Traders Boost Banks, Give up on Gold (But Bullion May Still Be Okay)

A nice little rally buoyed equities this week. We could see more of the same next week, according to some of the data in this afternoon's Commitments of Traders report. My trading setups for the S&P 500 and BKX U.S. Bank Index remains bullish for next week. See my latest signals table for more detail on the CFTC's latest weekly numbers and how they've affected my setups. Some highlights:

- U.S. financials: As noted in the past few weeks here, the large speculators continue to rebuild a nice big total open interest in the key three-month Eurodollar contract. That's the data that gives me signals for U.S. banks. These numbers also had a 63-percent correlation with BKX prices the following week between 1995 and 2007. Today's COT report shows the large specs again increasing their positioning, this time to 49.5 percent more than the week of June 1.

Meanwhile, however, a divergence has developed with the small trader total open interest, which also correlated with BKX albeit to a smaller degree (43 percent). The small traders have been reducing their positioning for the past three weeks, though not quite as much (only by six percent since the week of June 29). What could it mean? Time will tell if the small traders or large specs are right. Until then, the main take-home for me is this: My setup remains bullish one more week.

- S&P 500: This setup will remain bullish for at least three more weeks as the "smart money" commercial hedgers are still highly bullish in their net positioning while the wrong-way small traders remain decisively bearish. That said, the commercials have scaled back their bullish bet for the past two weeks both in absolute numbers (as a percentage of the total open interest) and in relation to recent data. Ditto for the small traders, except in the other direction. (They've gotten a tad more optimistic this past week.) However, as I've pointed out before a few times, the S&P 500 futures and options positioning has historically had very little correlation with week-to-week changes in market prices. So I tend to ignore those numbers until they hit extreme territory and give me a new signal.

- Gold: Woah. Now here's one market where the COT data has good correlations with prices. And this week's data was a bit of a stunner, with the large spec net positioning collapsing in a veritable panic, as you can see from my latest signals table. That data had a 62-percent correlation with next-week bullion prices. If that wasn't sorry enough news for gold bugs, the large spec total open interest has also been steadily capsizing, with a 15-percent decline over the past four weeks, including another drop-off in the latest COT report. That data has a very nice 77-percent correlation with gold prices.

All that said, this may not actually be such bad news after all. My backtesting found that the best trade was to fade both of those sets of data, and the signal remains bullish for a second week. In fact, the large specs haven't been this bearish in their net positioning relative to recent data since Sept. 2008 - just before the huge gold rally started that took bullion prices from around $680 to over $1,200 an ounce. One of the many mysteries of the COT data!

- Natural gas: My setup says bearish for a fifth straight week, then goes to cash on the open the week of Aug. 2. The COT data in this market at least was pretty unequivocal this week. The signal is bearish, and so was today's COT data, with declines in the total open interest of both the large specs and small traders. Those datasets correlated nicely with gas prices (58 and 60 percent, respectively).

- 30-year U.S. Treasury: My setup goes to cash on next week's open of trading after three weeks being bullish.

Hope you fared well this week and that you have a great weekend. Be sure to check back here 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

Thumbs Up for Banks and Bullion

Is this just a "sucker rally" that will soon blow up? Or will it have legs? From the charts, I'd say this thing is looking pretty beat up with lower lows since April. Today's mayhem doesn't help. But this afternoon's weekly Commitments of Traders report seems to disagree. It just gave me bullish signals for the BKX U.S. Bank Index, a benchmark for U.S. financials, and gold, which is looking almost as sad on the charts lately as stocks.

And as I've said before, this is one of the reasons I think it's so useful to know what the COT data is saying. It's usually pretty contrarian and helps me diversify my positions and thinking. (For newbies, the COT data is issued by the U.S. Commodity Futures Trading Commission and shows how trillions of dollars are positioned in futures and options by all manner of institutional pirates... er, I mean traders, hedgers and small-time speculators. See my Intro and FAQs pages for more details about how my trading system gets signals from this data.)

I've just updated my latest signals table based on Friday's COT report. Some highlights:

- S&P 500: My trading setup remains long for at least the next three weeks based on ultra-bullish positioning by the "smart money" commercial hedgers (who in backtesting were usually correctly positioned at key market turns) and the continuing and growing bearishness of the wrong-way small trader crowd - the little guys like you and me who, sadly and unprofitably, tend to be badly positioned.

- U.S. financials: As mentioned, my setup for BKX has gone to bullish. I'll execute the trade for next Monday's open of trading as usual. The setup has been in cash for the past 22 weeks, with the exception of two weeks when it was bearish (short). Also interesting, the large speculator total open interest in three-month Eurodollars (the liquidity measure, not the currency) has risen steadily for five consecutive weeks. This is notable because this data, which I use to get my signals for BKX, has a 63-percent correlation with BKX prices the following week. In fact, it's exploded by 46 percent since the week of June 1. That's a pretty big bullish bet.

But as I've also mention in many places on this site (like here), my signals aren't anything close to a sure bet. In fact, I expect to lose money much of the time and use strict stops and positioning sizing to control my risk. My trading system is based on backtesting of signals that worked historically and aren't guaranteed to do the same in the future by any means! Be warned.

- Gold: My bullion setup was in cash for seven weeks but has suddenly swung into bullish mode. The signal is to be executed on Monday's open of trading. It looks like the setup will stay bullish for two weeks, then go to cash (or possibly short, although that's a lot less likely) due to excessively exuberant positioning by the large speculator types, which I fade (trade opposite to) in this market.

- Crude oil: No new developments in this market, with the setup going into its sixth week in cash. The two groups of traders I follow for signals in crude have been giving opposing signals for a while, with the commercial hedgers positioned bullishly while the small traders (in this market, the smart money, surprisingly) are bearish. No trade until they learn to get along.

- Natural gas: A fourth week of my bearish signal for gas. The signal will continue on for a fifth week being short, then it'll go to bullish or cash. As you can see on my signals table, the small trader total open interest has jumped, putting that signal into the bullish column with a two-week trade delay.

- 30-year Treasury bond: My setup is bullish (meaning it expects the yield to fall) for a third week, then will go to cash the week of June 26.

Hope you did okay this week and that you have a great weekend. Be sure to 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

Smart Money Highly Bullish on Rebound

Steady as she goes. No new signals this week for my trading setups based on the Commitments of Traders data from the CFTC. I've updated my latest signals table based on Friday's COT data release. My trading setup for the S&P 500 is bullish again this week and will remain so for at least the next three weeks. As you can see from my signals table, the "smart money" commercial hedgers in S&P 500 futures and options are highly bullish this week, while the wrong-way small traders are again heavily bearish.

Sorry about the late and truncated report this week. Hope you had a good weekend. Check back in later today or tomorrow 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

Traders Give Bullish Signal for S&P 500

Another terrible week in the markets. Hope you survived it okay. The "smart money" may have been a little premature flying head-first into the market last week. Despite that, they're doing the same thing this week. The commercial hedgers are still heavily bullish in their net positioning in S&P 500 futures and options, according to today's Commitments of Traders report.

For newbies, the COT report is the free weekly data in which the U.S. Commodity Futures Trading Commission is kind enough to tell us how trillions of dollars are positioned in 150-plus major markets. I found this data could reliably give good-probability signals about future market prices in historic backtesting and created a trading system around it. (See more details on my FAQs and Intro pages.)

For the S&P 500, as you can see on my latest signals table, the "smart money" commercial hedgers have helped give my trading setup a bullish signal. The other reason for that signal is the very bearish net positioning of the wrong-way small traders - the little guys who tend to be badly positioned at key market turns. That bullish signal goes into effect on next week's open of trading and will last at least the next three weeks - possibly more.

Some other highlights from the latest COT data:

- U.S. financials: My setup for the BKX U.S. Bank Index remains in cash, but the COT data looks more promising each week. That doesn't mean it's not often wrong - as it obviously was last week, when it had gotten bullish while the market got meat-cleavered yet again. But historically, the data has a decent correlation with BKX values the next week, and the latest data shows another rise in total open interest of the large speculators and small traders - which has tended to be a good thing for bulls.

- 30-year Treasury bond: Bizarrely, despite the recent collapse in the Treasury's yield, my setup has just now decided to go bullish (meaning it believes the yield will fall more). Strange, but I'll take the trade anyway. That's the only way to use a trading system: Never question it, or you're in big trouble psychologically... and no doubt in your bottom line, too.

- Gold: My signal for bullion is in cash for another week, but the data has edged into more lackluster territory this week. Large spec total open interest, which has a 77-percent correlation with gold prices the next week, has edged down from 320,548 to 316,913. That could promise more trouble for gold, which saw a nasty little selloff this week.

- Natural gas: My gas setup is bearish for a second week next week and will remain so at least one more week after that.

- Nikkei: The setup has been bullish for five weeks and will remain so for five weeks longer, then go to cash.

- Crude oil: My setup for crude is in its fourth week in cash and shows no signs of going either long or short as the two signals that make it up continue to squabble and disagree with each other.

Have a good weekend, and be sure to check back here early next week for an update to my portfolio page. Happy Canada Day, and to American readers a great July 4.

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