Commercial Traders Love Crude - But Still Fading the Equities Rally

Another tiring week. How long have I been saying that? I should just create a short-cut key to write it faster. The market rally seems to be still intact, but who really knows. One thing is very clear: The commercial hedgers in S&P 500 futures and options - the so-called "smart money" -aren't jumping on board. They haven't reduced their net short position at all, despite this week's apparent breakouts on the charts in some areas. So that's not too good. On the other hand, thy seem to love crude oil. So if that's a tell for the direction of the market, maybe things aren't too bad. Check out my latest signals table for the word from my trading setups based on the weekly Commitments of Traders reports, which tell us how trillions of dollars in derivatives are being sloshed around in 100-plus markets. Some highlights from this afternoon's COT data:

- S&P 500: My setup for the S&P 500 remains bearish for a third week in a row. The signal seemed pretty mistaken mid-week as things took off - and I even traded the long side with some short-term discretionary plays - but as the week ended, it didn't seem so nutso after all. This week, the commercial traders have just slightly cut their relative net short positioning as a percentage of the total open interest. They're now 1.45 standard deviations below the average I use for this signal, up a little from 1.63 standard deviations below the previous week. Meanwhile, the wrong-way small traders are getting more bullish - also bad. They went from 0.1 standard deviations below average to 0.2 above. Not a big move, but not very reassuring either. They need to get a lot less net long to flip their signal to bullish.

- Crude oil: My new crude oil setup goes to bullish with execution on Monday's open of trading. This is based on a combination of super-bullish positioning by the commercial hedgers and small trader crowd (both of whom appear to be the "smart money" in this market, at least according to the timeframes I'm using to view them). In today's data, the commercials cut their net short positioning dramatically. They went from 0.57 standard deviations above average to 1.64 above - a big move. On the other hand, the small traders have suddenly slammed on the brakes, going from 1.89 standard deviations above the average down to 1.08 below it (just a hair above the signal line that would take their signal bearish, which is -1.1 standard deviations). But my setup for crude oil has trade delays for both signals (see my latest signals table for more details) - so these latest changes in positioning won't affect anything until mid-May. This bullish signal will last two weeks.

- Gold: My setup for gold remains bullish for a second week. However, an important move this week took place in the large speculator total open interest. These wrong-way folks are suddenly buying up bullion like crazy - not a bullish sign down the line. Their positioning went from 0.51 standard deviations below average to 1.49 above this week - flipping their signal to bearish. That signal works with a seven-week trade delay, so it doesn't affect anything for a little while. Just a warning sign that any coming rally might get overbought real fast.

Have a beautiful weekend and see you back here early next week with a portfolio update and, with hope, that promised BKX Bank Index trading setup. (It got delayed this week as I went back to review my existing setups a little more, including checking out the possibility of combining signals from three groups of traders to further improve reliability. Stay tuned.)

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC,Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing