Friday 29 August 2008

Data Sez: Gotta Get Gas, 10-Year Yield To Rise

Love this Commitments of Traders stuff. It always fascinates me to see what this data will pull out of its touque. Speaking of which, I gotta dig mine out soon! The nights are getting chilly up here in the mountains of Quebec. Maybe that coyote we saw the other day could make a nice hat. But I digress. My trading setups based on the COT data have given a few interesting new signals from today's update on trader positioning in derivatives markets. (See all the signals at the table linked at the top of my latest signals page.)

My long-standing bullish signal for the 10-year Treasury note has just gone bearish (meaning it's calling for the yield to rise). I posted a note last week on the divergence between the 10-year data and my still-quite-bullish setup for the three-month Fed Funds contract (see here). If the trend-setting yield does indeed rise, that wouldn't be a good sign for hopes of economic recovery. By the by, my 10-year setup has a trade delay of four weeks, so I'll sell my long position on the open of Sept. 29.

My setup for natural gas has also gone bullish. After the nutso week that market just had, I'm hoping it's now made a good base. But I'm still prepared for a wild ride. Gas is like that. Explosive! (This setup has no trade delay, meaning execution on the open after the weekend.)

My S&P 500 setup has gone to cash. But this signal isn't too relevant for my purposes since I had ignored it due to my risk-control rule. (See more on why in this post and more on this rule here.)

A couple of other interesting developments:

- Commercial traders in U.S. dollar index futures now have their sixth-most bearish net short position since 1992.

- Gold small traders haven't had such a small net long percentage-of-open-interest position since Sept. 2006 in comparison to the past data. That's when gold was basing below $600. Last week, their position was the second-most bearish it's ever been in comparison with the average I use for my setup for the HUI Gold Bugs Index and XGD Canadian Gold iShares.

Hope you have a good long weekend, and be sure to tune in early next week for my portfolio page update and perhaps, finally, some more news on a new copper setup.

TAGS: S&P 500, natural gas, gold, U.S. dollar, HUI, Gold Bugs, XGD, iShares, Treasuries, 10-year Treasury, interest rates, Fed Funds, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Tuesday 26 August 2008

Updates: My Portfolio

Just updated my portfolio page with current trade returns and those for positions closed yesterday. Good luck this week!

Friday 22 August 2008

Trader Data Smiles on Equities & Commodities; Dollar Done?

A seachange of sorts has just happened in trader positioning in derivatives markets, as reporting in today's weekly data release from the Commodity Futures Trading Commission. Equities are suddenly on much firmer ground, at least on a short-term basis going forward, while commodities aren't doing too badly either. Take a look at my latest signals page table for how my trading setups based on this fascinating government data are shaping up. Here are some highlights:

- My setups for the S&P 500 and Russell 2000 have flipped to the bullish column with today's data, with execution for the open of Monday's trading. The S&P 500 setup was in cash for the past six weeks, while RUT went into bearish mode this week. (I had reported erroneously last week that the S&P 500 setup was set to remain in cash at least until mid-September, but I didn't notice a bearish signal in the data for the week of July 29 that takes effect Monday.) The S&P 500 signal, incidentally, will only be in effect for a single week. This one-week bullish blip is based on the commercial traders turning quite bullish in the week of July 29, before flipping back to bearish since then. Since this setup remains in cash unless both of its signals agree, it goes back to cash the week of Sept. 1. Under my risk-control rule (see my "How It Works" page for more on that), I will be following the Russell 2000 signal (since my BKX Bank Index setup is also bullish) but ignoring the S&P 500 signal (because my Dow industrials signal is bearish).

- A bunch of new developments in commodities: heating oil and gold both go bearish as of Monday, but four of my six highly related commodities setups will still be bullish Monday (copper, platinum, crude and silver). Thus, I will sell my long gold bullion position but not go short. I'll also put on a long copper position, as called for by my setup for that market. Incidentally, I've been re-examining the copper data in my continuing efforts to refine my setups and this afternoon found a possible replacement setup that combines two of my best signals for the commercial traders and small traders. That new setup, which I could end up adopting after further testing, was in cash for the past four weeks and also just flipped to bullish for next week's open.

- The U.S. dollar index has staged an impressive rally in the past few weeks, briefly piercing above the downtrend line it has formed since early 2006. But my chart shows that breakout now failing, and the Commitments of Traders data looks pretty grim as well. The commercial traders in dollar futures are now more net short than any time since Nov. 2005, just as the greenback peaked. In relative terms compared to past data, they're 2.28 standard deviations below the moving average I use in this setup. I'd say that's a good bet for a new downleg.

- Lots has been said about the bullishness of Treasuries of late and how they've disconnected from inflation expectations. I've certainly noticed that in the commitments data. (See, for example, this post on how the Fed Funds contract positioning forecast weeks ago that Bernanke was highly unlikely to hike rates any time soon.) In Friday's data, the Fed Funds positioning remains quite bullish, albeit somewhat less so than in mid-July. Positioning remains one standard deviation above the average I use for my setup in that market, which means the market believes the Fed Fund rate, if anything, faces continued downward pressure. However, positioning in the 10-year Treasury is now heading off in its own direction. The commercial traders have sharply reduced their net long position in the past three weeks as a percentage of the total open interest. This week, they sit barely a hair from causing my 10-year setup to flip to bearish (meaning the yield would go up).

New markets update: A whack of new ETFs has launched to cover sectors in the commitments data that until now had to be traded using derivatives. These include cocoa, coffee, sugar, lumber, cotton, copper and platinum (both long and short). What's especially interesting about the first five on that list is they have only moderate to zero correlation with each other and with any other market in the basket for which I have signals. Between 1995 and 2007, the strongest correlations were -67% for cotton and BKX, -60% for cotton and SPX, and 58% for cotton and coffee. The results show these new markets present a big opportunity for adding diversification to an overall portfolio.

I also did a study comparing the volatility of the new markets and my existing ones. I typically like to be in the most volatile markets, as they present the highest potential for returns. Here's a list of the most volatile markets (in order): copper, heating oil, natural gas, crude oil, NDX, platinum, silver, coffee, gold, Russell 2000, sugar, BKX Bank Index, cotton, Nikkei, SPX, Dow industrials, lumber and cocoa.

Hope you have a relaxing weekend. See you early next week for my portfolio update and possibly more announcements about new setups.

TAGS: S&P 500, Russell 2000, Bernanke, Fed, interest rates, gold, silver, U.S. dollar, crude, NASDAQ 100, copper, platinum, heating oil, Dow industrials, Treasuries, Fed Funds, BKX, Bank Index, NDX, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Monday 18 August 2008

Markets Lean Bullish for Commodities, Indecisive for Equities

Are commodities finally done? Are equities back for good? Not so far, says regulatory data issued Friday. The latest Commitments of Traders report, which highlights trillions in dollars of positioning in over 100 markets, suggests the U.S. dollar is still in trouble, that commodities may have bottomed (at least temporarily) and that equities face more headwinds. You can check out my signals from my trading setups based on this data at the table linked here. Also see my newly updated portfolio page for my latest positions. Some highlights:

- Still no sign of better times from my trading setup for the S&P 500. The commercial traders remain decisively negatory with their net position as a percentage of the total open interest. My commercials signal is in bearish mode. The other signal in this setup - based on fading the small trader total open interest - is in bullish mode. Since these two signals don't agree, this setup remains in cash.

- My Russell 2000 setup has gone bearish for this week. But I should note this is a short-term trade that will last only one week. This is another combined setup that follows the signals of two groups of traders, when they agree. Based on the trade delays for the two signals, the overall setup will either go to cash or bullish as of the open, Aug. 25.

- My setup for silver is in bullish mode and is showing the second-most bullish reading in relation to historic positioning since the data started in 1995. The commercial traders are now 2.7 standard deviations above the moving average I use for this setup in their net position as a percentage of the total open interest in silver futures and options. This, coupled with the fact that commercial traders in the U.S. dollar index are at a historic extreme in their bearish positioning, suggests the recent rally in the greenback is done (at least for now).

Good luck this week!

TAGS: S&P 500, Russell 2000, silver, U.S. dollar, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Sunday 17 August 2008

New Signals for Crude (Bullish), Russell 2000 (Bearish) and Natural Gas (Cash)

Some interesting new signals for my trading setups based on the latest data Friday in the Commitments of Traders report. My setups have gone to cash for natural gas, bullish for crude oil and bearish for the Russell 2000. I can take all these signals according to my "highly correlated markets" risk-control rule. That rule says that I take a signal only if other highly correlated markets are leaning in the same direction. In the case of crude, four of the five commodities markets that are highly correlated to crude are now bullish. As for the Russell 2000, the Dow is bearish, while the BKX Bank Index is bullish, so with two of those three markets leaning bullish I will take the new Russell signal.

See my latest signals page table (click the link here) for all the details, and tune in early this week for a more detailed report on the latest data. Sorry for this truncated report. I was away for a few days and just checked in briefly into my office Sunday to update my spreadsheets and post this note. Have a good rest of your Sunday and good luck to us all this coming week!

Friday 15 August 2008

Holiday Delay

I'm still in summer vacation mode and away from the office for a couple of days, so I won't be able to post my usual Friday signals update until late on Sunday or first thing Monday, before the open naturally. Sorry about the delay! Hope you have a good weekend.

Monday 11 August 2008

Filled! Long Natural Gas

I've just updated my portfolio page with this morning's trade - long natural gas with a leveraged Horizons BetaPro HNU position (trading in Toronto). The page also shows my latest gains and losses in my existing positions in U.S. financials, the NASDAQ 100 index, bonds and gold bullion. The natural gas trade comes from my signal on Friday based on my COTs Timer trading strategy. (Scroll down to see that post.) The strategy works by following how groups of traders are positioned in the futures and options markets, as reported in the free weekly Commitments of Traders reports issued by the U.S. Commodity Futures Trading Commission. See more on how all this works here and how I came up with the strategy here.

TAGS: natural gas, Horizons BetaPro, HNU, financials, NASDAQ 100, bonds, gold, bullion, commodities, open interest, futures, options, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Friday 8 August 2008

Green Light for Natural Gas, Stop Sign for Gold: Data

Is this the bottom? Is it the top? I have no idea. But I can tell you my bullish signals for the BKX Bank Index and NASDAQ 100 are good for another week. Also, my trading setup for natural gas has gone to bullish after two weeks in cash. And my gold setup has just flashed bearish. That one works with a two-week trade delay, which means I'll sell my long position on the open of trading, Aug. 25. All these signals come from my COTs Timer trading system based on the government's free weekly Commitments of Traders reports, the latest of which was issued this afternoon. See my latest signals page table for all the gruesome details. Here are some more highlights:

- Whither the markets? My S&P 500 setup has been in cash for five weeks and shows no signs of figuring out which way it'll go. The "smart money" commercial traders this week have given a bearish signal, while the small traders have been on a bullish signal for the past seven weeks. The small trader signal is based on calculating the total open interest of the small traders (the long plus short positioning). Then I trade opposite to this positioning when it hits specific extremes. So when the small traders are jumping into the market, I want to jump out. Right now, the small traders are abandoning ship, but this signal isn't being confirmed by the commercials. The setup is thus in cash, and I'm still sitting this one out.

- Is the greenback bouncing? Not according to positioning in U.S. dollar index futures. For the past three weeks, the "smart money" commercial traders have sharply increased their net short position as a percentage of the total open interest. They now stand 1.6 standard deviations below the moving average I use for my dollar trading setup. The picture is still a little unclear, however; a number of my commodities setups are in bearish mode, and as I mentioned above, my gold setup has now gone south as well.

- My natural gas setup has gone to bullish after the "smart money" commercial traders reversed a couple of weeks of highly pessimistic net long positioning as a percentage of the total open interest in this market. This setup combines the signals of the commercials with a second setup based on the small trader total open interest - the long and short positions added together. When the total open interest hits bullish extremes, this has often been a good buying opportunity; conversely, when the small trader total interest gets super-low, it's a good time to sell. This week, both setups agreed with each other, giving me a bullish signal for next Monday's open of trading.

Have a relaxing weekend, and good luck next week. Be sure to tune in early in the week for my portfolio page update.

TAGS: natural gas, gold, NASDAQ 100, U.S. dollar, BKX, Bank Index, S&P 500, commodities, open interest, futures, options, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Monday 4 August 2008

NASDAQ 100, Silver Turn Bullish

Bullish signals for my trading setups for the NASDAQ 100 and silver markets from Friday's Commitments of Traders report. I've just updated my latest signals page table with the latest calls from all my setups. Sorry for this delayed update. I've just gotten back from vacation with family in New Brunswick, ending with a beautiful drive through stunning upper Maine and New Hampshire. I should note that I'll have to ignore this bullish call for silver because of my risk-control rule for highly correlated markets. That rule, explained in more detail here (scroll down to "risk-control rules"), states that I follow a signal only when the majority of setups in highly correlated markets are leaning in the same direction. In the case of silver, two other markets (gold and platinum) are currently bullish, while heating oil and copper are bearish and crude oil is in cash. So I will ignore the silver signal.

I'll be back later today or tomorrow with more details from the latest COT report. Meanwhile, see the table linked above for more info from my setups based on this free weekly government data. Good luck this week!