Who's Smarter—Bernanke or the COTs? Plus: Lots to Say on the Buck, Silver and Gold, the Treasuries, Equities and Agriculture

Some highlights from last Friday's Commitments of Traders report:

- In the 30-year Treasury, commercial traders flipped from a net long to a net short position as a percentage of the total open interest. They haven't been this bearish on the bond since early 2005 (meaning they think the bond's yield will rise). Since the commercial traders are the "dumb money" when it comes to guessing the direction of Treasury yields, this is actually a bullish sign for the bond.

So who is the smart money for the bond then? The large speculators. And in bond futures and options, they've just gotten super-bullish, flipping to a net long position for the first time in nearly two years. The combination of these two moves gives my trading setup for the 30-year Treasury a renewed bullish signal—the third such signal in a row in this setup (meaning the data is saying the yield is likely to fall). Get smart, Bernanke. You can't fight the COTs. Rates look like they're still headed down, as this note today from Montreal's BCA Research says, too.

- The "smart money" small traders in the 10-year Treasury have also suddenly gotten majorly bullish, sharply taking in their net short position and giving me a renewed bullish signal.

- In equities, the COTs are still leaning bullish. The wrong-way S&P 500 small traders, whom I fade in my setup for this market, hit a 12-year extreme of bearishness with their huge net short position in mid-October. They've reduced that position a tad in the latest COTs report, but only slightly so, leading me to think the market won't fall much further.

- In the precious metals, I think "yikes!" sums things up nicely. What carnage! As I mention in my report on Kitco, sharp selloffs like Monday's are one of the reasons it’s so hard to trade many commodities—the “ulcer factor” is just too high. Here’s a typical scenario: After weeks of happy upside drawing in lots of latecomer small investors to the party, a spot of bad news sparks a vicious run, and the little guy jumps ship, feeling burned. Then, the market recovers and rises again! In fact, losing money in precious metals early in my trading life was one of the best tuition fees I've paid for learning how to trade. (Here's a free tip for you: don't trade off oscillators!) So what does the latest COTs report say about the metals?

The data issued by the Commodity Futures Trading Commission on Nov. 9 shows the small traders in silver futures and options hitting a historically bearish extreme in their net position as a percentage of the total open interest. The “dumb money” little guys have suddenly reduced their net long position to the lowest it’s been since Nov. 2005. Back then, silver responded by exploding out of an 18-month trading range, nearly doubling in price over the ensuing half-year.

The latest positioning of the wrong-way crowd, whom I trade opposite to in my setup for silver, has given me a renewed bullish signal for silver. This means I’m staying long iShares Silver (SLV).

In my gold setups, I didn’t get any new or renewed signals from last Friday’s data. This means all my existing signals still hold: bearish for gold itself, the HUI Gold Bugs Index and the USERX Gold Fund; and bullish for XGD Canadian Gold iUnits. (Personal disclosure: I am long XGD.) In fact, the small traders in gold futures and options are so bearish right now that they are a hair away from giving a bullish renewed signal for my XGD setup. So this suggests Monday's selloff may just have been a temporary pause. (I should point out, however, that trading off the COTs involves lots of volatility, especially in riskier markets like commodities. So there’s no way to know for sure what the markets will really do, and my setups could very well be wrong!)

My setups for platinum (bullish), copper (bearish) and the U.S. dollar index (bearish) are also unchanged. In fact, the futures data for the U.S. dollar index seems to indicate the greenback may face continued downward pressure, as the “smart money” commercial traders continue to reduce their net long position as a percentage of the total open interest—their seventh straight such reduction since their position peaked in the Sept. 18 COTs report. Now, the commercials have a decidedly bearish tilt when compared to recent data—although I should note they’re still nowhere near registering a renewed bearish signal in my setup for the U.S. dollar index.

- My setup for wheat shows the commercials again giving a renewed bullish signal—the ninth signal in a row. Their extreme net positioning started in mid-September, late in the recent run-up in wheat prices, and has continued through the recent wheat selloff, suggesting they believe there are higher prices to come.

- On a slightly sour note, however, my COTs Agriculture Composite Index—which gives signals for the DBA PowerShares Agriculture Fund and is based on my setups for wheat, soybeans, corn and sugar—has turned down to 0.25 from last week's 0.57. The dropoff is due almost entirely to an increase in bullish sentiment among the "dumb money" large spec crowd in soybean futures and options. The index's fall could suggest there may be a spot of trouble for DBA, but it is still on a bullish signal and maintains a slightly bullish tilt (it's above 0)—so not really a reason for panic. Good luck this week, and see you back here Friday.