Friday, 2 July 2010

Traders Give Bullish Signal for S&P 500

Another terrible week in the markets. Hope you survived it okay. The "smart money" may have been a little premature flying head-first into the market last week. Despite that, they're doing the same thing this week. The commercial hedgers are still heavily bullish in their net positioning in S&P 500 futures and options, according to today's Commitments of Traders report.
For newbies, the COT report is the free weekly data in which the U.S. Commodity Futures Trading Commission is kind enough to tell us how trillions of dollars are positioned in 150-plus major markets. I found this data could reliably give good-probability signals about future market prices in historic backtesting and created a trading system around it. (See more details on my FAQs and Intro pages.)

For the S&P 500, as you can see on my latest signals table, the "smart money" commercial hedgers have helped give my trading setup a bullish signal. The other reason for that signal is the very bearish net positioning of the wrong-way small traders - the little guys who tend to be badly positioned at key market turns. That bullish signal goes into effect on next week's open of trading and will last at least the next three weeks - possibly more.

Some other highlights from the latest COT data:

- U.S. financials: My setup for the BKX U.S. Bank Index remains in cash, but the COT data looks more promising each week. That doesn't mean it's not often wrong - as it obviously was last week, when it had gotten bullish while the market got meat-cleavered yet again. But historically, the data has a decent correlation with BKX values the next week, and the latest data shows another rise in total open interest of the large speculators and small traders - which has tended to be a good thing for bulls.

- 30-year Treasury bond: Bizarrely, despite the recent collapse in the Treasury's yield, my setup has just now decided to go bullish (meaning it believes the yield will fall more). Strange, but I'll take the trade anyway. That's the only way to use a trading system: Never question it, or you're in big trouble psychologically... and no doubt in your bottom line, too.

- Gold: My signal for bullion is in cash for another week, but the data has edged into more lackluster territory this week. Large spec total open interest, which has a 77-percent correlation with gold prices the next week, has edged down from 320,548 to 316,913. That could promise more trouble for gold, which saw a nasty little selloff this week.

- Natural gas: My gas setup is bearish for a second week next week and will remain so at least one more week after that.

- Nikkei: The setup has been bullish for five weeks and will remain so for five weeks longer, then go to cash.

- Crude oil: My setup for crude is in its fourth week in cash and shows no signs of going either long or short as the two signals that make it up continue to squabble and disagree with each other.

Have a good weekend, and be sure to check back here early next week for an update to my portfolio page. Happy Canada Day, and to American readers a great July 4.


Anonymous said...

hi alex, your info from this weeks COT shows going long bonds. which etf do you use for this signal. thanks in advance for your comments. tony

Alex Roslin said...

Hi Tony,

It depends on the situation, but this time around I'm using TLT. Not a recommendation!