What a week in the markets - phew! Right up into the close with the wild action. In this week's Commitments of Traders data, the first new bearish signal in a little while in one of the major equity markets - the S&P 500. (Check the explanatory links above for details on how my system trades this. For one thing, there's no trade delay in the S&P 500 trading setup, meaning execution on the next weekly open.)
Meanwhile, renewed bullish signals in some markets, while renewed bearish signals in others. Quite the motley bunch, in fact!
What to make of all this? I'll ponder that over the weekend and get back to you with some deep thoughts early next week. Meanwhile, best wishes for a happy and safe Canada Day to Canadian readers, and happy 4th to American readers.
New Signals*
BULLISH
None
BEARISH
-S&P 500
Renewed Signals**
BULLISH
-10-Year Treasury Yield
-NASDAQ-100
-Dow Jones Industrial Average
-Russell 2000
-Gold
-US Global Investors Funds US Gold Fund, USERX
-S&P/TSE Canadian Gold iUnits ETF, XGD.TO
-Gold Bugs Index, HUI
BEARISH
-Soybean Oil
-Natural Gas***
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO
-Oil Service Holders, OIH
-Semiconductor Index, SOX
-Nikkei Average
Existing signals (date of original signal in parentheses)****
BULLISH
-30-Year Treasury Yield (3-Jan-07)
-10-Year Treasury Yield (17-Apr-07)
-S&P 500 (20-Mar-07)
-S&P/TSX Composite (15-Aug-06)
-NASDAQ 100 (27-Mar-07)
-Dow Jones Industrial Average (20-Mar-07)
-Russell 2000 (1-Aug-06)
-Gold (29-May-07)
-US Global Investors Funds US Gold Fund, USERX (12-Jun-07)
-S&P/TSE Canadian Gold iUnits ETF, XGD.TO (22-May-07)
-Gold Bugs Index, HUI (29-May-07)
BEARISH
-13-Week Treasury Bill (27-Feb-07)
-S&P/TSE Canadian Energy iUnits ETF, XEG.TO (3-Apr-07)
-Oil Service Holders, OIH (3-Apr-07)
-NASDAQ Composite (26-Dec-06)
-Semiconductor Index, SOX (20-Mar-07)
-S&P 400 Mid Cap (3-Jan-07)
-Nikkei Average (19-Dec-06)
-Soybean Oil (11-Nov-06)
-Silver (1-May-07)
-Copper (10-Apr-07)
-Canadian Dollar (10-Apr-07)
-U.S. Dollar Index (3-Oct-06)
NEUTRAL
-Crude Oil, Light Sweet (3-Apr-07)***
-Natural Gas (27-Mar-07)***
Notes
* For an explanation of what I do after a new signal, click “How It Works” above.
** A “renewed” signal is when a market is already on a bullish or bearish signal, and traders again register an extreme net trading position in the same direction. I normally ignore renewed signals unless I don't already have a trade on in this market. I haven't studied the profitability of trading on renewed signals.
*** See my special caveats for my Crude Oil and Natural Gas setups (click “The Trading Setups” above and check the table footnotes).
**** The date in parentheses is the date of the COTs report that gave this signal - not the date I would have executed the trade (which can be up to five weeks later). The existing signals are often several months old and are listed here as references, not trading recommendations.
11 comments:
Alex, sorry if this is a stupid question but why is the signal for S&P 500 bearish? Looking at the current COT report, it looks to me like the commercial traders are still pretty long (at least from a historical point of view). Please explain. If the explanation is already somewhere on your site, please point me in the right direction. Thanks, btw, you're doing a great job.
I've been following the COT reports for years and I'm wondering how you can get a bearish signal from this weeks report when the Commercials have one of the largest long positions in years. The combined large and e-mini contracts of the S&P, Nasdaq, Dow and Russell are net long by over 18 billion dollars. They haven't even had a long signal until recently in years much less one of that magnitude.
Hi,
Thanks for your message. Please take a look at the explanatory links in the column to the right, including the "Profit/Loss Results" and "How This System is Different" pages. This setup doesn't follow the commercial traders, but rather fades the small specs.
Following the commercial traders isn't necessarily the most consistently profitable strategy in many markets - contrary to the popular notions out there about the COTs data.
Regards,
Alex
Hi Gary,
Thanks for your comment. See my response to the previous message.
Regards,
Alex
Alex,
I would be careful of data mining the results you are looking for. For me to trade a system it not only has to test with a positive expectancy but it has to make sense to me. It makes sense to follow the commercials. They control by far most of the money in the markets. I want to be on the same side of the fence as they are. When they get to extremes it is normally a good idea to pay attention since their money controls the markets. It doesn't make any sense to me to fade the little guys their money amounts to nothing in the markets. To fade them just because they are dumb money tells me nothing about what the big money is doing.
Hi Gary,
Thanks for your follow-up. Good point about data mining. Check back to read my recent posts on this score. I've just done a major exercize of system validation to address this issue, and the results are in the table on the "Profit/Loss Results" page.
I embarked on this work of testing the COTs data for this very reason. Rather than relying on the popular notions of how to read the COTs reports, I wanted to study the data in relation to cash prices and find out what verifiable patterns it can reveal to us.
The fact is the commercials turn out to be the best traders to watch in only about one-third of the markets I've studied.
However, if you have better validated results from another model, I'd love to see the details. I'm always trying to improve my system and am very open to other ideas.
Regards,
Alex
Alex, thanks for the explanation. I presume it does not happen very often that the commercial traders and the small specs are long at the same time. Or perhaps it does, but in any case, I wonder (in terms of probability) how the markets fair during those times. Also, do the small traders typically go long before the commercials start shorting? If so, maybe we can tell something about how long we might have before the commercials are likely to start shorting. Any thoughts?
Great job with the blog Alex. I've been trying to make some sense of the COT since hearing about it thru "Gary" on another blog. You've been very informative and helpful in that regard, and continue to be so.
Thanks,
John
Hi,
You raise some good questions. I recently tried optimizing a couple of setups based on combining signals of two groups of traders, but the problem with that is it introduces half a dozen new constraints (or trading rules) into the system.
Thus, it's confidence level for future profitability may be undermined if there aren't enough trades, which is sometimes the case in any COTs-based system because it is weekly and data goes back only to 1995 for the combined futures-and-options figures.
The only such setup I maintained is the one for the 30-year Treasury because there were enough trades to maintain a high level of statistical validity.
Regards,
Alex
Alex,
I sent you an e-mail regarding the spreadshhet but I havn't recieved a reply. Are you stopped sending them out?
Not at all. Just sent out a couple more this morning. Please give me a chance to respond to the requests. I'm a little backlogged here.
Thanks,
Alex
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