Probably Not a Top, Wrong-Way Traders Too Bearish

A depressing week in the markets has the top-callers back out in force. You can see it especially clearly in the numbers in Friday's Commitments of Traders report. See my just-updated latest signals table for the details. This week's data shows the wrong-way small traders in S&P 500 futures and options getting still more bearish in their net positioning. Friday saw them at 2.20 standard deviations below their moving average in their net position as a percentage of the total open interest. That's their most bearish in 13 months.

And you know that when the little guy gets really short - at least in this market - that's historically been a sign of more upside. Particularly when that's confirmed by the commercial hedgers being bullish. In this case, they are. My latest signals table shows them at high levels of bullishness since late June. Friday's data finds them still maintaining a solidly bullish net position. Some other highlights:

- U.S. banks: My trading setup for the U.S. BKX Bank Index, a basket of the major U.S. financials, remains in cash a fourth week. But two of its three component signals are now bullish. In Friday's numbers, the small trader total open interest has nicely turned around, pushing their signal into the bullish column.

- 30-Year Treasury Bond: My setup for the 30-Year Bond will go to cash the week of Sept. 7, then to bearish (meaning a call that interest rates would go up as the bond price trades opposite to the bond yield). This, after three weeks being bullish. Friday's data saw the small trader total open interest - which this setup fades (trades opposite to) - shoot up enough to push their signal into the bearish column.

- Natural gas: I'm holding on to my hat for another probably-insane week in this market. My setup says to be short for a week more, then to go back to cash in natural gas. Take a look at the nutso natural gas chart, and you'll see what I'm talking about. This market is craaaaazy.

- Gold: How long will this trading range last? You know the longer it does, the more whacky the breakout or breakdown will be. Well, there is some possible news to report from Friday's data. Large speculator total open interest (which I'm fading in this market) has suddenly moved significantly down, flipping their signal into the bullish column. Nothing to get too excited about just yet; that signal operates with a seven-week trade delay. So we're talking about a potential impact starting Oct. 19. The other signal in this setup has to agree at that point for there to be a trade on the long side. Right now, that other signal - fading the large spec net position - is bearish. This week's data saw the large specs still happily long. But lots can happen in seven weeks.

Good luck next week, and be sure to tune back in for my portfolio update early this coming week.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

S&P 500 Smart Money Super-Pumped, Wrong-Way Traders Super-Edgy

Sure was an interesting week. Still seems like a lot of disbelieving bears out there, just waiting for this market to crack up - even as it keeps bouncing back like it did again this week. Today's Commitments of Traders report confirms just how bearish the good people out there are. Check out my just-updated latest signals table to see those numbers.

The data shows the wrong-way small traders in S&P 500 futures and options at a remarkable 2.02 standard deviations below the moving average I use to study their relative positioning. That's their most bearish in over a year. The small traders have steadily reduced their relative net positioning for seven straight weeks as a percentage of the total interest - during almost the entire rise of the market off its mid-July low. Meanwhile, the commercial hedgers, who tend to be correctly positioned at market turns, have gotten even more bullish than they were last week.

All this bodes very nicely for my bullish signal for the S&P 500 that takes effect on Monday's open of trading. I'll hold that trade for at least three weeks due to the trade delays within this setup. Some other highlights from the new data:

- Banks: Mixed news for U.S. financials. Large speculator net positioning in the three-month Eurodollar contract has completely reversed course after a four-week decline as a percentage of the total open interest. And that is bearish. Today's data shows it bumping back up, which has turned their signal bullish. However, the small trader total open interest continues to fall off a cliff, and that is bearish. My setup for the U.S. BKX Bank Index remains in cash for a third week.

- Crude oil: My trading setup for crude oil - presently bullish - stays so for two more weeks, then goes to cash. Friday's data shows the small trader net position collapsing as a percentage of the total open interest. Their signal has now gone to bearish. So if the commercial hedgers, which are already on a bearish signal, remain that way inclined a few more weeks, we could get actually a bearish call from this setup in eight weeks' time. (The small trader signal has an eight-week trade delay before execution.)

- Natural gas: My setup for natural gas goes bearish on Monday's open. Gas has already gotten destroyed for more than two weeks. (I bought a discretionary short position last week as it broke down.) My COT signal will last two weeks, after which time the setup will go either to cash or bullish. Today's data saw the small trader total open interest rally nicely, which is bullish in this market according to my backtesting. But that signal has a two-week trade delay, so it won't impact my setup right away.

Be sure to tune in early next week for my portfolio update. Have a good weekend, and rabbit feet for next week.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

Going Long Treasury Bond and Nikkei, Cautious About Banks

The markets seem to have shrugged off that little selloff, but this week's Commitments of Traders data suggests we may not be completely out of the woods. The numbers are giving some mixed signals, with a bullish trade starting Monday for the Nikkei and positive data for the end of the month in the S&P 500 but bearishness signalled for banks. Also potentially worrisome is a bullish signal Monday for the 30-Year Treasury Bond (meaning the bond yield would fall). Bond prices have a moderately negative long-term correlation with equities and commodities (though that kind of relationship often means less in shorter-time horizons, including for the coming week). I've just updated my latest signals table with the data from Friday's COT report for the markets I'm trading with my COTs Timer system. Some highlights:

- S&P 500: The data in S&P 500 futures and options is looking up. My trading setup for this market goes bullish on the open of Monday, August 24, and the numbers remain hopeful into mid-September. The "smart money" commercial hedgers are super-bullish in their net positioning, while the wrong-way small traders are increasingly negative, as you can see from the data on my latest signals table.

- U.S. banks: More trouble for U.S. banks, if the COT data for the three-month Eurodollar contract is any indication. (That's the interest rate, not the currency.) All three of the groups of traders that make up my setup for the BKX U.S. Bank Index are now in the bearish column. Because of the varying trade delays for the three signals, there's no bearish trade just yet in that setup, which has been in cash since Aug. 10. But it's still not pretty.

- Natural gas: This ridiculously volatile commodity has sold off massively since my trading setup went to cash in early August, making new lows this week. My setup suggests this might not be the end to the correction in natural gas. It's given me a bearish signal with a one-week trade delay - meaning execution on the open of trading on Monday, August 24.

I've also just updated my portfolio page with my bond and Nikkei entries and the current result from my open long crude position. Good luck next week!

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

Cool Mention

Wow! I am blowed away. Trader and blogger Stephen Vita has listed COTs Timer among his top 10 favourite trading blogs at Blogs.com. If you don't know who Vita is, check out his free AlchemyOfTrading.com blog here. A subscription to his paid site is probably the smartest thing any trader could get, whether beginner or experienced, vegeterian or Martian or paraskavedekatriaphobic. I've never found anything to remotely compete with Vita's mix of trading smarts, hilarious commentary on the daily market grind and morons running our collective economies, and over-the-shoulder look at his decision-making as a trader and money manager. Although his approach is disretionary and COTs Timer is mechanical, I've learned TONS from him, and this trading strategy wouldn't exist in its present form without him. Thanks for your great site, Stephen. I'm humbled you'd think of me.

Taking Profits in Banks, Going Long Crude

What a difference a week makes. The latest data from Friday's Commitments of Traders report shows some pretty massive changes in trader positioning. That has triggered a bunch of signals for my trading setups based around this free weekly government data reporting trillions of dollars in derivatives positioning in major markets.

The best way to see what really happened is to check out my latest signals table, which I've just updated with the new numbers. Now, I know from the traffic data that many readers don't actually take a look at that table week to week. I encourage you to spend a little time figuring out how it works. The raw numbers give a better picture than anything I can write. So I think it's well worth the trouble. Some highlights:

- S&P 500: Commercial hedgers are still highly bullish, small traders still quite negative. These are perfect good conditions for the bullish signal my S&P 500 trading setup has given for the open of trading Monday, Aug. 24. Due to the three-week trade delay in this setup, that signal will now last two weeks at least.

- Financials: My trading setup for the BKX U.S. Bank Index goes to cash for Monday's open after four weeks being long. What a sweet run, but time for me to get out. Large speculator net positioning and total open interest have suddenly collapsed, according to Friday's data. The only thing keeping this setup from going short is small trader total open interest, which remains defiantly buoyant, though it too has dropped considerably since the prior week.

- Crude oil: Commercial net positioning has suddenly taken a sharp downturn this past week. With the four-week trade delay for the commercial signal, the change will cap off my bullish signal for crude oil that starts on Monday's open. The signal will now run four weeks until Friday's commercial bearishness impacts. Since small traders remain bullish, the signal won't go over to short, but rather will go to cash on Sept. 7. Until then, let the black gold flow!

- Gold: Speaking of gold, my setup for the yellow metal has more bad news for gold bugs. This week could have put the setup in the long column after seven weeks in cash. But alas, no. Large speculators, whom I fade in this setup, have gone bearish based on Friday's data. This, after a year being long. Wow. Their net position as a percentage of the total open interest hasn't been this excessively bullish compared to recent data since April 2004, when a similar bullish spike foretold a selloff and half-year sideways move for bullion. Friday's move put the large spec signal firmly in the bearish column. I had thought the setup could actually finally go bullish this week, based on the large spec total open interest, which had gotten super-bearish in mid-June, setting up for a long signal around now. Oh well.

- Nikkei: My setup for Japan's Nikkei Average goes to cash next week for a single week, then returns to bullish.

Tune back in early next week for a portfolio update. Have a good weekend, and best of luck next week. Looks like we might really need it.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond,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

S&P 500 Setup is Bullish for End of August - Sorry!

An attentive reader just pointed out a mistake on this site regarding my S&P 500 setup. I had the signal line for the small traders set at 0.65 standard deviations below the moving average in some places and 0.6 below in others. In fact, the best backtested results came from setting the signal line at 0.6 - as it is on my sample spreadsheets on my DIY page. I had been testing both signal lines a while back, and I guess I neglected to change that on my own spreadsheet! Duh! So I've corrected this now throughout this site.

The main impact is that last Friday's Commitments of Traders data actually means my S&P 500 setup has, indeed, given a bullish signal. This, due to the increase in bearishness of the wrong-way small traders in their derivatives positioning. With the three-week trade delays in that setup, this means my S&P 500 setup will go bullish on the open of trading Monday, Aug. 24. Sorry about the mix-up - and many thanks to this reader (and to an earlier one as well a couple of weeks ago, who wrote in about the same issue, albeit less fruitfully because, at that time, I couldn't figure out what the problem was). Good luck this week!