The S&P 500 small traders have boosted up their net long positioning in futures and options to extreme levels in the past two weeks, according to the Commitments of Traders data released weekly by the Commodity Futures Trading Commission.
That's not a good thing for bulls. The small traders tend to hit extremes in their net positioning just as the market is about to go in the other direction. As you can see on my newly updated latest signals table, the wrong-way small trader positioning put them over my signal line on Oct. 9 - way, way over - taking their signal bearish. That same week, the "smart money" commercial hedgers got ultra-bearish in their positioning. My testing has found that it's worked best to wait three weeks before acting on such new signals in this market. Hence, my bearish trade to be executed Nov. 2. Today's COT data didn't give any reason for optimism, as the numbers on that table indicate. The commercial traders have gotten even more bearish. Not good at all. Some other highlights from the latest data:
- U.S. financials: Also not good this week is the major turnaround in the data that I use to trade the BKX U.S. Bank Index. The large speculator total open interest in the three-month Eurodollar (the liquidity measure, not the currency) has declined significantly in the past week, as you can see from the latest signals table. That data has a very strong 61-percent correlation with next week's BKX values historically. Dovetailing with this ominous development is the fact that the small trader total open interest, which has a 41-percent correlation with the BKX the following week, has also dropped a fair deal - so much so, in fact, that my small trader signal has gone bearish. My trading setup for the BKX remains in cash, however. It requires all three signals to agree, and that hasn't happened in quite some time now.
- Crude oil: My trading setup for crude goes to bearish on Monday's open of trading. Kind of odd, seeing as how crude had a huge breakout this week technically speaking, rising above key resistance. But I don't second-guess mechanical signals. (I use risk-control rules, including stops and appropriate position sizes, in case I'm wrong, which is inevitable. See more on those rules at my How It Works page.) The crude setup will remain bearish for at least five weeks and maybe more.
- Gold: My trading setup for gold goes to cash on Monday's open of trading. It will remain so for at least two weeks, then could go back to bearish unless the large speculators suddenly get much more bearish. At present, they have been at elevated levels of bullishness since early August - a warning sign.
- Natural gas: This setup goes back to bearish on Monday's open, too. That signal will last for only one week because of how the two groups of traders don't line up correctly after that.
Have a good weekend, and good luck next week. Tune back into my portfolio page early next week for an update.
19 comments:
Hi Alex,
For SP500, you are fading net position % and in last your trade signal you generate sell signal.
My question: in last COT report the small net position is negative on extreme levels ( small trader short the market), if you fading them you must be bull the market. Am I right?
Mark
So you do not look at the eminis where most of the small traders would be? http://i37.tinypic.com/14e2yab.jpg
Thank you, Alex. Very interesting.
Is "4) If I get a new signal..." the only location on your site were you discuss your philosophy for delaying trades ?
Hi Severino,
No - you are forgetting that the emini contract is a fifth of the value of the larger contract. So your own table shows you are incorrect. Furthermore, my testing has shown that the larger contract has tended to give better, more robust setups. That said, I haven't returned to the emini data with my current testing technique to re-verify that. On my to-do list. If you are interested in the data, go right ahead and test it yourself. Let me know what you find. For more info on all this, check my FAQs page.
Regards,
Alex
Hi Anonymous,
Thanks for your questions. I have explained it in various comments in the past, but those aren't easily findable. I've just added some more details on my FAQs page about the delays.
Regards,
Alex
Hi Mark,
I'm not sure I understand what you mean. The small traders don't have a negative net position in the last COT report as a percentage of the total open interest. In any case, their net position is irrelevant to me. It's their relative positioning (compared to the moving average) that I care about.
Regards,
Alex
$VIX is down 10 days in a row.
This is also a VERY rare occurrence.Fear is the contrarian play. I say the VIX not only goes up next week, it spikes much higher in a one or two day period.
Hi In Debt...,
VIX has broken down seriously below support, but interestingly enough, today (barring a massive reversal) will be a completed 9 count of a TD setup. Often, a completed setup is followed by a brief consolidation period.
But a setup often eventually leads to a TD countdown, which would entail more downside for VIX. And VIX broke down below support quite early in its setup, so that again suggests a good chance of more downside eventually.
Regards,
Alex
What does "TD" stand for?
That would be "Tom DeMark."
Regards,
Alex
Alex,
I just read this interesting post. It seems the author agrees with you that the vix is due for another beating after trending sideways for the near future (consolidation). Does this mean it's time to buy vix puts? I bought vix puts at 28-29 but sold too early (at 25.5) and feel like a fool for all the missed profits!
http://vixandmore.blogspot.com/2009/10/vix-narrowly-misses-new-consecutive-day.html
Alex,
Here is some more additional context about liquidity flows. Treasury to bail out the FHA through buying FNM/FRE bonds (again). Also, Bernanke reassured traders that repos would not put an end to liquidity (sloshing).
http://debtsofanation.blogspot.com/2009/10/debts-of-
spenders-treasury-to-buy.html
I suppose this means we'll hit 20k by the end of the year.
Hi In Debt...,
I took a look at the weekly and monthly charts of VIX for more insights. On the weekly chart, VIX just had a failed breakout above a TDST resistance line at 27.04 and is now just above a TDST support line at 20.47 on a 3 count of a TD Setup. That's pretty early in the count, and if VIX falls below that line, the theory is it would continue to a completed 9 count (i.e. more downside).
On the monthly chart, however, VIX is this month on track to complete a full 9 count of a TD Buy Setup. A completed setup is often followed by a short consolidation period, then can reverse or continue into a TD Countdown (i.e. 13 closes lower than the lowest low two bars prior). Support is way down below at 9.70 - around the 2007 low.
I'd say the key would be those two weekly TDST lines. If one or the other goes, that will show us the long-term trend pretty clearly.
Regards,
Alex
Your $VIX more downside view would seem to contradict your bearishness on S&P 500 ?
Thanks
Hi Anonymous,
Sort of, yes. My views on the VIX came from the chart, while my bearish signal comes from a mechanical system. At the same time, it's possible that VIX will enter a consolidation stage or even a small retracement at the end of a completed setup. In that case, there's not necessarily a contradiction. I can't say right now how long the SPX signal will last either - or how far down SPX might go if it does go down. The SPX signal is certainly not saying the rally is over. There's no way to really know that right now.
Regards,
Alex
Hi Alex, UUP broke out of a downtrend wedge. If the USD bounces our equities will tk a hit. Your call on OIL worked out, really confussed on the SnP. I know your long til Nov 2nd but man oh man. Really looking forward to your data analysis this Frifay to see if the commercials have added to shorts or exited shorts for a late mth rally?
Thanks
Joseph
Hey Joseph,
SPX is holding up nicely the past few days and has broken out to a new high.
Regards,
Alex
Wow - talk about a vix reversal! Good thing I didnt buy those puts.
Hi In Debt...,
Yeah, freaky. It's still well below the TDST line at 23.44, so the damage isn't too big yet. But on the weekly chart it broke below a weekly support line at 20.14 briefly intraday, then reversed back above. That's probably not a good development.
Regards,
Alex
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