Note To Self: Sell Canadian Energy iUnits

Just a reminder that my sell signal for the S&P/TSX Canadian Energy iUnits (symbol XEG.TO) takes effect for the open tomorrow, Monday, April 30. See my note for Monday, April 9, for more details ("Crude Oil: Sell").

Also note that my data for XEG.TO goes back only to March 2001, so my largest past drawdown for this trade is relatively low and probably doesn't reflect as much volatility as the other data sets, which mostly go back to 1995. As a consequence, my maximum portfolio allocation for this trade is relatively large, but my stop is also smaller.

What does all that mean? I know, I know you're probably scratching your head. Click "How It Works" and "Glossary" on the right for some explanations, or write me a comment with your question.

Renewed Buys: TSX, Nikkei; Renewed Sells: Soybean Oil, C$

New Signals*
None

Renewed Signals**
BUY
-TSX
-Nikkei

SELL
-Natural Gas***
-Soybean Oil
-Canadian Dollar

Existing signals (date of original signal in parentheses)****
BUY
-10-Year Treasury Yield (23-Mar-07)
-S&P 500 (1-Sep-06)
-NASDAQ (30-Mar-07)
-Semiconductor Index, symbol: SOX (30-Mar-07)
-Dow Jones Industrial Average (23-Dec-05)
-Russell 2000 (4-Aug-06)
-Nikkei (6-Feb-04)
-TSX (23-Mar-07)

SELL
-S&P/TSE Canadian Energy iUnits ETF, symbol: XEG.TO (6-Apr-07)
-Oil Service Holders ETF, symbol: OIH (21-Apr-06)
-S&P 400 Midcap (8-Jan-07)
-Soybean Oil (5-May-06)
-US Global Investors Funds US Gold Fund, USERX (2-Feb-07)
-S&P/TSE Canadian Gold iUnits ETF, symbol: XGD.TO (2-Feb-07)
-Gold Bugs Index, HUI (16-Feb-07)
-Canadian Dollar (13-Apr-07)
-U.S. Dollar Index (6-Oct-06)

NEUTRAL
-Crude Oil, Light Sweet (6-Apr-07)***
-Natural Gas (30-Mar-07)***

Notes
* For an explanation of what I do after a new signal, click “How It Works” on the right.

** A “renewed” signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. Click “Glossary” in right-hand column for more details.

*** See my special caveats for Crude Oil and Natural Gas (click “Profit/Loss Results” in the right-hand column).

**** The date in parentheses refers to the day on which the COTs Report was released that gave this signal. For details on how these trades work, including trade delays and portfolio allocation, click on “Profit/Loss Results” in right-hand column.

Please note that my system gave these existing signals months ago in many cases. My profit/loss calculations were based solely on taking trades shortly after the signals were given as indicated in the “Trade delay” column on the “Profit/Loss Results” page—NOT at random moments long after the signals were given. Even small delays in trade execution have resulted in major reductions in past gains. In other words, this list of current signals is only a reference, not a list of trades I would execute right now.

New Market: Natural Gas - Sell... With a Twist

Sell gas. That's what the latest COTs numbers are telling me.

Natural gas flashed a sell on March 30 when large speculators hit an extreme level of bearishness in their futures and options holdings - a level that in the past has often signalled a turn in this market.

This setup is unusual for a couple of reasons. It's the only market in which I found it was actually profitable to trade on the same side as the large specs - as opposed to fading or trading opposite to this group of traders. COTs cognoscenti will know this is unusual because the large specs are usually known as the "dumb money" who are often wrong at market extremes. Curiously, that wasn't the case for natural gas.

Also unusual is that I didn't find any profitable setup for the short side of this trade. As I explain on the "Profit/Loss Results" page (see the link in the right-hand column), this setup is based on buying natural gas on a buy signal and being in cash during a sell signal (not going short) - like my crude oil trade.

This signal was historically best if executed with a three-week delay. In other words, it should have been executed for the open Monday, April 23. After the original signal, there were two renewed sell signals last week and the week before.

New Market: TSX - Buy, Buy, Buy

I've just added another market to my coverage - the S&P/Toronto Stock Exchange Composite Index. Although the TSX isn't covered by the COTs Report, I correlated it with the S&P 500 COTs data to come up with a trading system that has historically beaten the TSX by a wide margin. Click on the "Profit/Loss Results" page for details on this new setup.

The TSX flashed a buy signal on March 23 after commercial traders adopted a bullish posture in S&P 500 futures and options that in the past has usually led to superior gains on the TSX. The signal historically worked best if delayed by two weeks. This means the buy should have taken effect for the open Monday, April 9.

The TSX setup has subsequently continued to flash renewed buy signals each week - for a total of five buy signals so far - because of the continued bullishness of the commercials. (Click "Glossary" and "Profit/Loss Results" for more information on how my system works and my terminology.)

New Markets: Loonie and Greenback

COTs Timing works for currencies, too. I'm expanding my coverage to include the Canadian Dollar and U.S. Dollar Index.

The loonie gave a sell signal on April 13, when the large speculators reached an extreme level of bullishness that in the past has usually given profitable sell signals. This trade has worked best on a four-week delay, meaning the sell should be executed for the open Monday, May 14.

Note that the Canadian dollar sell signal coincides with recent sell signals for crude oil and the Canadian Energy iUnits ETF.

The U.S. Dollar Index has been on a sell since Oct. 2006.

For more details on both setups, check the updated "Profits/Results" page in the right-hand column.

Today's COTs Report: No New Signals

New Signals
None

Renewed Signals*
BUY
-NASDAQ
-Nikkei

SELL
-Crude Oil, Light Sweet**
-S&P/TSE Canadian Energy iUnits ETF, symbol: XEG.TO
-Soybean Oil (sell)

Existing signals (date of original signal in parentheses)***
BUY
-10-Year Treasury Yield (23-Mar-07)
-S&P 500 (1-Sep-06)
-NASDAQ (30-Mar-07)
-Semiconductor Index, symbol: SOX (30-Mar-07)
-Dow Jones Industrial Average (23-Dec-05)
-Russell 2000 (4-Aug-06)
-Nikkei (6-Feb-04)

SELL
-Crude Oil, Light Sweet (6-Apr-07)**
-S&P/TSE Canadian Energy iUnits ETF, symbol: XEG.TO (6-Apr-07)
-Oil Service Holders ETF, symbol: OIH (21-Apr-06)
-S&P 400 Midcap (8-Jan-07)
-Soybean Oil (5-May-06)
-US Global Investors Funds US Gold Fund, USERX (2-Feb-07)
-S&P/TSE Canadian Gold iUnits ETF, symbol: XGD.TO (2-Feb-07)
-Gold Bugs Index, HUI (16-Feb-07)

Notes
* A “renewed” signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. See “Glossary” in right-hand column for more details.

** See footnote for Crude Oil on “Profit/Loss Results” page in right-hand column.

*** The date in parentheses refers to the day on which the COTs Report was released that gave this signal. For details on how these trades work, including trade delays and portfolio allocation, click on “Profit/Loss Results” in right-hand column.

Please note that my system gave these existing signals months ago in many cases. My profit/loss calculations were based solely on taking trades shortly after the signals were given as indicated in the “Trade delay” column on the “Profit/Loss Results” page—NOT at random moments long after the signals were given. Even small delays in trade execution have resulted in major reductions in past gains. In other words, this list of current signals is only a reference, not a list of trades I would execute right now.

New Market: HUI Gold Bugs Index

I'm expanding my coverage to the Gold Bugs Index (symbol HUI). See the details on the "Profit/Loss Results" page in the right-hand column.

This HUI trade has returned a 2,914-percent profit since 1996, compared to 96 percent from buying-and-holding the index itself. That's a 5.51-percent gain on average per week. There were eight winning trades and one losing one as of this date. (The one losing trade is actually the current signal - a sell on the open of trading on Feb. 19 - so it may yet turn out to be a winner.)

It was a risky trade, though. Although all completed trades were eventually winners, there was a huge drawdown to ride out - 42 percent. So I won't be allocating more than a maximum 5 percent to this trade. (See "Portfolio allocation" under "Glossary" in the right-hand column for an explanation of how I calculate this figure.)

New Markets: Russell 2000 and SOX

I'm expanding my market coverage to include the Russell 2000 Index and SOX Semiconductor Index. For full details of both trades, click on "Profit/Loss Results" in the right-hand column.

My system has been long the Russell 2000 since March 2003. It has had a 266-percent return since the first trade signal in 1999 - compared to a 102-percent gain from buying-and-holding the Russell 2000. The average weekly profit was 0.63 percent, with the largest loss being 10 percent.

As for the SOX, I found the COTs data for the NASDAQ gave excellent historical returns for the Semiconductors - an 890-percent profit, compared to 23 percent from buying-and-holding the SOX itself. Just as with the NASDAQ trade (see below), my system gave a buy for the SOX on March 30 - for execution with a one-week delay on the open Monday, April 9.

The average weekly profit was 2.18 percent since the first trade signal in 1999. The largest drawdown for the SOX trade was 24 percent.

No New Signals

Today's COTs numbers didn't generate any new signals in the markets I follow. Not one!

I did get renewed buy signals for the NASDAQ and Nikkei and renewed sells for USO and XEG.TO. (See caveat about USO in my last post as well as details on how I do the XEG.TO trade.)

A "renewed" signal is one in which a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. I haven't studied how profitable it is to follow renewed signals, but from time to time I have done trades based on renewed signals when I didn't have a trade on yet.

Crude Oil: Sell

My apologies for the delay in posting my latest signals for last Friday's COTs numbers. I was on the road for the past few days, but here I am back at home in Montreal after a three-month vacation in beautiful Spanish Wells, the Bahamas. Hey, what's all this white fluffy stuff on the ground? Brrr! Welcome to Montreal!

The latest COTs release produced two new signals: sell USO and sell XEG.TO (S&P/TSE Canadian Energy iUnits). The USO signal was generated after large speculators in crude oil signalled excessive bullishness, by cranking up their net percentage-of-open-interest position to an extreme long position that historically has been a profitable point to sell holdings. The XEG.TO trade is based on extreme bearishness on the part of another group, the commercial traders. I found this group has historically given the best signals for XEG.

The USO signal was historically most profitable if acted upon the following Monday (i.e. today). Unfortunately, I was traveling all day and only just now put in my order to sell my USO position for tomorrow's open. (USO fell 3.19 percent today. Ouch!)

The XEG trade has worked best on a three-week delay. That means I'm going to sell on the open on Monday, April 30.

It's important to note that the USO trade is a little special. It's the only market in which I couldn't find profitable, market-beating signals for both the buy and sell sides. The trade did achieve a 401-percent profit on the buy side since 1995 (easily beating USO's gain of 227 percent) - but lost 17 percent on the sell side. In other words, the trade has worked best following only the buy signals and ignoring the sell signals. So in the USO trade, I'm not actually going to short crude oil.

As for the XEG trade, both the buy and sell sides gave superior profits with a 360-percent total return, compared to 179 percent for buying-and-holding XEG.

In order to determine position size, as before (see posts below), I rely on the largest historic drawdown for each trade and my decision not to risk more than 2 percent of total assets in any single trade. The biggest drawdown was 26 percent on the USO trade and 8 percent on XEG. However, my data for XEG goes back only to 2001, so that may account for the smaller drawdown in XEG. (The 26-percent USO drawdown occurred in 1997.)

All other signals remain the same as last week... *

Buy: NASDAQ, S&P 500, DJIA, Nikkei

Sell: 10-year Treasury, OIH, S&P 400 Midcap, USERX, XGD.TO

* Please note that my system gave these signals many months ago in most cases. My profit/loss calculations were based solely on taking trades immediately after the signals were given or at most several weeks later - NOT at random moments long after the signals were given. In other words, this list of current signals is only a reference, not a list of trades I would execute right now. Now that I'm back from vacation, I hope to expand this blog to include the specs for each trade. I also want to expand my coverage to many more markets.