Saturday, 27 March 2010

Small Traders Fall Off Cliff, Treasury Yield to Break Out?

Are we feeling a little toppy yet? The way some stocks are rising is insane. It's going to be a mess when this ends. But that might not happen for a little while more, according to the Commitments of Traders report issued yesterday afternoon.
The data on trader positioning in various markets shows the wrong-way small traders in S&P 500 futures and options have just tumbled off a cliff in their positioning, getting supremely more bearish. I've just updated my latest signals table with the data for this and other markets.

The COT data may be bad news for the little guy, but good news for the rally, as historically markets have tended to go up when the small traders hit extremes in their bearish positioning relative to recent data. The small trader net long position hasn't been this paltry in a year and a half. Meanwhile, the "smart money" commercial hedgers, while a little less bullish this week again - their seventh consecutive week of reduced bullishness compared to recent data - still have a solidly bullish tilt in their positioning.

The data from the three-month Eurodollar contract, which gives me signals for the BKX U.S. Bank Index, is fairly ambivalent this week, although it's turned up slightly since last week, when it had really soured. The large speculator total open interest, which has a 63-percent correlation with BKX the following week, has bounced back a little after two weeks of declines. On the other hand, the small trader total open interest, with a 42-percent correlation to BKX, has declined slightly. My trading setup for BKX remains in cash for a seventh straight week because its three signals don't agree again.

In gold, my trading setup remains bullish for the second straight week. But the data shows the large specs are running for cover. That's good news for my signal, which fades the large specs in their net position and total open interest. On the other hand, those datasets correlate strongly with next-week gold prices, so the COT report could be suggesting more trouble for bullion this coming week.

Similar situation for natural gas. The setup is bullish, but the trader positioning, which also correlates very nicely with gas prices, has suddenly plummeted. This setup, in particular, sees lots of volatility, like gas itself, which broke down big-time this week after looking like it might want to finally bounce. I'm holding onto my hat.

Finally, my setup for the 30-year Treasury bond has turned bearish for this coming week's open of trading (meaning the yield would go up). That's based on fading the small trader and large spec total open interest, which both hit extremes of excessive bullishness. The setup will remain bearish for two weeks, then go to cash or bullish. So this may not be the big bond break some people have been calling for. That said, the yield is back at the old highs of 2008 and 2009 - so who knows.

Hope you did well last week and that you have a good weekend. I'll be on the road this week, so I won't have a chance to do a portfolio update and may be a little late in my next post. Apologies. I'll do my best to get it up before next Monday's open of trading. Good luck this week!

Sunday, 21 March 2010

Going Long Gold, Gas; Ominous Bank Data

I've just updated my latest signals table based on Friday's Commitments of Traders data. New signals: crude oil, which is now bullish, will turn bearish on the open of the week of April 19, and gold, until today in cash, goes bullish on tomorrow's (Monday's) open of trading. Gold looks set to remain bullish for up to five weeks based on the COT data.
Also, from last week's data, natural gas goes bullish on Monday's open, too. Gas, which has seen a bloodbath in recent weeks, could be further buoyed by the fact that the small trader and large spec net positions as a percentage of the total open interest - which both correlate strongly with natural gas prices the next week - have both jumped up nicely, as you'll note on my latest signals table.

In other news, the wrong-way S&P 500 small traders have again gotten more bearish in their futures and options positioning - fading the rally as they've done since early January. Doh! Meanwhile, the "smart money" commercial hedgers are a mite less bullish in their positioning, but still light-years from getting bearish enough to flip my trading setup to bearish. It remains bullish.

Of special interest is the three-month Eurodollar data, which gives me signals for the BKX U.S. Bank Index. The large spec total open interest correlates nicely with BKX, but it has just fallen off a cliff, as you'll see on my table. A very dramatic reversal. Oh-oh.

Hope you did well last week and continue to do so this coming week. Check in early this week for an update of my portfolio page.

Friday, 12 March 2010

Wrong-Way Small Traders Still Fading Rally; Gas Could Rally, Not so Much Gold

How overbought can a rally get? It turns out, very! As Stephen Vita has been pointing out, it feels a lot like Q4 1999. What do the new Commitments of Traders numbers out today tell us? I've put up the data and new signals on my latest signals table. Some highlights:
- S&P 500: The wrong-way small traders have gotten more bearish, according to this afternoon's COT report. They've in fact had a bearish tilt in their net positioning in future and options since early January - fading the entire rally. Since my trading setup for the S&P 500 trades opposite to the small traders, their latest move to get more relatively bearish should be a good sign for the rally.

On the other hand, the commercial hedgers also got a little more bearish this past week. And both sets of data correlate poorly with week-to-week fluctuations in S&P 500 prices. The main point is we're still very far from the kinds of positioning extremes needed to signal a turn in this market, at least if past data is any indication. So the setup remains long.

- Banks: The data on U.S. financials is also mixed, as you can see on that table. My setup for the BKX U.S. Bank Index remains in cash this week.

- Nikkei: My trading setup for Japan's Nikkei Average goes to cash after seven weeks being short. The setup went short in late January just as the market was selling off, so it'll wind up around even, probably with a small loss. The setup will stay in cash for a spell, then go long in late April. That's the farthest-out signal I think I've got at this point. It could suggest that the market could surprise some more and fail to implode this spring as many anticipate it will.

- Gold: Gold and other precious metals haven't kept pace with the rest of the rally. They've sold off this week while my gold setup was in cash. The setup will remain in cash next week, and the data foretells more weakness for bullion. The large speculators have cut their net position and total open interest - and both of those sets of data have correlated quite well with gold prices the following week.

- Natural gas: My setup for gas, after being in cash five weeks, is now signaling to go long in a week's time - i.e. on the open of trading the week of March 22. As I noted in last week's post, the data has started to suggest the bloodbath might be finally over for gas. Now, the setup has officially gone to the bullish column.

Hope you did nicely this week and that you have a great weekend. Check in early next week for an update to my portfolio page.

Monday, 8 March 2010

I'm Oily But Not Gassy

I went long crude oil this morning and closed down my gold position, in accordance with my signals based on the Commitments of Traders data. Here's what the latest COT report has to say about the markets:
- S&P 500: The "smart money" commercial traders are a little less bullish this week, as you can see on my latest signals table. But my trading setup for the S&P 500 remains long. The change in commercial positioning is so small it has no effect on my signal. As well, week-to-week fluctuations in the S&P 500 COT data have virtually no correlation with index prices. You'll also note from that table that the wrong-way small trader crowd has gotten a bit less bearish. If those trends both continue, eventually the signal will flip to bearish. But we're nowhere near that point yet.

- U.S. banks: My trading setup for the BKX U.S. Bank Index (based on the three-month Eurodollar COT data) is in cash again this week. The COT data has been flipping around like a fish in a pail recently. The large speculator total open interest has been particularly volatile. This data has a strong 63-percent correlation with the BKX the following week. Its signal has gone from bullish to bearish and now back to bullish in the past three weeks. The latest COT report shows the large spec and small trader total open interest rebounding in relation to past data, so that is a bullish portent - though the move isn't decisive enough to be a trading signal for me by itself.

- Gold: My setup for gold goes to cash on this week's open. That's because the large spec total open interest, which I fade in this market, got excessively bullish in mid-January. That caused a bearish signal for two weeks, and with a seven-week trade delay, it took effect this week. The overall setup is in cash because the other signal that makes it up - based on the large spec net position as a percentage of the total open interest - is still bullish. If that remains so, in two weeks the setup will go back to bullish.

Also of interest: The large spec total open interest, which has a nice 77-percent correlation with next week's gold price, has shot up this past week.

- Natural gas: My natural gas setup remains in cash, but Friday's data looks quite sunny. The small traders and large specs have both upped their total open interest in a major way. That's bullish because they both are the "smart money" in this market. As well, both sets of data correlate strongly with gas prices the ensuing week. It's still not enough to give my setup a bullish signal, but it could suggest the rout in gas is almost over.

Good luck this week! My portfolio page is now updated with results of my closed gold trade and open positions.

Saturday, 6 March 2010

Crude Bullish, Gold to Cash

Just updated my latest signals table based on Friday's Commitments of Traders report. New signals for next week's open of trading in gold (cash) and crude oil (bullish). I'll be back Monday with a detailed post on the new data. Hope you did well this past week. And what a nice one it was. Have a good weekend!

Monday, 1 March 2010

Data Highly Bullish for S&P 500, Not So Much for Banks

U.S. banks look like they're super-vulnerable based on Friday's Commitments of Traders data, as I reported in Sunday's brief update. As you can see on my latest signals table, the large speculators and small traders in three-month Eurodollars have all of a sudden gotten massively bearish in their total open interest, reversing highly bullish positioning from the previous week. What about other markets?

- S&P 500: In this market, the "smart money" commercial hedgers have slightly reduced their hugely bullish net position as a percentage of the total open interest, but my trading setup for this market remains on its bullish call. The commercials have maintained four straight weeks with a net position over 1.8 standard deviations above the average. They haven't been this optimistic in relation to recent data since July, when they got set up nicely for the end of a month-long trading range and the six-month rally that ended in January.

- 30-Year U.S. Treasury bond: My trading setup for bonds is in cash, but it seems like it really wants to go bearish (meaning the yield would rise). The small trader total open interest, which my setup fades, has just seen a vertiginous rise this week. The small trader signal was already bearish coming into Friday. This week, the small traders are joined by my other signal representing the large speculators, whom I also fade. Their total open interest has also shot up since the previous week, giving them a bearish signal. The setup remains in cash for now because both signals operate with delays of several weeks. But if the signals remain aligned a little while longer, the setup will go short.

- Gold: Will bullion catch a bid with the rest of the market? Will it go to $3,000 - or maybe $30,000? Or $300? How anyone can predict these things is beyond me. Either way, my setup is long. This week, the COT data is looking a little shinier for gold. Going up are both the large spec total open interest and the net position relative to the open interest. Both are strongly correlated with gold prices the following week, so there's a nice chance of some strength.

My portfolio page is now updated with my current positioning and results of open trades. Good luck the rest of this week!