Banks Could Take Hit

Woah - potentially very bearish data for U.S. financials in Friday's Commitments of Traders report. Check out my latest signals table for more details. I'll be back here later with a fuller update. No bearish signal for banks just yet, but the data doesn't bode well. A bearish signal is possible in two weeks' time. As well, the data, which correlates strongly with the BKX U.S. Bank Index, suggests a risk of weakness ahead.

Data Looking Up

Will this small rebound soon exhaust itself, or is the selloff over? The Commitments of Traders data seems to be leaning toward the bullish case. My trading setup for the S&P 500 has given a bullish signal to take effect on Monday's open of trading. The latest COT data issued Friday continues to look optimistic for the S&P 500, with the "smart money" commercial hedgers remaining heavily bullish in their net positioning compared to recent data, while the wrong-way small trader crowd is again set up very bearishly.

Check out my just-updated latest signals table for more details about Friday's data and my current signals for the various markets I'm covering. In the other data:

- U.S. banks: My setup for the benchmark BKX U.S. Bank Index, which is based on the three-month Eurodollar contract (the liquidity measure, not the currency!), is in cash again this week, the second in a row. But this data is looking up this week, too. The large spec and small trader open interest, which correlate nicely with next-week BKX prices, has risen decently, according to Friday's COT report.

- Crude oil: My crude oil setup is still on track to go bullish on the open on March 8, but this week's data shows the small traders, whom my signal trades alongside, getting dramatically bearish in their net futures and options positioning in relation to recent data. That has pushed their signal to bearish. But that signal works with a delay of eight weeks. So it won't take effect for quite a while. My bullish signal will remain in effect until that point, which I will update you on as we get closer.

- Gold: My trading setup for bullion is still bullish, as it's been since Feb. 1. Moreover, this week's data has rebounded back into somwhat more bullish territory. You may have noticed that last week's COT data for gold had shown a sudden, rather significant drop in large spec net positioning and total open interest. I fade both of those datasets, but week-to-week that data correlates strongly with next week's gold prices. Friday's data, on the other hand, shows the large specs getting more net long and building back their open interest relative to recent data. Those could be bullish portents for the coming week.

Hope you did well last week. Please tune back in early this coming week for an update of my portfolio page. Good luck this 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

Banks, Natural Gas to Cash

New signals and data are now up on my latest signals table based on Friday's Commitments of Traders report. New signals to report: My trading setups for U.S. banks and natural gas both go from bullish to cash on this week's open of trading. Be sure to check out the latest signals table for more details about what the data is doing now.

In other news, my setup for the S&P 500 is still on track for turning bullish in a week's time (on Feb. 22). My gold setup remains bullish, while my setup for the Nikkei is still bearish.

My 30-year Treasury bond and crude oil setups are both in cash, although crude will go bullish on March 8. Sorry for the late update. Hope you did well last week and that you'll do even better this week. For Canadian and U.S. readers, hope you have a good holiday today. Tune in Tuesday for an update of my portfolio page.

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

Commercial Hedgers Bet Big on Rebound

What a crazy day to cap a nutso week. Feels like we're back in the dog days of early last year. So many people are sitting in front of computers with their finger on the nuclear button. But new data from the Commitments of Traders report today suggests my series of bullish signals from last week are still on track. I've updated my latest signals table based on the new figures released this afternoon. A few highlights:

- S&P 500: You have to go back to Sept. 2007 to find a time when the "smart money" commercial hedgers have been this bullish. As you'll see on that latest signals table, these guys are in heavy-duty extreme territory in their bullish net positioning. Meanwhile, the wrong-way small traders have gotten even more super-sizedly bearish. This is setting up very nicely for my long bullish trade starting on the open of trading on Feb. 22. Note that, as I explained in a special post yesterday, such big moves in trader positioning don't necessarily take effect right away. On average, in the S&P 500 data, the commercial and small trader signals were best traded with a three-week delay in my backtesting.

- U.S. banks: My second week of being bullish in this market. The data is still looking pretty hot, even if it's a hair less bullish this week.

- Crude oil: My setup remains in cash, but the data has given me a new bullish signal with a four-week delay. It's to take effect March 8, I guess somewhat in sync with the yearly seasonal trade.

- Gold: Bullion remains also bullish. The data, which correlates strongly with bullion prices, has also gotten a little more bullish Friday.

- Natural gas: My trading setup for gas is bullish a second week and will remain so next week, then cash out.

Hope you did okay last week. Please check back in early next week for an update of my portfolio page. 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

Market Tanks! Was the Smart Money Wrong?

The market is caving in today, and that prompted a trader friend to express frustration about the commercial hedgers in the Commitments of Traders data. You'll recall from my post last Friday that they got uber-bullish last week. So what gives? Are they wrong? He also noted that commercials used to have a better record a few years back.

It made me wonder if there were types of markets when the correlation has worked differently. So I checked out the numbers. Check these correlations out. Overall, contrary to conventional wisdom, the "smart money" commercial trader net position as a percentage of the total open interest has had a negative -25-percent correlation with S&P 500 weekly open prices a week later.

That's right - a negative correlation. So trading alongside the commercials week to week would have lost you piles of money. That actually makes sense, in a way. These guys accumulate positions as markets decline and vice versa. It's only when they hit extremes of positioning that I've found you can trade alongside them. And then, only if their signal happens to agree with that of another group of traders. That's why I use two signals in my own S&P 500 setup and only trade when both agree. And on top of that, the signal tends to work most reliably not right away - but with a delay of about three weeks on average.

Here's something else I found. Here are historic correlations in certain time periods between the commercial net position and S&P 500 prices a week later:

- March 1995-Nov. 1997: -71%

- Dec. 1997-Dec. 1999: +14%

- Dec. 1999-March 2003: 0%

- March 2003-June 2008: +34%

- March 2003-today: +53%

- June 2008-today: +63%

- March 1995-today: -25%

So clearly, the COT data has changed quite a bit over the various periods in how it interacts with market prices. Trading just off this information would have been a fairly random exercise. That's again why I think the data needs to be filtered with some more complex trading system. Good luck the rest of this week!