Sombre Outlook for Next Week

What a freakishly nutty ride this week in the markets has been. I hope you fared okay. We may need to hold onto our hats a little longer. Things don't look much better for next week if today's Commitments of Traders report from the Commodity Futures Trading Commission is any indication. See my latest signals table for the sad details. Some highlights:

- U.S. financials: The data that gives me signals for the benchmark BKX U.S. Bank Index seems to have given good signals warning of the trouble we've seen lately. The latest COT report suggests more of the same. The large speculator and small trader total open interest in three-month Eurodollars has continued to decline significantly. As I've reported before, that data correlates moderately with BKX prices the following week. In fact, this week marks the fourth in a row of declining large spec total open interest. It's off 28 percent since the week of April 20. That's the longest stretch of declining total open interest for the large specs since the one that started in January 2009 as the market crash was accelerating.

- S&P 500: The "smart money" commercial hedgers have switched gears in a big way and reduced their net futures and options positions to the point where they have given me a bearish signal toward my S&P 500 trading setup. This setup has been in cash since February 22, and it takes a position when both the commercials and small traders give the same signal. The wrong-way small traders are still highly bearish, as they've been since the beginning of 2010, missing the entire rally. So this setup overall will now go to cash the week of June 14.

- Gold: My setup for bullion is bullish for a second week, then goes to cash or bearish on the open of trading the week of May 31. Note that the latest signals table shows the data going substantially more bearish in the last COT report. This suggests that next week could see more downward pressure on gold prices, as that data correlates moderately to strongly with bullion. If this bullish signal makes money, it will be in spite of trader positioning.

- Natural gas: My setup for gas remains in cash, but the latest COT data is highly bearish for gas. This data correlates moderately with gas prices.

- Crude oil: My setup remains bearish for a spell longer and goes to cash on the open of trading the week of June 14.

Have a great weekend, especially for Canadian readers enjoying a holiday Monday. Please tune back in early next week for an update to 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