Friday, 26 June 2009

Smart Money Traders Turn Bullish on S&P 500

No new signals for this coming week from any of my trading setups based on the weekly derivatives data in the Commitments of Traders reports. But a big change in the data today signals a possible shift to a more bullish future. Or maybe just a one-week blip. Who knows? I've just updated my latest signals table based on this afternoon's new data.
Especially interesting: the "smart money" commercial hedgers have finally gotten off the couch and jumped into the S&P 500. If you're a regular here, you'll know the commercial traders haven't been exactly enamoured by the rally since March and have faded it with a large net short position in futures and options.

This week, big change. The commercials reduced their net short position significantly, triggering a bullish signal from their side in my S&P 500 setup. They haven't been this optimistic about the market since mid-March.

Note, however, my commercial signal works with a three-week trade delay. So no action until the open of trading Monday, July 20.

Another caveat: the other signal that makes up that setup - fading the small traders, who tend to be wrongly positioned at market turns - has moved closer to flipping from bullish to bearish. That's because, as you'll note on my latest signals table, these wrong-way folks have suddenly bumped up their net long position as a percentage of the total open interest. These people tend to be so wrong, in fact, backtesting suggests you could have reliably done the opposite and made good money.

So if they hit a bullish extreme in their positioning in coming weeks, that would put their signal in the bearish column. They're still not quite there yet, so things look good for the bullish side for now. Regardless, the S&P 500 setup will go bullish July 20, for at least one week.

Tune back in here early next week for a more detailed look at the other markets I'm covering with my setups and for a portfolio results update. Have a fine weekend.

13 comments:

In Debt We Trust said...

I noticed that the vix has declined substantially w/in the past 2 trading days - on virtually no news or fundamentals!

But strangely enough, the vix puts are not selling at par value....

Anonymous said...

The latest data shows a large drop in Commercial open interest both long and short, both the large and small contracts. Does this have much effect on your model?

In Debt We Trust said...

What does your signal say for Eurodollar Futures? Other analysts are also detecting signs of bullishness:

http://www.mizuho-cb.co.uk/TresInternet/PDF%27S/eurodollar.pdf

Alex Roslin said...

Hi Anonymous,

Thanks for your message. I haven't found the commercial open interest to be the best indicator. When it did produce somewhat reliable signals, it worked best to fade the total open interest (long plus short positions).

Regards,
Alex

Alex Roslin said...

Hi In Debt...,

Thanks for your message. As the updated numbers on the latest signals table show, the data has pulled back from its fairly bearish tilt last week. It's still in cash and not giving a bullish signal, but the data is clearly more optimistic in the latest report.

Regards,
Alex

Anonymous said...

Smart money for SPX is no longer commercials, as it has been proven the past three months, it's JPM and GS gunning the tape at the close and in the overnight session, forcing buy stops and 'technical" entries. Then they pull the plug. Can't use SPX for COT, it's too heavy. You need to work more with currencies.

Alex Roslin said...

Hi Anonymous,

Thanks for your comments. The commercial hedgers can be wrong at times - no trading system is right all the time - and that's why I've found it's far more reliable to combine their signals with those of the small traders, whom I'm fading in this setup.

My record using that approach since January for this setup is two wins, one loss, with an average six-percent gain. That's not statistically meaningful, but it suggests you're wrong that the commercial signal isn't working at all any more.

That said, I do plan to turn to studying some of the currencies soon. Copper is what I'm close to finishing my next setup for right now - one of the historically most volatile markets under the sun.

Regards,
Alex

dave said...

Anonymous @ June 30, 2009 1:08 AM,

Anyone who denies your "gunning the tape at the close" info doesn't actually trade. Next day's first half-hour proves this all too often.

Thanks for commenting. Please do so more often.

Regards,
dave

Alex Roslin said...

Hi dave,

For the record, I do agree a lot of the trading - esp. when the program traders hit at 2 or 3 p.m. - does feel manipulated these days. Or more manipulated than usual. But does that have lasting long-term impacts that don't reveal themselves in some kind of identifiable patterns?

Lots of people believe gold is manipulated too. But there are still trends that can be traded off with the Commitments of Traders data or otherwise.

Regards,
Alex

dave said...

Alex,
"But does that have lasting long-term impacts that don't reveal themselves in some kind of identifiable patterns?"

UNLESS the pattern work relates close to next day's open day-in day-out, "gunning the tape at the close" flies beneath the radar. I'm not a conspiracist; i don't even believe in the PPT. "Gunning the tape at the close" does affect those of us who are active traders or manage money. With all due respect because i certainly appreciate your work, "two wins, one loss" since January is hardly in the line of fire.

The days when you could simply enter or exit markets at the open or close are dead & gone forever.

Regards,
dave

Alex Roslin said...

Hi Dave,

I do agree conditions seem to have changed for day traders. I just don't believe I can draw any conclusions for the long-term based on a few months of changed conditions along the lines you're talking about.

The three trades I mentioned are for the S&P 500 setup alone. In total, I've got 10 closed trades since December (seven wins, three losses, 8.95-percent gain on average with a holding period of 2.9 weeks) that seem to indicate that trading with the system I'm using hasn't stopped working during the last half year or so.

Those 10 trades probably have little statistical validity too for the long-term. Rather, their success merely indicates that conditions didn't change in the past six months to the point that the Commitments of Traders data didn't work.

And even if the win ratio is 0% in the next six months, that actually probably says little about the statistical validity of this system too. It would be frustrating, but you need a lot more data than that to say with any confidence that conditions have really changed.

Regards,
Alex

Alex Roslin said...

Hi again Dave,

Incidentally, I trade frequently on a day and swing basis. I know it's been harder to make money. I have no way of knowing if there's manipulation - or just lots of scared people. But using only the technical price action, I agree trading on the open is usually pretty suicidal.

Regards,
Alex

dave said...

Hi Alex,


Once again, i applaud your contribution regarding mkts information.

You wrote "I do agree conditions seem to have changed for day traders."

I am not saying that conditions have changed "FOR day traders" but "BECAUSE OF the prevalence of day traders" that did not exist in such numbers 20 yrs ago (because of online trading & cheap commissions).

Take a look at a one minute intraday chart of XLE for last Thurs July 2. At 3:27 EST XLE bottoms & rallies vigourously til 3:55 EST. That was daytraders getting out of profitable short positions even though there is a very prosperous developing H&S top that will have more influence over the near & short-term.

Once the daytraders stopped covering shorts XLE plummets in the remaining 5 minutes.

As Art Cashin said many times last fall he had never seen so many nervous shorts (day traders) who were so easy to spook againt the trend.

Regards,
dave