Silver Commercials Hit Panic Button

The excitement never ends. Look at those banks getting their throats torn out today. It was a great day to be short. So what do the magical little numbers in the Commitments of Traders tell us about this mess? For newbies, this COTs stuff is the data on trillions of dollars of trader positioning issued weekly for free by the nice folks at the U.S. Commodity Futures Trading Commission. Check my updated table on the Latest Signals page for all the gory details. Here are some highlights:

- First, the ever-popular silver. After a nine-month bullish signal, my trading setup based on the COTs data flipped to bearish last week. That's because the "smart money" commercial traders hit the brakes and bumped up their net short position in silver futures and options to an extreme level that, in the past, has led to reliable selling opportunities. Last week, the commercials were 1.2 standard deviations below the moving average I use for this setup.

So what did they do in today's COTs report? The commercials are now even far more bearish - 2.4 standard deviations below the moving average. Oh-oh. Their net short position is more bearish now in absolute terms than since the July 24, 2007, COTs report, just before silver crashed 12 percent in the space of two weeks as the subprime meltdown kicked off. In relative terms, compared to past data, the commercial traders are now more bearish than any time since the end of Nov. 2006, just before silver fell from a high of $14.17 to $12.05 in the space of four weeks - a 15-percent drawdown. Needless to say, my setup is still on a sell.

- My trading setup for Canadian Energy iShares (XEG), which is based on trading on the same side as the commercial traders in crude oil, has flipped to bearish. Note that this setup works with a three-week trade delay, meaning execution would be for the open of trading on Monday, March 24. That, coincidentally, is also the date for execution of my bearish signal for crude oil, which is based on fading the large speculators. Meanwhile, my Oil Services Holders (OIH) setup, also based on the commercial traders, remains in bullish mode for the time being.

- Looks like March 24 will be a busy trading day for me since that's also the date for execution of my bearish signal for copper. Interestingly, this setup, based on trading on the same side as the copper small traders, just flipped back to bullish. Confused? Allow me to explain. The setup works with an eight-week trade delay. So what it's asking me to do is go bearish copper on March 24, then go back to bullish for the open of Monday, April 28.

- Gotta love that new setup for the BKX Bank Index, based on trading on the same side as the commercial traders in 3-month Eurodollars futures and options. What did my SKF UltraShort Financials gain today? Nearly 8 percent? Crazy. But alas, the setup flipped back to bullish last Friday, so with the one-week trade delay, that means I'm dumping SKF and going long on Monday's open.

- One more interesting market this week: the 10-year Treasury Note. The commercial traders, whom I follow for my setup for the note, have gotten steadily less net short since the setup flipped to bullish with the Dec. 24, 2007, COTs report. In fact, you have to go back to July 2006 to find a time when they were less net short as a percentage of the total open interest. That was around when the 10-year peaked at 5.2 percent and started a long slide down to 4.4 percent in Dec. 2006. In relative terms, though, the commercial positioning isn't quite at such a remarkable level. These guys were also this bullish in mid-January, just before the yield rose about 40 basis points - oops! - and before that in Jan. 2007, just before the yield fell about 40 basis points - good one!

Hope you have a good weekend, and check in next week for more updates and with any luck more newly revised setups. And, of course, your comments.

10-Year Treasury Commercial Traders Super-Bullish

Just updated my Latest Signals page with the results and parameter values for my newly revised setup for the 10-year Treasury note. This one was fun to study since the measures of statistical robustness were through the roof for so many of the possible setups, especially for the commercial traders. It was hard to settle on the best one. The one I'm going to use now has a 99.99997-percent confidence interval for profitability and 99.95 percent for beating the market. Not too shabby! The Sharpe score is 1.9 and Robust Sharpe is 1.4.

So what's the setup doing now? It flipped to bullish with the Dec. 24, 2007, COTs report. (That means the setup thinks the 10-year yield will fall, since the note trades opposite to the yield.) The setup uses a four-week trade delay, so that means it bought on the open Monday, Jan. 28. The commercial net position has remained well above the bullish signal line ever since the initial signal - nine consecutive weeks.

Filled! Dumped Silver, Shorted Banks

Just updated my portfolio page to reflect sale of iShares Silver (SLV) based on Friday's bearish signal and purchase of UltraShort Financials ProShares (SKF) based on the bearish signal in the BKX Bank Index setup from the Feb. 15 COTs report. Note to self: the BKX setup flipped back to bullish last Friday, so I'm holding SKF for just a week, then going long on next Monday's open. Looks like the trade's working okay so far this morning!

Sayonara, Silver. Thanks for the Memories.

Woah, what a crazy mess of new signals from today's Commitments of Traders report. For one thing, it's the end of my nine-month bullish signal for silver. Sad day. This one was good to me. But time to move on, says the COTs data. My setup for silver is my best one in terms of statistical robustness, and I'd never second-guess it, so I'll be saying bye-bye to my SLV iShares Silver for the open of Monday's trading. Interestingly, my gold and HUI Gold Bugs Index setups both remain in bullish mode. I'm still packing some XGD Canadian Gold iShares, so should be interesting to see what unfolds.

See the Latest Signals page table for all the gory details from this afternoon's data. Some other highlights: the crude oil data is giving me a bearish signal, for execution in a month's time. (The trade delay for this setup is four weeks.) Also, my new setup for the BKX Bank Index, based on the Eurodollars COTs data, has flipped back to bullish, with a one-week trade delay. That's kind of amusing because the setup gave a bearish signal last week, for execution this Monday. What does this mean? I'm going to take a nibble on an inverse financials ETF for Monday's opening, but I'm holding it for just one week. It's that kind of setup. Fast and furious.

What else? Oh yes. My Russell 2000 setup has flipped to bearish. This one trades off a seven-week delay, meaning for execution April 14. Will that be the end of this "rally" - or whatever you wanna call it? The wise, far-looking RUT setup says: yes.

Housekeeping: You'll notice a change to my latest signals table. I took out the column for renewed signals and replaced it with one giving the dates for execution of any pending new signals. The renewed signals table was becoming less relevant for two reasons: (1) As I've mentioned before, there's limited correlation between week-to-week fluctuations of the COTs data, and I've never studied the usefulness of acting on the renewed signals, and (2) They can be misleading because of how the various setup parameter values work. In some cases, the signals lines are so close together, or in a few cases identical, that the setup gives renewed signals practically every week, if not every week.

I think the trade execution info is more useful because many of the setups have trade delays and I often find myself needing to recalculate the dates for pending trades. So this table will be a good reminder. Hope you did okay this week, and have a great weekend!

Eurodollars Positioning Bearish for Banks

Just included a cool new trading setup in my Latest Signals table results. It's for bank stocks. How's that? you ask. Bank stocks aren't in the Commitments of Traders reports, which I use as the basis for all the setups on that list. Right you are, my friend. But I tested the Eurodollars contract positioning against the KBW Bank Index (BKX) and, lo and behold, so was born one of the best setups I've seen in any market, second only to my silver setup. Who would have thought that boring old banks would be so profitable historically?

The setup trades on the same side as the large speculators in the Eurodollar contract. (Btw, Eurodollars have nothing to do with Euros. They're based on U.S.-denominated deposits in banks outside the U.S., and they trade depending on credit conditions. See Wikipedia's entry for some basic details.) What's striking for me isn't so much the straight profit numbers of this new setup, but the measures of statistical robustness. See the columns near the right-hand edge of that table for the confidence intervals, which are really good. This setup has a Sharpe ratio of 4.3 (compared to 4.5 for my silver setup and 3.4 for my S&P 500 setup, my previous top two). For you stats enthusiasts, the regressed annual return (RAR%) of the BKX setup is 31% and the Robust Sharpe ratio (using RAR% instead of the compound annual growth rate) is 5.3, which is pretty sweet.

So what's the setup saying right now? It's been working overtime of late, flipping between bullish and bearish signals every week or two (or four) since October. The setup gave a new bearish signal from last Friday's COTs report, which with the one-week trade delay it uses means for execution on the open Monday, Feb. 25.

Portfolio: Added Russell

Just updated my portfolio page with new positions based on my bullish signal for the Russell 2000 for the open of this week.

Gold "Smart Money" Large Specs: Super-Bullish

Just posted my new gold setup specs and results on my Latest Signals page table based on trading on the same side as the large speculators in futures and options. All the details are on that table so enterprising readers can recreate this one for yourselves. You may recall I revised my gold setup just a few weeks ago. Why another change? The last setup I was using was based on tests of the COTs data with no trade delay for execution of the signal. I've only now had a chance to go over results for delaying the trade, and the new setup I'm going to start using has an even better record of past profitability and statistical robustness. After this round of updates and refining of all my setups, I don't plan to revisit them before about a year, although I'll probably take another look at them in about six months just to see how my various measures are working in terms of robustness. Ideally, if the setups are indeed robust, I won't have to change many of them in a year's time.

So what's the new gold setup doing now? It just flipped to bullish with the Jan. 22 COTs report. The setup works with a two-week trade delay, meaning execution was for the open of trading Monday, Feb. 11. Works for me! Incidentally, the large specs haven't been this bullish in absolute terms since early Jan. 2006. In relative terms, compared to recent data, they've not been so bullish since the July 24 COTs report. Hope American readers had a good long weekend, and good luck this week!

Loonie Traders At Bullish Extremes

The Canadian dollar is bullish. That's at least according to my newly revised trading setup for the loonie based on trading positions as reported in weekly data by the U.S. Commodity Futures Trading Commission. My setup works by trading on the same side as the small traders in Canadian dollar futures and options when they hit specific points of positioning that has led to profitable, statistically robust returns. See my Latest Signals page table for all the details.

The small traders have steadily built back up their net long position as a percentage of the total interest since it hit an interim bottom in early November. In fact, the smart money in this market hasn't been this bullish in absolute terms since Aug. 2006. The setup works with a seven-week trade delay, so that previous bullish episode would have translated into a buy around Oct. 2006. That would have been a little premature, as the Canadian dollar's latest incredible ascent started in Feb. 2007. That's an example of why it's usually not that helpful to look at net trader positioning without the help of some kind of filter. We want to compare the current position to recent norms that have proved helpful in identifying good historic trading opportunities.

As it happens, when compared to recent trader positioning, my loonie setup has hit a position more bullish than at any time since Feb. 2007. Accounting for the seven-week trade delay, that earlier positioning would have given a buy in early April 2007. And that's exactly when the loonie exploded upwards from 86 cents to $1.10 by last November. More recently, the setup got a two-week bearish signal starting with the Oct. 30 COTs report, which would have profited from part of the Canadian dollar's recent plunge. The current bullish signal, from the Nov. 13 COTs report, took effect as of the open Jan. 7 and is now down 75 basis points.

COTs Smile On Equities, Natural Gas

Things slowly seem to be turning more sunny for equity bulls. I've just updated the table linked on my Latest Signals page with the word from today's Commitments of Traders data. My trading system based on this weekly free government data works by getting signals when traders hit specific extremes of bullishness and bearishness that in the past have led to profitable and statistically robust trading opportunities.

So what does the latest report say? My COTs U.S. Composite Equity Index continues to turn upward and now has a slight bullish tilt, with a reading of 0.11, up from last week's -0.1. (I'm revising all my setups right now as part of a yearly process, so these numbers are based on revisions from what I reported last week.) The index is still on a bearish signal, but it's steadily climbed upward for the past three weeks and is now above zero for the first time since the Dec. 31 COTs report.

A few other notes: I've updated two more of my setups, those for natural gas and copper. The new setup results are on the Latest Signals page, plus updates for their latest signals. I really like both of them. Their Sharpe ratios are 2.8 for natural gas and 2.7 for copper, and the confidence intervals are also pretty sweet. (See the table for those numbers.) Note that natural gas flipped to bullish with the Jan. 29 COTs report. Also, note that copper works with an eight-week trade delay, meaning the latest bearish signal from the Jan. 22 COTs report takes effect on the open Monday, March 24. Will be interesting to see if any ongoing market rally peters out around that point. I should note there's a second copper setup that's almost as good and has no trade delay, based on following the commercial traders. It went to bearish with the Feb. 2 COTs report. I still plan to study whether some kind of combined signal from both of these copper setups would give superior, more statistically robust results. Stay tuned.

Finally, note to self regarding Russell 2000: My setup for this market went to bullish with the Dec. 24 COTs report. With the seven-week delay for this setup, that means I'll be buying something to track this signal for the open this coming Monday, Feb. 18. Check in here early next week with portfolio updates and more details from today's COTs data. Hope you have a good weekend!

COTs Looking Up for Bulls, Going Long NASDAQ-100

My trading setup for the NASDAQ-100 index has flipped to bullish after a seven-week bearish stint during the recent market nuttiness. The new signal comes from today's Commitments of Traders report issued by the U.S. Commodity Futures Trading Commission. Check my Latest Signals page for all the calls from my trading setups based on this fascinating, free government data. I should point out this new NDX signal is for a newly revised setup for this market, which has a greater statistical confidence level than my previous one. It works with no trade delay, meaning I'll be selling my existing QID ProShares UltraShort position and going long for Monday's open.

In other news, my S&P 500 setup also flipped to bullish with the Jan. 15 COTs report. This setup uses a three-week trade delay, which means execution again Monday. So I'll be selling my SDS ProShares UltraShort position and going long this index, too. And readers may recall my Russell 2000 setup also flipped to bullish with the Dec. 24 COTs report, which, with the seven-week trade delay for that setup, means I'll be going long RUT on the open Feb. 18. So a bevy of long signals, suggesting we're turning the corner on the recent market hellishness.

As well, my OIH Oil Services Holders and XEG iShares Canadian Energy Fund setups both also flipped to bullish, for execution Feb. 18.

At the same time, my COTs U.S. Composite Equity Index has buoyed significantly, rising to -0.18 from last week's -0.99 (numbers revised based on my new NDX setup) and putting an end to 10 weeks of straight bearish signals for this index. Are things finally looking up for the bulls? Hope so because that's what my money's on!

Of the T-Bill, Nikkei, Crude, Bullion & More

I'm back with some more highlights from last Friday's Commitments of Traders report. Here's how my trading setups based on these reports saw the world this week:

- After a short-lived two-week bearish signal for the 13-week T-Bill, my setup has now flipped back to bullish. This setup is based on trading on the same side as the small traders in 3-month Eurodollar futures and options when they hit specific extremes of bullishness and bearishness. Well, they've been a little over the map in recent weeks. And now, they've built up a tidy little net long position as a percentage of the total open interest, pushing them back into the bullish column (meaning the yield would fall).

- Despite the heavy-duty volatility of late, the "dumb money" large speculators in Nikkei futures and options maintain their near-record net short position as a percentage of the total open interest. They've held on at these super-bearish levels since mid-September. Their position, while a tad less net short than last week, is still 189 percent below the signal line I use for this setup to trigger a buy signal. So me, I'm still long Japanese equities in my own portfolio. Not every one of these signals is going to make me money, but the point is to trade enough of them and keep the faith so that, overall, the portfolio does.

- The stars seem to be lining up for the crude complex. With energy stocks flipping to bullish two weeks ago (for execution Feb. 18, using a three-week trade delay), my crude oil setup is also flashing a bunch of renewed bullish signals. The latter is based on fading the "dumb money" large specs, who have dropped to their smallest net long position since last June. Crude watchers may recall that's just before oil exploded upward from a two-month trading range. More importantly to my own thinking, the large spec position has fallen to 2.19 standard deviations below the moving average I use for this setup. These guys haven't been this negatory since Jan. 2007. Hey, isn't that when crude ended a six-month downdraft and the current rise in prices began? Sweet. I'm long!

- The misery continues for agriculture, at least according to trader positioning in wheat, corn, sugar and soybeans. My COTs Agriculture Composite Index, based on my setups for all four commodities, has sunk back down this week. It's now at -1.79, off from last week's -1.62. Seven straight bearish signals. Not pretty.

- Meanwhile, happy times still here for gold stocks and silver. My setup for the HUI Gold Bugs Index and XGD iShares Canadian Gold Fund, based on fading the small traders, remains on its bullish call. The dumb money folks got a fair bit more bullish this week, boosting their net long position to 0.45 standard deviations above the moving average I use for this setup. But that's still a long shot from flipping me to bearish. I'm still long this one. Same for silver. My silver setup works by trading the same side as the commercials. Sure, they're really net short, but they're always really net short. The trick is to figure out when they're really, really, really net short - or not. And right now, they're moderately bullish, according to my setup. Still long here, too.

- Interestingly, the gold large specs significantly bumped up their net long position as a percentage of the total open interest this week. They're now more net long in absolute terms than they've been since last September and October, when my gold setup flipped to bearish. But these things are all relative. I think it's more important to look at the net position relative to the recent data. And in those terms, the growing large spec net long position, while worrisome from the bullish perspective, is still quite far from giving me a renewed bearish signal.

I don't have a trade on for the gold signal since I'm already heavily exposed to the sector through my XGD and SLV positions. But I note all this to gauge whether bullion might be topping out here or just selling off a little. As I pointed out in this post, gold is in a kind of statistical fat-tail phase that exceeds past trading data - unpredictable new territory. That makes it harder to guess what will happen. Still, it looks to me like there may be more buying than selling pressure for bullion.

Dow Jones Industrials Go Bearish

Looks like that might have been a premature bottom-is-in call in my post earlier today. This afternoon's Commitments of Traders data on positioning in the markets isn't quite as bullish as you might think from all the happily optimistic analysts out there. Perhaps we've got a bunch of more volatility headed our way after all. I've just posted the results from my trading setups based on this weekly data on my Latest Signals page.

My setup for the Dow Jones industrials has now turned bearish. This setup has no trade delay, which means execution is for the open on Monday. The Dow Jones signal is based on fading the "dumb money" large speculators when they get super-bullish or bearish. They've been reducing their huge net short position steadily for several weeks and are now nearly net long. It's a surprise after my SP500 and Russell 2000 setups have flipped to bullish for execution on Feb. 11 and 18, respectively. Overall, equities are still gasping for life, according to my COTs U.S. Equity Composite Index, based on all three of those setups plus the one for the NASDAQ 100. That index, now revised to take into account my new SP500 setup's dataset, has edged up to -0.74 from last week's -0.89. Good but not great. No sir. The index is giving its 10th straight bearish signal. Oh-oh. I think tough-guy Bernanke broke something.

On a housekeeping note: you'll see I've got my OIH Oil Services Holders and XEG iShares Canadian Energy setups both listed as bullish as of the Jan. 22 COTs report. This, with a trade delay of three weeks (i.e., for the open Monday, Feb. 18). When I was updating my setup signals last week, I didn't spot these two new signals as they're way at the end of my crude oil spreadsheet and I'm in the process of revising them. Sorry! Have a good weekend, and tune back in here for more details from the latest COTs report early next week.

New S&P 500 Setup: Bullish Signal for Feb. 11

Hi folks. I've just taken another look at possible trading setups based on the Commitments of Traders data on futures and options positioning on the S&P 500. I managed to find a new trading setup that I really like. The results are posted on the Latest Signals page. I think you'll agree they're pretty good. Especially interesting is that, while they've been on a bearish signal during the recent market rout, they flipped to bullish with the Jan. 15 COTs report. The setup uses a three-week trade delay, so that means I'll execute the buy for the open next Monday, Feb. 11. My UltraShort ProShares S&P 500 position has been a great hedge for my portfolio, based on my previous setup's bearish signal. Also worth nothing is that my Russell 2000 setup flipped to bullish a few weeks ago, and with the seven-week trade delay for that setup, the buy is to be executed for Monday, Feb. 18. So all this suggests the bottom really is in around here - although we still need to wait a little longer for the ideal buy point, from the perspective of historic relationships between trading positions and price action.

I've also updated my Sample Spreadsheets page with the new S&P 500 setup so you can download it. See you later this afternoon with the latest signals from today's COTs report. Thanks again to reader Dave for his help locating this new S&P 500 setup. One of the great unexpected benefits of creating this blog is meeting readers to share insights and brainstorm about this fascinating data!