Easening in the Offening, Say COTs

The world waits as Bernanke & Co. deliberate. I did a quick check back through my Treasuries data from the Commitments of Traders reports to see what I could glean about what might happen at 2 p.m. today. As you may recall, my Fed Funds and 13-week T-Bill trading setups based on the COTs data are on bullish signals, signaling lower short-term interest rates.

The Fed Funds signal, which came with the Sept. 25 COTs report, is especially interesting because it ended a two-year bearish call that coincided nicely with the Fed tightening campaign. In the case of the T-Bill, my setup is based on trading on the same side as the small traders in the 3-month Eurodollar contract. These guys haven't been this bullish since the July 29, 2003, COTs report, near the bottom of the bear market, just before T-Bill rates started to rise. In the very next COTs report, they suddenly flipped to a highly bearish net short position. The change caused my setup for the T-Bill to go from bullish to bearish, and it stayed that way for the most part for the next two years, until Oct. 2005. This is one of my most statistically robust trading setups (see the "Latest Signals" page for more details), so I really enjoy seeing what it has to say. Starting in the July 24 COTs report, it gave a series of 11 bullish signals, and it just gave another one in last Friday's data. I think that means some strong easing measures are in the offing...

So do you think gold and silver are topping? How high can they take it? Is it going to $5,000, as one reader informed me the other day? Is the U.S. dollar kaput? Read my take on the precious metals, copper and U.S. dollar at Kitco.com.

It's Quiet - Too Quiet

Few renewed signals out of today's Commitments of Traders report issued by the Commodity Futures Trading Commission, and no new signals. My existing (mostly) bullish equities signals all still hold, but my COTs U.S. Equities Composite Index has taken another dive. It's fallen to 0.20 from last week's 0.46, the fourth straight drop. It's now well below where it stood during last summer's meltdown, when it bottomed at 0.40. On the other hand, it's still got a bullish tilt (since it's above 0), and most importantly, it remains solidly on its bullish signal. (A -0.8 reading is needed to flip it to bearish.) So the index might just be signaling that the market indigestion we're seeing isn't quite over yet.

Also interesting: my new COTs Agriculture Composite Index, based on my setups for wheat, sugar, corn and soybeans, has risen to a fairly bullish 0.62 from last week's 0.36. (Like with my equities composite index, a "1" here means all four setups just gave a bullish signal for execution on next week's open.) As well, my setup for the 30-year Treasury has given a renewed bullish signal, as has the setup for the 13-week T-Bill, hinting at lower interest rates to come. Listen up, Helicopter Ben. I'm busy working on my Hallowe'en costume during your meeting next week so I'm not available to brief you guys, but you're welcome to visit my "Latest Signals" page for the full details and to check in early next week with more thoughts on Friday's COTs data.

Portfolio Update: Dumped Energy Short

Just updated my portfolio page (see Navigation bar) to reflect my sale of the 200-percent leveraged DUG UltraShort Oil & Gas ProShares ETF just before the close yesterday. DUG has recovered somewhat in recent days, helping to offset losses in my long equity holdings as the market digests its new subprime woes, but I needed to raise some cash for another project. Technically, energy stocks look weak, as this chart of OIH vs. USO shows. But as Stephen Vita often points out at his great AlchemyOfTrading.com blog, citing Paul Tudor Jones: "Losers average losers." So DUG was the one to go.

New Composite Agriculture Setup Bullish

Just posted the results of a new composite indicator I've created for the Goldman Sachs Agricultural Sub-index, based on the Commitments of Traders reports. (See table on "Latest Signals" page.) My COTs Composite Agriculture Index combines my trading setups for corn, soybeans, wheat and sugar. It's got a 16-2 win-loss ratio and scored at a 99-percent confidence level for profitability, which is pretty good, if I say so myself. The setup gave a timely bullish call with the Aug. 14 COTs report and proceeded to yield six straight bullish signals. I'll create a table with all the historic data and post it some time soon. The setup goes long when my Comp Ag Index hits 0.9 or more standard deviations above its 104-week moving average and goes short when it falls to 0.9 standard deviations or more below the average.

One possibility for trading it would be the DBA PowerShares Agriculture ETF, which has pretty good volume even though it's been around less than a year. DBA has a 0.75 correlation with the GSCI Ag Sub-index, has been about half as volatile, but alas has risen only about half as much since the beginning of 2007.

COTs Signal Lower Fed Funds Rate

Some highlights from the latest Commitments of Traders report issued last Friday by the Commodity Futures Trading Commission:

- What will the Fed do at its next meeting on Oct. 30 and 31? Large speculators are signaling a lower Federal Funds rate at some point in the future, according to my trading setup based on the COTs data. The large specs are the large investment firms and hedge funds. Amusingly enough, these geniuses are normally considered the "dumb money" because they're often wrongly positioned at market turns. However, my research has found that's not true in every market. In fact, in the Treasuries, they and the small traders are actually the "smart money," while the commercial traders are the dummkopfs. In the Fed Funds futures and options, the large specs flipped my setup to a bullish signal with the Sept. 25 COTs report and have now given four consecutive bullish signals. This is based on their fast-growing net long position as a percentage of the total open interest, which has now hit a level not seen since Jan. 2006.

- If you can't quite wrap your mind around the fact that the large specs can be the smart money, rest assured: in my S&P 500 setup, the small traders are back to their usual moronic ways as the "dumb money." And they're still super-bearish as of the latest COTs report, with their net short position falling 1.29 standard deviations below its 17-week moving average. This is bearish enough to give me another bullish signal - the fourth in a row for this setup. Which suggests the COTs see the current market difficulties as a mere hiccup.

- But here's another twist for you: In my setup for the SOX Semiconductors, the large specs are back to being the smart money. Don't shoot the messenger: the funny little COTs numbers work in mysterious ways; no doubt this is why so few have been able to make much headway with them after all these decades. What say the NASDAQ 100 large specs? They're mega-bullish. And that means a fourth renewed bullish signal for my SOX setup, which is based on the NASDAQ 100 COTs data.

- Similarly, in my natural gas setup, the large specs also turn out to be the smart money. And they're still highly bearish, giving a renewed bearish signal in the last report. Sorry, gas bulls.

- For my read on the metals, check out my report this week at Kitco.com. Good luck this week, and see you back here Friday.

Energy Traders Avoid Scrutiny: GAO

Who oversees the post-Enron energy derivatives market? Who knows! Debate is heating up again about the Commodity Futures Trading Commission's role in overseeing energy trading in the wake of the Amaranth hedge-fund blow-up. The latest to weigh in is the Government Accounting Office, with a report calling for changes in how CFTC operates and expanded powers for the agency. See the "Futures & Options News" page to read the report and several news stories about the debate.

Portfolio Update: Reduced Long Equity Position A Tad

Just updated my portfolio page to reflect my sale of a tech fund based on my recent bearish signal for the NASDAQ 100. This new signal, based on fading the large speculators when their futures and options net position hits extremes of bullishness and bearishness, was based on the Commitments of Traders report issued Oct. 12. My NASDAQ 100 setup works best with a one-week trade delay, so I executed the signal this past Monday. Check the "Latest Signals" page for more details on this setup, and "How It Works" to learn more about all this COTs stuff and my system based on these interesting government reports.

COTs Timer in SFO Mag

Check out the current issue of Stocks, Futures and Options Magazine for a story I did on the Commitments of Traders reports and various ways of using them in your trading and investing. Also in SFO's November issue: this interview with Sharon Brown-Hruska, former chair of the U.S. Commodity Futures Trading Commission, which publishes the weekly COTs reports. Her topics include the CFTC's recent jurisdictional battles with FERC, which I've also chronicled on my COTs news page.

New Setup Down on Pound

Just posted results and the latest signal for my newest trading setup based on the Commitments of Traders reports for the British pound. The setup has been on a bearish signal since May 2006. It's based on trading with the commercial traders when their net futures and options position hits certain extremes of bullishness and bearishness as reported by the U.S. Commodity Futures Trading Commission in its free weekly reports. Read all the juicy details in the table on the "Latest Signals & Results" page (see Navigation bar).

COTs Still Bullish, Mostly

What a miserable day in the markets. Ghosts of '87 seem to have folks spooked. What say the wise little numbers of the Commitments of Traders report issued today at 3:30 EST by the U.S. Commodity Futures Trading Commission? Ah, yes. Calm and soothing, as usual.

The latest report strikes a fairly reassuring tone for bulls, with renewed bullish signals for the S&P 500 and Semiconductors and nary a bearish signal in sight for equities. Last week's new bearish signal for the NASDAQ Composite Index is the only downer note among my equity setups. (That setup works best with a trade delay of one-week, meaning execution on next week's open of trading.) But somewhat troubling: My COTs U.S. Equity Composite Indicator, based on four of my equity setups, has declined again to 0.46 from last week's 0.58, the third straight decline. That's just a hair above where it stood as of the Sept. 11 COTs report (0.42) and the July 24 report (0.40) during the "Crash of '07." However, this indicator is still on a bullish signal. It's also far from the "-1" reading that would mean a bearish signal was just given on average by all four setups, for execution on next week's open.

See my "Latest Signals" page in the Navigation bar for more of my latest signals, and click "How It Works" for, you guessed it, how all this COTs stuff works. Check you back here early next week for a more detailed report on today's COTs data. Hope you fared well this week and have a relaxing weekend.

Blog Updates, New Setup for Heating Oil Bearish

Just updated the three tables on my "Latest Signals & Results" page (see Navigation bar). The main table will now include signals for my latest setup: heating oil. This one is based on trading opposite to the small traders in heating oil futures and options when they hit extremes of bullishess and bearishness. It's based exclusively on the fascinating free government data provided in the weekly Commitments of Traders reports by the U.S. Commodity Futures Trading Commission. The setup, which boasts some pretty good past results and statistical confidence levels, has been bearish since last March, a bit of a dog of a call, unfortunately, but the setup nonetheless looks pretty interesting.

I've also updated my tables for my COTs U.S. Composite Equity Indicator - based on four of my equity setups, also derived from the COTs data - and my gold setup's signals and running results. See you back here later with this afternoon's COTs numbers.

Drop in Clicks Signalled Market Woes?

Happy Birthday to us, COTs Timer. Last Saturday marked five months in full operation mode for this blog. I've had over 17,000 absolute unique visitors and 75,000 page views from 112 countries (top five: the U.S., Canada, Australia, the UK and Italy) and 2,796 cities (top five: Vancouver, Toronto, Montreal, New York and LA). Thanks for all your support and input!

What's interesting about all this is a curious phenomenon I've heard about from other financial bloggers: visits (and Google Ad clicks) seem to be correlated with market ups and downs. This was especially notable during the summer's market correction. (I've also noticed a drop-off in messages posted to a market list I'm on when things go sour.) I've just done a study of this, and sure enough, there's quite a fascinating correlation. Page impressions have a 0.49 correlation with the S&P 500 (same day open price), while Ad earnings have a 0.24 correlation. So it would appear people are not only less willing to investigate the resources represented by the ads when the market goes down; they also tend to explore less financially online, period. People are simply cocooning.

But what's far more interesting is the click data also seems to have some predictive value. Page impressions have a 0.52 correlation with the S&P 500 open price one trading day later, and the correlation keeps rising to peak at 0.63 for eight trading days out. Not bad! In other words, ups and downs in click numbers are often reflected in market prices eight days later on average.

Word of warning: My number of page impressions has slowly dropped since an interim peak on Oct. 9, falling by 60 percent as of yesterday. This has of course roughly coincided with the recent market selloff. I'll keep you posted about significant changes in this rather interesting indicator, including when (or if!) it starts heading back up.

Small Traders Mega-Bearish on S&P 500

I'm back with some highlights from the latest Commitments of Traders report issued Oct. 12 by the U.S. Commodity Futures Trading Commission:

- The "dumb money" small traders seem to be expecting some kind of crash again. What else is new. In S&P 500 futures and options, they now have a larger net short position as a percentage of the open interest than at any time since Aug. 1995. With their position now standing at two standard deviations below its 17-week moving average, I get another bullish signal - the third in a row - for my S&P 500 setup, which relies on fading these unfortunately not very market-savvy individuals. Smarten up, folks. You're getting ripped off.

- Meanwhile, the "dumb money" large speculators are going mental in NASDAQ 100 futures and options, flipping to a large net long position and, this week, hitting that magic point that switches my setup from bullish to bearish. Just a few weeks ago, in late August and early September, as markets were shooting up, these guys were super-gloomy. Now, they've suddenly become hugely pumped on the markets. Oh-oh.

- Generally, though, a fairly bullish tone emerges from the last COTs report, with renewed bullish signals in the Semiconductors, NASDAQ composite index, Dow Jones industrials and Nikkei. Likewise, as mentioned Friday, my COTs U.S. Composite Equity Indicator gives overall benediction to the markets with a fairly bullish 0.58 reading, though that's down a fair bit from last week's 0.98. (A "1" means the four equity setups that make up this indicator are all on average giving a bullish signal to be executed on next week's open.)

- Astute readers will notice that my setups for the Semiconductors and NASDAQ 100 seem to contradict each other; the former trades with the large specs while the latter fades them. Oddly enough, they both have proven historically profitable and statistically viable in my testing. That's because they work on very different horizons as reflected in the values I use for the moving averages and standard deviations.

- For my take on the precious metals, check my piece at Kitco.com. Good luck this week.

NASDAQ 100 Goes Bearish

My trading setup for the NASDAQ 100 has flipped to bearish. This is because the "dumb money" large speculators have suddenly gone from being heavily net short in their futures and options positions to a historically extreme net long position as a percentage of the total interest, according to today's data from the U.S. Commodity Futures Trading Commission.

The large specs, whom I fade in my setup for the NASDAQ 100, have hit a specific level of bullishness that has signaled a good chance of a market turn, according to past data. The new signal brings to an end this setup's bullish run since the March 27 COTs report (executed on April 9 with an opening price of 1,816.99; today's close was 2,177.99).

The new signal and much more are all updated on the table at my "Latest Signals & Results" page in the Navigation bar, which shows all my signals from this afternoon's Commitments of Traders report. This table also gives important details about the NASDAQ 100 setup, including risk data and the largest past drawdown. The setup works best with a one-week trade delay, meaning I will execute the trade for the open on Monday, Oct. 22. See my "How It Works" page to learn what I do after a new signal.

In other news, my U.S. Composite Indicator, which is based on four of my COTs-based equity trading setups, has declined again to a reading of 0.58 from last week's 0.98. (For newbies, a "1" means all four setups are on average giving a bullish signal for execution on the open of next week's trading, while a "-1" means a bearish signal across the board.) The falling number could signal some coming market volatility, although it still maintains a fairly bullish tilt. Hope you have a good weekend and fare well next week. Drop in again early next week to see other highlights and thoughts from today's COTs report.

New Trading Setup: COTs Frown on Sugar

Just updated my table on the "Latest Signals" page with results from my new trading setup for sugar. The setup has just flipped to cash as of the Sept. 25 COTs report. Sugar, alas, is a hard one to trade, it seems. No wonder, too. Prices have been all over the map, starting above $14 in 1995, dropping to $5, then careening back and forth like a drunk driver for a while to arrive at $12 by the start of 2007. My sugar setup works by trading on the same side as the commercial traders when their net futures and options position hits specific historic extremes of bullishness and bearishness. The setup worked best following only the bullish signals with a long position and going to cash on a bearish signal. While the bearish signals were cumulatively profitable since 1995, when the data starts, they produced super-volatile results, including one drawdown of 79 percent. The setup proved to be slightly more statistically robust using only the bullish signals (though still not highly so), while being invested only 57 percent of the time.

Like all my setups, the sugar setup is based solely on the Commitments of Traders reports issued for free weekly by the U.S. Commodity Futures Trading Commission. Some analysts said it couldn't be done, suggesting this valuable government data shouldn't be relied on for trading without the use of other indicators. Not true. Most markets I've looked at have yielded setups that historically beat the underlying markets and stood up well in terms of their profitability confidence intervals.

Falling Interest Rates to Lift Markets (Or Spell Trouble)?

Interesting stuff in the latest Commitments of Traders report issued by the U.S. Commodity Futures Trading Commission. Generally, a sunny forecast for you market bulls, including falling interest rates and rising equities. Here are some highlights from my trading setups based on this fascinating, free government data:

- Will the Fed lower interest rates and if so by how much? My setup for the 30-day Fed Funds contract has just flipped to bullish for the contract (meaning bearish for the rate), after over two years of being bearish. The COTs report issued last Friday, Oct. 5, gave me a second straight bullish signal. This setup is based on trading the same side as the large speculators, who have built a historically extreme bullish net long position in this market.

- Similar news from my setup for the 13-week Treasury Bill. This one, based on trading on the same side as the small traders, is now giving its 11th straight bullish signal (meaning it's calling for the T-Bill rate to fall). Falling interest rates should be good for equities, but they could also signal economic problems, which would ultimately be not so good.

- Large specs are super-bearish on natural gas. My setup for this market trades on the same side as the large speculators, and they've given a slew of 24 bearish signals in the past 28 weeks.

- A cohort of renewed bullish signals for equities - namely, the NASDAQ composite index, S&P 500, Semiconductors, Russell 2000, TSX, Nikkei and my U.S. Composite Equity Indicator, which is based on four of my U.S. equity setups.

Portfolio Update

Just updated my portfolio page (see link in Navigation bar) to reflect my trade today based on my Nikkei bullish signal from the Aug. 28 Commitments of Traders report. Devotees of this space will recall that trade setup has a five-week trade delay, so execution was for the open of trading this week. More details on that setup are available at my "Latest Signals" page. The setup fades the large speculators when they hit extremes in their net futures and options position as a percentage of the total open interest as reported by the U.S. Commodity Futures Trading Commission.

New Setup: COTs Like the Taste of Wheat

Just posted results and signals for my latest trading setup based on the Commitments of Traders reports. This one is for wheat. Check the "Latest Signals" page for the details. It's just flipped bullish with the Sept. 11, 2007, COTs report and, as of last Friday's data, has now given three straight renewed bullish signals. This is based on trading with the commercial traders - the smart money insiders in most markets, though not all! - when they hit specific extremes of bullishness and bearishness in their net futures and options positions as a percentage of the total open interest.

New Setup: Soybeans Bullish

Just posted results and the latest signal for my newest trading setup for soybeans. It's based on fading the small traders in soybeans futures and options, as reported in the Commitments of Traders reports issued weekly for free by the U.S. Commodity Futures Trading Commission. Check the "Latest Signals & Results" link.

COTs Content With Market Rise

Just updated my "Latest Signals" page with this afternoon's data from the lovely and talented Commitments of Traders reports. A nice array of renewed bullish signals for equities confirms the market's optimistic tilt of late. My U.S. Composite Equity Indicator, based on four of my trading setups built around the COTs reports, has given a second straight bullish signal, though it's fallen from a super-bullish 1.22 to a merely quite bullish 0.98. For those of you not in the know, a "1" reading or higher means all four setups have just given a bullish signal for execution on the open of next week's trading.

I'll be back here early next week with more details on this latest data from the Commodity Futures Trading Commission, which reports on trillions in futures and options holdings in 100-odd markets.

Note to Self: My Nikkei bullish signal from the Aug. 28 COTs report calls for being executed on the open of trading next week. (This is based on the setup's five-week trade delay. For more details on this setup and how all this works, check the "Latest Signals" and "How It Works" links.) Hope you did well this week and have a great weekend.

Corn: New Setup is Bullish

I've just posted details of a new trading setup for corn that I've developed based on the Commitments of Traders reports. See my "Latest Signals" page in the Navigation bar. The setup is based on fading - trading opposite to - the small traders in corn futures and options when they hit specific historic extremes in their net position as a percentage of the total open interest. The setup flipped to bullish in the COTs report dated June 26 and subsequently saw 12 straight bullish signals, matching the only other previous such bullish run back in 1998.

Federal Funds Setup Flips to Bullish: COTs Say Rate Will Fall After 2-Yr Bearish Signal

I've just posted details of a new trading setup I developed based on the Commitments of Traders report for the 30-day Federal Funds. The timing couldn't have been better. After a two-year bearish signal (meaning the setup called for the Fed Funds rate to rise), it has just flipped to bullish in the last COTs report.

(The signal is for the Fed Funds contract, so a bullish signal means the Fed Funds rate is expected to fall. NOTE: I posted incorrect information about this setup's latest signal here yesterday that wasn't quite up to date. I just realized my error and wanted to correct this post as soon as possible.)

I think the results for this new setup are quite interesting. You can check them out at the "Latest Signals & Results" page in the Navigation bar. The setup's bearish signal accurately called the rise in the Fed Funds rate from 3.01 percent in June 2005. In fact, watching this baby correctly call the rate's ups and downs amid the dot-com bust and market recovery is a thing of beauty. I hope to share it with you soon with a table showing all the signals.

The setup is based on trading on the same side as the large speculators when they hit specific historic extremes in their net futures and options position as a percentage of the total open interest. That's right, the same side. Ordinarily, we consider the large specs to be the "dumb money" of the markets, but I've found that's not always the case, especially not in any of the Treasury markets.

Also: Just updated the results table for my gold setup with the last trade completed this Monday. (Click "Latest Signals.")

Record Nikkei Position: Mega-Bullish

Some dramatic moves in the last Commitments of Traders report. Here are some highlights:

- The "dumb money" large speculators in Nikkei futures and options have dramatically increased their net short position, giving me a second straight bullish signal. In fact, they've never held such a large net short position as a percentage of the total interest since the data began in 1995. The extreme positioning coincides with my new bullish signal from the Aug. 28 COTs report. My Nikkei trading setup based on the COTs data has a five-week trade delay, and I will execute it for the open of trading next week. (Click "How It Works" and "Latest Signals" in the Navigation bar for more info.)

- S&P 500 small traders suddenly reversed course from a fairly bullish net long position to a near-record of bearishness - 3.24 standard deviations below the 17-week moving average. This flipped my signal for this setup from bearish to bullish. That's based on fading the small traders when they hit extremes in their net positioning.

- My setup for the 13-week T-Bill gave its 10th consecutive bullish signal. That's based on trading on the same side as the small traders in 3-Month Eurodollars. The run started with the July 24 COTs report, at the beginning of the Credit Crunch of 2007.

Blog Update: My Portfolio Page

Just updated my portfolio page to reflect trades this morning based on Friday's bullish signal for the S&P 500. Note that I haven't dumped my XGD Canadian Gold iUnits or SLV iShares Silver Trust positions, despite the new bearish signals for gold and gold stocks.

Those bearish signals were based on the extreme bearishness among commercial traders in gold futures and options. My setups for XGD and silver, on the other hand, are based on fading the small traders in gold and silver. The gold small traders are at a neutral level, while silver small traders are actually quite bearish. So my existing signals in those two setups still hold. Best of luck today.