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