T-Bill Most Bullish in Four Years; Plus: Bullion Bull no Bull? And Wheat Drives Ag Rebound

When was the last time the COTs data was this bullish for the 13-week Treasury Bill? The answer: way back in July 2003. Remember those days? That was precisely the bottom for the T-Bill yield, as it hit below the amazing how-low-can-you-go level of 0.8 percent amid the post-dot-com deflation panic and the Iraq war.

That was also the last time the "smart money" small traders in the 3-month Eurodollar contract had a net position above zero as a percentage of the total open interest. My trading setup for the T-Bill trades on the same side as the small Eurodollar traders. They've been on a bullish signal since Feb. 2007 (meaning they're betting the T-Bill yield will fall). Hey, ain't that when the yield peaked? Nice. You might have read some nonsense about how the Fed is reluctant to lower rates at its next meeting. Well, the latest COTs report issued last Friday gave me a renewed bullish signal, meaning still more downward pressure for the yield. We'll see.

Now, I'd never pretend the COTs data gets it right all the time. Just look at the win/loss results on the table linked to my "Latest Signals" page. In fact, no trading system is right all the time. If you know of one, I'd love to see it. The goal of my system is high-probability trades that catch the long moves. As Jesse Livermore said in the classic Reminiscences of a Stock Operator: “The big money was not in the individual fluctuations but in the main movements… I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!” It was true in the '20s, and I think it's still true now. In fact, I'm going to put that quote up here somewhere. I always find it fascinating how this free government data can often help us foresee market moves.

Other Treasuries data confirms the tendency toward lower rates across the yield curve. All my Treasuries setups - from the 30-day Fed Funds contract out to the 30-year bond - are bullish. (See the table on the "Latest Signals" page for the exact dates these signals started and the results for these setups.) My 10-year Treasury setup has given its second straight renewed bullish signal, while my 30-year bond setup has now given its fourth consecutive renewed bullish signal. See my note from last week for more on the bullishness of my 10- and 30-year setups. My guess is all this is bullish for equities and the reflationary trade - e.g., precious metals - but I think it also portends major economic troubles ahead. Will reflation crash on the shores of recession? Your guess is as good as mine.

Other highlights from the latest COTs report:

- My COTs Agriculture Composite Index has rebounded smartly after last week's big dip. It now stands at 0.52, up from the previous week's 0.25. One reason: the commercial traders in wheat futures and options, already on a bullish signal, have again bumped up their net long position as a percentage of the total open interest. They've also given a 10th straight bullish signal.

- The latest COTs report suggests the recent explosive rise in precious metals prices may not yet be at an end. The small traders in gold and silver continue to be resolutely gloomy about bullion despite the ramp-up in prices, as they've been since the summer. The latest COTs report shows the gold small traders have reduced their net long position to the smallest it’s been since late June. That was just before the price of gold exploded from below $640 an ounce to peak above $830 in early November. Bullion prices have since retreated, but my guess right now is the COTs data may be trying to tell us this is a temporary spot of weakness, not a new downtrend for precious metals.

I use a setup based on the gold small traders to trade the Canadian Gold iUnits ETF (symbol XGD, trading in Toronto). This setup works by trading opposite to the small traders when their net position hits specific bullish or bearish extremes. This setup flipped to bullish back in May, and the latest COTs report gave me a renewed bullish signal for XGD.

My setup for silver works by trading opposite to the silver small traders. It’s been long since July, when the silver traders hit a bearish extreme in their net position. (Disclosure: I’m long both XGD and iShares Silver Trust, SLV.)

The COTs data for the U.S. dollar index supports this generally bullish view for the precious metals. The latest COTs report shows the “smart money” commercial traders—the folks with the best market information in most, though not all, markets—again reducing their net long position as a percentage of the total open interest, their seventh such decrease in a row. Their positioning is now decidedly bearish in comparison with the recent historic data.

However, I should point out that my trading setups for gold itself, the HUI Gold Bugs Index and USERX Gold Fund all flipped to bearish in late September, and they remain on that bearish signal as of the latest COTs report. These three setups are based on trading on the same side as the commercials. The latest COTs report shows them again reducing their net long position, and now they stand at an entirely neutral level in comparison with past data.

So they remain far from flipping back to a bullish signal. Sorry, gold bugs! These bearish signals did presage the current bout of weakness for the sector, but perhaps the overall COTs gold data is telling us the recent selloff is but a pause, not an end to the precious-metals bull.