New Story: "Bullish Signal for Gold Stocks"

Apologies for not filing my promised post here with more details on last Friday's Commitments of Traders report. I've been occupied with refining my trading setups, and time just slipped away. Sorry! For your reading entertainment, I thought I'd at least include a link to my report for this week at Kitco.com on the bullion scene and the greenback. It's titled "Bullish Signal for Gold Stocks." Click here to check that out. I'll be back here Friday with my usual weekly signals, if not sooner with more announcements about revised trading setups based on the COTs data. Good luck this week!

New Silver Setup: Still Long

At first, the numbers looked impossible. But more checking showed they're not. With the help of reader Dave, a computer programming whiz and fellow COTs enthusiast, I'm pleased to report the results of an astonishing new trading setup for silver based on the Commitments of Traders data that's issued by the Commodity Futures Trading Commission. These blessed folks release free weekly data on trading positions in 100-odd markets, which I found a way to trade off. The results for the new silver setup are on my Latest Signals page. The setup trades on the same side as the "smart money" commercial traders when they hit specific points of bullishness and bearishness in their futures and options net position as a percentage of the total open interest. The setup, which achieved a 99.99998-percent confidence interval for profitability on a Student's t-test, has been long since May 2007. (Disclosure: I've been long iShares Silver Trust, symbol SLV, since my previous silver setup flipped to bullish last summer.)

What's For Lunch? Us?

We're not out of the woods yet, my friends. Are we bear lunch? I dunno. But I can tell you this: this afternoon's Commitments of Traders report ain't very promising for you bulls out there. See my Latest Signals page for all the grim details. My COTs U.S. Composite Equity Index is flat from last week: -0.9964 this week, up a teeny-tiny baby-step from -1.0001. This is based on the readings from my trading setups built on the COTs data for the NASDAQ 100, S&P 500, Dow Jones industrials and Russell 2000. A -1 reading for the index means all four setups have just flashed a sell for execution on next week's open of trading. So even though I'm not convinced we're bear catnip yet, the market might not be ready to bounce, either. (For you newbies, see the explanatory links on the right for more info on how all this works.)

My COTs Agriculture Composite Index (based on my setups for sugar, wheat, soybeans and corn) is also a real downer these days, but bouncing a little better. It's up to a -1.62 from last week's near-record -2.13. Don't know how heartening that is, but hey, it is what it is.

But not all commodities are busted up. My HUI Gold Bugs Index setup is giving a second renewed bullish call, based on the "dumb money" small traders sharply cutting their net long position as a percentage of the total open interest. In silver, the large speculators (also the dumb money) are building up their net long position to somewhat excessively bullish levels, but so far so good; they haven't reached the historic extremes I'm looking for in order to flip me to bearish silver.

The other interesting area is crude oil. The wrong-way large specs have dramatically reduced their net long futures and options position in the past two weeks as crude has corrected. It's given me another renewed bullish signal for crude, one of the better setups I've seen so far in the COTs data, if the past results on that table mean anything.

Of course, it's impossible to say how all these setups will perform in future. We can only guess based on various statistical measures of their robustness. That's really true for all trading systems, whether mechanical or discretionary. Incidentally, if you read something about historic market patterns but there's no mention of backtesting and tests for robustness at all, be skeptical. And that covers a lot of pretty well-known analysts out there!

Speaking of all this, I plan to include some new measures on that table soon that will let you compare them with other kinds of setups being traded out there. I have to say the COTs stand up really well. See you back here early next week with some more details on today's report. Have a good weekend!

New Leveraged Commodity ETFs

I'm not ordinarily one to boost a financial-services company, but I thought some readers might be interested to know that Toronto-based Horizons BetaPro has just vastly expanded its list of leveraged commodity ETFs - the only ones available at this point worldwide. Trading out of Toronto, they target 200-percent returns (or the inverse of that for their short funds) for gold bullion, gold stocks, base-metal mining stocks, crude oil and natural gas. (The funds trade in Canadian dollars but use currency hedging to target the U.S.-dollar returns for those commodities.) The company is also launching another couple of ETFs (both long and short) for the agriculture sector in two weeks (specifically, a basket of soybeans, corn and wheat). For more info check the company's site here. For a great regularly updated list of U.S. and Canadian ETFs, including volume info, check Don Vialoux's DVTechTalk.com site. (Incidentally, they didn't give me anything to post this! Just gives me another way to trade some of these COTs signals. Muchas gracias, amigos!)

Stories: Bullion Highs, Market Woes

You can check out my take on precious metals and the woe-begotten greenback in my piece for Kitco, titled "Bullion Boom Still Has Legs" (click here). I've also just posted on my Financial Stories webpage a story I did in Monday's Montreal Gazette on the current market craziness, titled "Riding Out the Market Mayhem." (Click the link in the Navigation bar on the right.)

Bernanke Move May Not be Enough

Well, that was unexpected. Just when you thought the markets couldn't act any nuttier, Bernanke turns around and lops off 0.75 points. In contrast, Friday's Commitments of Traders report was fairly subdued, offering only a couple of new signals, though plenty of renewed ones. (See my table on the Latest Signals page for the full details.) Some highlights:

- More signs that the bottom is nigh for plummeting Treasuries yields. My five-year Treasury trading setup - based on the COTs data issued weekly by U.S. Commodity Futures Trading Commission - has now flipped to bearish (meaning it's calling for the yield to rise). This setup works with no trade delay (i.e., execution on the open of trading this week). Well, look at that. The yield opened down over 5 percent from the previous close.

- Same for my 13-week T-Bill setup. It's also flipped to bearish. As you'll see from my Latest Signals table, my 10-year Treasury setup had already flipped to bearish with the Nov. 10 COTs report. This leaves only the two setups at both extremes of the yield curve - the 30-year bond and 30-day Fed Funds contract - still bullish.

- Amazingly, the S&P 500 small traders - the "dumb money" whom I fade in my setup for this index - are still highly bullish in last Friday's data. These poor folks, the fodder of the markets, are just 10 percent below the signal line I use to trigger a bearish signal in this setup. Of course, the setup is already on a bearish signal, but this is an indication of how wrongway this crowd still is - and that the selling pressure could remain strong, regardless of what Bernanke does.

- Similar for the NASDAQ 100 small traders. These guys are at 57 percent of the signal line for triggering a renewed bearish signal. Bad signs for the bulls.

- In the Dow Jones industrials data, the "dumb money" large speculators have actually been significantly reducing their net short position for the past two weeks - likely a bearish development. Last Friday, their net position was neutral by historic standards.

- Same for the Russell 2000 large specs. They've been increasing their net long position as a percentage of the total open interest for three weeks.

- My COTs Agriculture Composite Index, based on my setups for sugar, wheat, corn and soybeans, has dropped again to -2.13 from last week's -1.92. The setup is now giving its fifth straight bearish signal. A -1 reading means all four setups have just given a bearish signal for execution on next week's open of trading. This is the lowest the index has seen since May 2000 when it fell to -2.18.

- So what about crude oil and bullion? Is the commodity bull market really dead? My crude oil setup seems to think not. Based on fading the large specs, the setup shows the "dumb money" is still far from being excessively bullish and thus triggering a bearish signal. In fact, the last COTs report finds their net position far, far below the level that would mean they're overly bullish. As for bullion, I've just done a separate report that should be up soon on Kitco.com. I'll post a link when that happens. Good luck this week!

New Crude Oil Setup: Still Bullish

Markets getting the crap kicked out of them today in Toronto and Europe. Wow. Just checking in to report I've further refined my crude oil trading setup based on the Commitments of Traders reports. The new setup fades the "dumb money" large speculators when their net futures and options position hits specific extremes of bullishness and bearishness as a percentage of the total open interest, as reported weekly by the Commodity Futures Trading Commission. The latest COTs report from Friday shows the large specs - these are the big investment firms and hedge funds - slightly reducing their net long futures and options position. They've now got a fairly strong bearish bias in comparison with their recent trading positions. The setup has been bullish since the Sept. 25 COTs report. See the details of this setup on my Latest Signals page. Thanks again to Dave for testing a few million setups to help us narrow down the best ones!

Market Troubles Not Over, Say COTs

Holy Moses! That was fun. Are you ready for more of the same? Today's Commitments of Traders report suggests the woes for equity markets aren't over yet. My COTs U.S. Composite Equity Index is giving its fifth straight bearish signal, after flipping to the bearish column with the Dec. 18 COTs report. The index has increased ever so slightly to -1 from last week's horrible -1.23. But that's little consolation. A -1 reading or worse means all four equity trading setups that make up this index just gave a bearish signal, on average, for execution on next week's open of trading.

(For you newbies, the COTs reports are issued weekly by the U.S. Commodity Futures Trading Commission, and they detail futures and options holdings in 100-odd markets like gold and the S&P 500 index. I've developed a way to trade off this data when it hits bullish and bearish extremes.)

See my other latest new and renewed signals on my Latest Signals page. I'll be back here early next week with more thoughts on today's data. Hope you survived this week and have a great weekend.

Gloom 'n Doom for Stocks 'n Agriculture

What a difference a couple of days has made in the market mood since my post last Friday. In fact, what a difference a couple of hours has made since the open this morning! Commodities still getting chopped up, but equities are rebounding. So what does the Commitments of Traders data tell us about this mess. Here are some highlights based on the latest report issued Friday by the Commodity Futures Trading Commission:

- As I reported last week, my S&P 500 trading setup has flipped from cash to bearish based on the slope of the 50-week moving average of the index prices. The slope, which I use to define whether the index is in an up or downtrend, turned down based on the weekly open price last week. Monday's weekly open price still has the index in a downtrend.

- Gloomy news also from my COTs U.S. Composite Equity Index. It flipped to bearish with the Dec. 18 COTs report and has now given four straight bearish signals. What's more, the index now stands at -1.23, up slightly from last week's -1.59, but still well below the -1 reading that means all four of my U.S. equity trading setups making up this index are giving a bearish signal, on average, for execution on next week's open of trading. Not so good.

- The Treasuries markets seem to be reflecting this gloom. My setup for the 30-day Federal Funds contract is bullish (meaning it's calling for the Fed Funds rate to fall). Back in the happy days of December - ah, yes, remember how good things looked back then? - this setup actually got very near to the point where it flipped to bearish (meaning it thought the Fed would go back to hiking rates). That was based on the large specs building a large net short position in the contract. How things have changed. Since then, the large specs have rebuilt a huge net long position, giving a renewed bearish signal for the Fed Funds contract. They're in fact 47 percent above the signal line for this setup, meaning the "smart money" is making a gigantic bet rates will continue to drop.

- My Russell 2000 setup flipped to bullish mode with the Dec. 24 COTs report, but take a good look at the table on my Latest Signals page. The trade delay for this setup is seven weeks, meaning execution for the open Feb. 18. Will be interesting to see how the other equity setups line up around that time. But that's a looong way away when you're trading markets like these!

- In crude oil, the "dumb money" small traders are steadily building up a net long futures and options position and now approach the signal line of excessive bullishness that would trigger a bearish signal. They stand at 89 percent of that line, meaning not quite there but close.

- Agriculture has been ripping this fall, with the PowerShares Agriculture Fund (DBA) shooting up 50 percent since last August. Is it all over but the crying? Since flipping to bearish with the Dec. 24 COTs report, my COTs Agriculture Composite Index has now fallen to a miserable -1.92 from last week's -1.73. Last Friday makes four straight bearish signals. (Like with my equity index, a -1 reading for the ag index means all four component setups for wheat, corn, soybeans and sugar are giving a bearish signal.) My ag index has, in fact, never been this low in relative terms (in relation to the recent data), and it hasn't been this low in absolute terms since May 2000, just before the Dow Jones Agriculture Subindex tottered over and collapsed over 30 percent to its 2001-02 lows.

- For my take on bullion and the U.S. dollar, check out my post this week at Kitco.com. Good luck this week, and see you back here after the next COTs report Friday afternoon.

Portfolio Adjustments: Short S&P 500, Longer Nikkei

Just updated my portfolio page with trades as of this morning. I executed the new bearish signal for the S&P 500 for the open this morning using the 200-percent leveraged ProShares Ultra Short S&P 500 Fund (SDS). I also boosted my Japanese equities holding to reflect my new portfolio allocation for my revised Nikkei setup, which is bullish. And I dumped some other long equities holdings in line with my new dataset for the U.S. Composite Equity Index based on my revised equities setups. This index flipped to bearish with the Dec. 18 Commitments of Traders report.

Selling the S&P 500

Well, that sure was interesting. I mean updating my newly revised trading setups just now with this afternoon's data from the Commodity Futures Trading Commission. Oh, yeah, the markets were interesting, too!

As you'll see from my Latest Signals page (see link on the right), my setup for the S&P 500 has now gone to bearish. The setup had already been in bearish mode since the Dec. 24 Commitments of Traders report based on the excessive bullishness of the "dumb money" small trader crowd . But I was waiting for confirmation from the 50-week moving average of the S&P 500 index before selling the index short. If the average is sloped upward, I go to cash during bearish signals, instead of going short. As of the open of this week's trading, however, the 50-week average is now sloping downward. This setup operates with no trade delay, meaning execution for the open of trading Monday. See the "How It Works" link for more on how my trading system based on the COTs data works.

I'll be back here early next week with more details from the latest data.

More blog updates: I've updated the Latest Signals page with newly revised, improved setups for the Nikkei, silver and XGD Canadian Gold iShares. These are in addition to the other new ones I've announced in the past few days for the S&P 500, NASDAQ 100, Dow Jones industrials, Russell 2000, gold and the HUI Gold Bugs Index. Thanks again to the ever-talented Dave for his insights and help with these setups!

Also: I've made some refinements to my risk-management rules for this trading system. Read about them in the notes on my Latest Signals page table (see notes 8 and 12). Also see the explanations on my Glossary page under "Portfolio Allocation." Have a good weekend and good luck next week!

Nikkei Large Specs Hit Record Net Short

My newly revised trading setup for Japan's Nikkei Stock Average is super-bullish. I've just posted the results and signal info for my newly revised setup on my table at the Latest Signals page (see the Navigation bar on the right).

Like all my other setups, it's based on the futures and options data released each week by the U.S. Commodity Futures Trading Commission. My Nikkei setup trades opposite to the large speculators when they hit specific extremes of bullishness and bearishness. Last Friday's Commitments of Traders report showed the Nikkei large specs having built a record large net futures and options position as a percentage of the total open interest. They stand at a rare historic extreme of bearishness. This gave my Nikkei setup its 16th straight bullish signal. This could be a sign that the markets in general are more likely to head up from here than down.

Finally, thanks again to reader Dave for his invaluable help with this new setup.

New Setups Update

I've updated my main table on the Latest Signals page with more newly revised trading setups based on the Commitments of Traders reports, which detail trillions of dollars in futures and options positions in the major markets. I'm looking back at all my setups as part of an exercize of refinement that's good to do periodically for mechanical trading systems. I've found some much-improved setups for all four of the U.S. equity markets in the COTs reports: the S&P 500, NASDAQ 100, Dow Jones industrials and Russell 2000. I've also found another, even better setup for the HUI Gold Bugs Index, which really blew me away. I actually had to widen the columns in the table to accommodate the huge returns.

My new Russell 2000 setup was in bearish mode between mid-February 2007 and just two weeks ago, when it flipped to bullish. This setup operates with a seven-week delay, however, so it's not necessarily saying the coast is clear right now.

As well, you'll also notice I've temporarily removed my signal for my COTs U.S. Equity Composite Index, which combines the four U.S. equity setups into a signal for the broader stock market. I'm still testing the best parameter values to use to get signals for this index, but I can say the most robust and profitable setups I've found so far turned bearish on Dec. 18 or Dec. 24.

Finally, apologies for any confusion these revisions may be causing and interruptions in the signals from any replaced setups. Once this process is done in the coming weeks, I think the results will speak for themselves in terms of more accurate calls.

Changes for Gold and HUI Signals

I've just made a couple of changes to my table on my Latest Signals page. My newly revised trading setup for gold has hit its 12-percent stop, so it's gone to cash. It's been on a bearish signal since the Sept. 25 Commitments of Traders report, but as we all know, gold has shot to new highs since then. The signal was based on extreme bearishness by the "smart money" commercial traders, but they don't get it right every time. This is why we've got stops. The setup will remain in cash until there's a bullish signal or the price falls back below the entry price for the Sept. 25 trade ($750.60).

The second change concerns the HUI Gold Bugs Index. My newly revised HUI setup uses a price filter to minimize drawdowns and improve its statistical robustness. The filter was triggered in mid-October, when HUI rose along with the price of gold. My HUI setup, like that for gold, had gone to bearish with the Sept. 25 COTs report. My filter rule works like this: if the weekly open price causes a trade to see a drawdown of three percent or more, the setup goes to cash on the next weekly open. The trade is re-entered on the same side as the prevailing COTs signal on the following weekly open if the drawdown for the trade reverses and goes back under three percent. Failing that, the trade is re-entered on the same side as the prevailing COTs signal two weeks later.

Consider it a "time out" for a market that's not behaving right. I discovered the filter inadvertently while looking for ways to blend COTs signals with signals from the price data. In the case of HUI, my setup went to cash for two weeks, then re-entered on the short side after the Oct. 30 COTs report (with the entry as usual on the next weekly open, Nov. 5).

Bull Market a Goner?

Rock 'n roll. Quite the end to quite a day to end quite a week! I hope you managed okay. Where to begin... Oh yes, the fresh new Commitments of Traders data issued today to help us figure out what the big boys are doing in the markets. Thanks, Commodity Futures Trading Commission. What does this data have to say this week?

Looks like another very mixed bag. I've updated the table on my Latest Signals page with, you guessed it, the latest signals I got in my trading setups based on the COTs data. They include two new signals for platinum and wheat, both flipping to bearish. In the case of platinum, be aware that my setup goes to cash during bearish signals (rather than selling platinum short). The new signal for wheat means all five of my agriculture setups are now in the sell column, as is my COTs Agriculture Composite Index.

As for the beleaguered equities, my newly revised setup for the S&P 500 is giving a second straight bearish signal after flipping negatory with last week's COTs report. This setup works with a price filter based on the slope of the 50-week simple moving average of the S&P 500. During uptrends, instead of going short, the setup doesn't fight the trend and merely goes to cash. My new NASDAQ 100 setup is also flashing another bearish signal, its third since flipping to bearish in the Dec. 18 COTs report. Both these setups are based on fading the small traders, who for some bizarre reason have just hit optimistic extremes in their net futures and options positioning.

My Dow Jones industrials setup, however, isn't confirming all this contrarian gloom and, in fact, is supremely bullish. This setup is based on the "smart money" commercial traders, who've just put on their largest net long futures and options position since March 2004, a position that's hit 150 percent above the signal line I use for this setup. As well, my COTs U.S. Composite Equity Index, which combines the data from my setups for the S&P 500, Russell 2000, Dow Jones industrials and NASDAQ 100, has recovered somewhat from last week's dip into the negative column at -0.22 to this week's simply neutral 0.03. More importantly, the index also remains on its long-term bullish signal.

So what does it all mean? Perhaps money is rotating to big caps and, so far at least, the five-year bull market is still breathing. Check back here next week for more analysis of the latest COTs data and new trading setups. Have a good weekend!

Sorry, Gold Bugs! Improved Gold and HUI Setups Still Bearish

I've got new trading setups for gold and the HUI Gold Bugs Index based, like all my other setups, on the nifty little Commitments of Traders reports issued weekly by the U.S. Commodity Futures Trading Commission. These improved setups really blow me away, especially the one for HUI. (Thanks again to reader Dave for his invaluable input!) Take a look at the results on my Latest Signals page, where I've posted the setup numbers on the main table and the running results for the gold setup in a separate table lower down.

Sadly for you wacky gold bugs out there, both setups flipped to bearish on the same date as my old gold and HUI setups did - Sept. 25 - and remain bearish right now. Sorry, folks! Let the hate mail begin. You'll also notice from the updated Latest Signals table I've dropped my setup for the USERX U.S. Gold Fund, which had virtually the same signals as my old gold and HUI setups and was starting to feel a little redundant. Still holding onto my XGD Canadian Gold iUnits setup for the time being though, which has been on a bullish signal since May 22. (I'm personally long XGD too.) But I might trim some of my precious-metals position soon in accordance with new rules I'm developing to limit portfolio allocations in correlated markets like gold and silver. I've also been long silver since my setup flipped to bullish from the July 3 COTs report, and my total precious-metals position is nearly 30 percent of my total assets. My new rule will set a maximum allocation of 20 percent in any one highly correlated market.

New Crude Oil Setup Loves the Black Stuff

I've just updated my "Latest Signals" table with the results from my newly revised trading setup for crude oil based on the Commitments of Traders data. Instead of trading opposite to the "dumb money" large speculators, like my old setup did, the new signals come from fading the small traders. Turns out they're even dumber! Sad but true. The little guy like you and me is hamburger in the markets. Which is where the COTs reports come in. This great government data helps us figure out what the smart money - and the dumb - is doing in the markets, so we can, with luck, steer clear of trouble.

My new crude setup boasts significantly better profitability and statistical robustness. As well, it was profitable on both the long and short sides in historic testing, unlike the old setup, which was in cash during bearish signals. What's the setup saying right now? It's been on a bullish signal since the Feb. 20 COTs report, near the beginning of crude's incredible 12-month run-up from just over $50 to around $100 today. The small traders have just flipped to a net long futures and options position after seven weeks of being net short and now have a slight bullish tilt. But they're still nowhere near any kind of irrational exuberance that would trigger a bearish signal.

Thanks again to reader Dave for his invaluable help with refining this new setup!

S&P 500 Spreadsheet Updated With Improved Setup

I've just updated the S&P 500 sample spreadsheet on my "DIY" page (see link on the right) with my new setup for this index, which uses different parameter values and includes a price filter to improve the profitability and statistical robustness. The setup flipped to bearish with last Friday's Commitments of Traders report, but since the S&P 500's 50-week moving average remains sloped upward, the setup went to cash instead of selling the index short.

Since I just developed this new setup and missed the boat by a few days on selling my SSO ProShares leveraged SP500 position, I'm going to look for a good place to sell based on the technical price action.

Revised Setups Turn Bearish

I hope you had a great New Year and wish you all the best in 2008. I've just posted results from two revised setups I've developed for the S&P 500 and NASDAQ 100 on my "Latest Signals" page table. Both setups have turned bearish in the past two weeks. They're both based on fading (trading opposite to) the "dumb money" small traders when their net futures and options positions hit extremes of bullishness and bearishness, according to the Commitments of Traders data issued weekly by the U.S. Commodity Futures Trading Commission. Confused? The explanatory links to the right give background on the COTs reports.

After nearly 12 months of trading based on this data, I'm going through a year-end process of revising and updating my setups. As luck would have it, a clever reader got in touch to tell me about a program he's written that helps identify good setups based on this data, and he's been kind enough to share his fascinating results. (Thanks, Dave!)

The new setups boast both improved profitability and statistical robustness according to a number of new measures I've been studying. I'll be posting these details on my "Latest Signals" table in the coming weeks and hope to improve on all my setups.

Meanwhile, back to those new signals... My S&P 500 setup has just gone to cash with last Friday's COTs report. As I explain in the notes to the "Latest Signals" table, this new setup uses a filter based on the S&P 500 index's 50-week moving average. The average basically prevents me from going short during uptrends or from going long during downtrends. So when the small traders get excessively bullish, as they did last Friday, I get a bearish signal. But I don't sell the index short. Instead, I simply go to cash. (The setup would go short the SP500 if we got a bearish signal and the price average was sloped downward.) Essentially, we're trying to avoid fighting the price trend, which can continue in one direction longer than we often expect.

As for the NASDAQ 100, my new setup also fades the small traders. They've also just hit a historic extreme in their futures and options position. (My old setup faded the large speculators, but I found the small traders had a better record of being dumb.) This setup doesn't rely on any kind of price-based filter.

Finally, my COTs U.S. Equity Index based on these revised setups has turned decisively bearish as you might imagine. It's fallen to -0.22 from last week's 0.35, giving this index a strong bearish tilt. Nevertheless, the index so far continues to remain on a bullish signal.

You'll notice my revised table has also dropped my setups for the NASDAQ composite index and the SOX Semiconductors Index. Both of those setups were also based on the NASDAQ 100 COTs data, but I felt having three setups based on this one series of data may have been confusing and, besides, their results were nowhere near as good as my new NASDAQ 100 setup. I will, however, take another look at those setups and post new ones if I find anything worthwhile. Apologies to anyone who wanted to keep seeing that information. Good luck this week and in 2008!