are looking up. And in crude, my trading setup has turned bullish for mid-August.

Here are a few highlights from the data that I've just updated on my latest signals table.

- S&P 500: The "smart money" commercial hedgers have shot up to 2.43 standard deviations above the moving average in their net futures and options positioning as a portion of the total open interest. They haven't been this bullish compared to the past data since the end of Sept. 2007. The latest COT report shows them at their 12th most bullish positioning since the beginning of the data in 1995.

That's positive for the bulls. The caveat is that the folks I'm fading in this market, the wrong-way S&P 500 small traders, hit an extreme of bullishness the previous week - oops, bad timing, guys! - and they have yet to work off their excessive net long positioning this week. They've got to do that first before my setup can turn bullish in this market.

- Natural gas: This setup is bullish as of Monday's open and will remain so for at least two weeks. Nice timing, what with the massacre last week. People ask about the trade delays built into my trading setups based on the COT data. Both signals in this setup - based on fading the large spec net position and their total open interest - turned bullish on me the Friday before last. But there are trade delays for both signals. If I had acted on those signals this past week, I'd have been toast. The backtesting shows there's sometimes good reason to wait before acting on major moves in the COT data. I think the fact that markets don't react to the data right away - or don't do so right away in the expected direction - leads to confusion about the usefulness of the data. This last week in this market was a good real-time example. Thanks, backtesting.

- U.S. banks: My trading setup for the BKX U.S. Bank Index - based on the three-month Eurodollar contract (the interest rate, not the currency) - has gone bullish for Monday's open.

- Nikkei: This setup is still long - its sixth straight week - and now finds the small traders - whom I trade alongside in this market; no, they're not always the "dumb money" contrary to popular wisdom - boosting their net long position to an astonishing 4.08 standard deviations above the mean as a percentage of the total open interest. That's by far the most relatively bullish they've ever been. Wow. Something big could be brewing in this market over the coming weeks. Note the small traders operate with an eight-week trade delay in my Nikkei setup. So their extreme of positioning could take a little time to make itself felt. But when it happens, it could be a surprise.

-Crude oil: This setup has gone bullish, but not right away. Execution will be on the open of trading Monday, Aug. 10. See more details on the latest signals table.

Be sure to check in for an update of my portfolio page Monday. Good luck this week!

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

Data Categories Won't Change: CFTC

Got in touch with the Commodity Futures Trading Commission just now to ask about planned changes to its Commitments of Traders reports. The changes announced today, intended to promote greater transparency, include new disaggregated data for the commercial and large spec categories to better show how hedge funds and swap dealers are positioned.

But rest assured, the CFTC's Jay Huhman has emailed me. Existing categories will remain untouched, and the current reports will continue in the same format as before. The CFTC envisages releasing the extra broken-out data in a new report. Phew. Changing the categories would have likely invalidated most of the existing research into the past data - including my own - which wouldn't have had much usefulness going forward. Thanks, CFTC.

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.

Other highlights:

- 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.

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

Holiday Delay

This week's Commitments of Traders report is delayed until Monday afternoon because of the holiday in the U.S. Happy 4th of July to American readers! See you back here Monday.