Friday, 9 April 2010

Banks on Sell

U.S. financials could take a hit next week, according to today's Commitments of Traders data from the Commodity Futures Trading Commission. My trading setup for the BKX U.S. Bank Index, a basket of the major U.S. financials, has gone bearish for execution on next week's open of trading. See more on the unhappy news at my newly updated latest signals table.
The signal comes from a major drop-off in trader positioning in three-month Eurodollars, which give me signals for BKX. A couple of caveats you'll notice from my signals table:

(1) The small traders have sharply increased their total open interest in the latest COT report. This is actually bullish because their total open interest correlates nicely with BKX values. In fact, it went up so much my small trader signal went from bearish to bullish this week. But that signal takes two weeks for that signal to take effect, based on the results of my backtesting. So next week could still be bumpy.

(2) However, large spec total open interest was steady, going up a hair from 1.685 to 1.686 million contracts. This data also correlates with BKX values. So overall, the data may be pointing to a pause rather than an end to the bull market since March '09.

For the S&P 500, my setup remains bullish for its eighth consecutive week. The data here looks decidedly less bullish this week. The commercial hedgers are in their seventh straight week of declining net positioning in futures and options, while the wrong-way small traders have bumped up their net position two weeks in a row. But as I've mentioned ad nauseum before, net positioning in this market correlates very poorly with S&P 500 prices. In fact, the best run-up in the market could be in the last period just before the commercial hedgers really sell off and small traders pile into the market. Neither event is even close to happening right now, so I think the data suggests the present trend remains intact for a little longer at least.

My 30-year Treasury bond setup goes to cash after two weeks being bearish.

In gold, my setup remains bullish for a fourth week, but large speculator total open interest has now risen to extreme territory, putting this component's signal into the bearish column. This signal takes seven weeks to take effect, so my overall bullion setup remains buoyantly bullish for now.

And finally, natural gas goes into its fourth week being bullish. So far, it's been a volatile signal, as per usual with this market. The latest COT report offers some hope for an end to the carnage as small trader total open interest, which has a 60-percent correlation with next week's gas price, has bounced nicely. This bullish signal, however, will last just this one more week before going to cash.

Hope you did well this week and that you have a great weekend. Check back in early next week for a portfolio page update.

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