Friday, 12 March 2010

Wrong-Way Small Traders Still Fading Rally; Gas Could Rally, Not so Much Gold

How overbought can a rally get? It turns out, very! As Stephen Vita has been pointing out, it feels a lot like Q4 1999. What do the new Commitments of Traders numbers out today tell us? I've put up the data and new signals on my latest signals table. Some highlights:
- S&P 500: The wrong-way small traders have gotten more bearish, according to this afternoon's COT report. They've in fact had a bearish tilt in their net positioning in future and options since early January - fading the entire rally. Since my trading setup for the S&P 500 trades opposite to the small traders, their latest move to get more relatively bearish should be a good sign for the rally.

On the other hand, the commercial hedgers also got a little more bearish this past week. And both sets of data correlate poorly with week-to-week fluctuations in S&P 500 prices. The main point is we're still very far from the kinds of positioning extremes needed to signal a turn in this market, at least if past data is any indication. So the setup remains long.

- Banks: The data on U.S. financials is also mixed, as you can see on that table. My setup for the BKX U.S. Bank Index remains in cash this week.

- Nikkei: My trading setup for Japan's Nikkei Average goes to cash after seven weeks being short. The setup went short in late January just as the market was selling off, so it'll wind up around even, probably with a small loss. The setup will stay in cash for a spell, then go long in late April. That's the farthest-out signal I think I've got at this point. It could suggest that the market could surprise some more and fail to implode this spring as many anticipate it will.

- Gold: Gold and other precious metals haven't kept pace with the rest of the rally. They've sold off this week while my gold setup was in cash. The setup will remain in cash next week, and the data foretells more weakness for bullion. The large speculators have cut their net position and total open interest - and both of those sets of data have correlated quite well with gold prices the following week.

- Natural gas: My setup for gas, after being in cash five weeks, is now signaling to go long in a week's time - i.e. on the open of trading the week of March 22. As I noted in last week's post, the data has started to suggest the bloodbath might be finally over for gas. Now, the setup has officially gone to the bullish column.

Hope you did nicely this week and that you have a great weekend. Check in early next week for an update to my portfolio page.


Joseph said...

Hi Alex, OIL went positive for you on Mar 8th but your signals say Bearish. Why have you gon bullish when Com/Small traders signal this.. ?

8-Mr-10 Commercial Traders (4) Net % Bearish -0.69
Small Traders (8) Net % Bearish -0.02

Thanks, just trying to learn

Edward said...

Small traders do not trade the S&P 500 index, nor could they afford to. These are all hedges. You need to check e-mini data, not the cash index.

Edward said...

To clarify: the maintenance margin on SPX full contract is $22,500 per single contract. These are not small traders or retail traders, but either large or small institutions. So again, you need to go to the e-mini, which has a $4000 maintenance per contract. The COT data for SPX full contract is not to be trusted since most of the trades are hedges, especially going into quad witching.

MarketFeel said...

do you chart the movements anywhere
I would love to see the cot report over time

Alex Roslin said...

Hi Joseph,

The crude oil setup has trade delays that mean those bearish signals don't take effect right away.


Alex Roslin said...

Hi Edward,

Thanks for your comments. I've addressed this question at length on my FAQs page.


Alex Roslin said...

Hi MarketFeel,

I don't do that myself, but some of the links in the right-hand column (scroll down) will lead you to excellent resources that allow you to do that.