Friday, 23 July 2010
Traders Boost Banks, Give up on Gold (But Bullion May Still Be Okay)
A nice little rally buoyed equities this week. We could see more of the same next week, according to some of the data in this afternoon's Commitments of Traders report. My trading setups for the S&P 500 and BKX U.S. Bank Index remains bullish for next week. See my latest signals table for more detail on the CFTC's latest weekly numbers and how they've affected my setups. Some highlights:
- U.S. financials: As noted in the past few weeks here, the large speculators continue to rebuild a nice big total open interest in the key three-month Eurodollar contract. That's the data that gives me signals for U.S. banks. These numbers also had a 63-percent correlation with BKX prices the following week between 1995 and 2007. Today's COT report shows the large specs again increasing their positioning, this time to 49.5 percent more than the week of June 1.
Meanwhile, however, a divergence has developed with the small trader total open interest, which also correlated with BKX albeit to a smaller degree (43 percent). The small traders have been reducing their positioning for the past three weeks, though not quite as much (only by six percent since the week of June 29). What could it mean? Time will tell if the small traders or large specs are right. Until then, the main take-home for me is this: My setup remains bullish one more week.
- S&P 500: This setup will remain bullish for at least three more weeks as the "smart money" commercial hedgers are still highly bullish in their net positioning while the wrong-way small traders remain decisively bearish. That said, the commercials have scaled back their bullish bet for the past two weeks both in absolute numbers (as a percentage of the total open interest) and in relation to recent data. Ditto for the small traders, except in the other direction. (They've gotten a tad more optimistic this past week.) However, as I've pointed out before a few times, the S&P 500 futures and options positioning has historically had very little correlation with week-to-week changes in market prices. So I tend to ignore those numbers until they hit extreme territory and give me a new signal.
- Gold: Woah. Now here's one market where the COT data has good correlations with prices. And this week's data was a bit of a stunner, with the large spec net positioning collapsing in a veritable panic, as you can see from my latest signals table. That data had a 62-percent correlation with next-week bullion prices. If that wasn't sorry enough news for gold bugs, the large spec total open interest has also been steadily capsizing, with a 15-percent decline over the past four weeks, including another drop-off in the latest COT report. That data has a very nice 77-percent correlation with gold prices.
All that said, this may not actually be such bad news after all. My backtesting found that the best trade was to fade both of those sets of data, and the signal remains bullish for a second week. In fact, the large specs haven't been this bearish in their net positioning relative to recent data since Sept. 2008 - just before the huge gold rally started that took bullion prices from around $680 to over $1,200 an ounce. One of the many mysteries of the COT data!
- Natural gas: My setup says bearish for a fifth straight week, then goes to cash on the open the week of Aug. 2. The COT data in this market at least was pretty unequivocal this week. The signal is bearish, and so was today's COT data, with declines in the total open interest of both the large specs and small traders. Those datasets correlated nicely with gas prices (58 and 60 percent, respectively).
- 30-year U.S. Treasury: My setup goes to cash on next week's open of trading after three weeks being bullish.
Hope you fared well this week and that you have a great weekend. Be sure to check back here early next week for an update to my portfolio page.