Sunday, 29 August 2010

Wrong-Way S&P 500 Traders Now Excessively Bullish

Wow - just when we've maybe started to forget last year's psycho volatility, here we are into it again. What's more, talk of a fall fall is winding up as we get into the traditionally wacky autumn months, plus a bitter U.S. congressional election campaign making things even more haywire. For at least one more week, the Commitments of Traders data released Friday seems to be saying some bullish things, but into September, it's looking a fair bit rougher overall - or at least that's my take. See my latest signals table for the actual signals and details on the numbers. A few highlights:
- S&P 500: As could be expected, just as markets head into their historically dodgiest period of the year, the wrong-way small traders have suddenly gotten uber-bullish in their net futures and options positioning, according to the CFTC's latest COT numbers. They're at such an extreme that their signal has gone bearish in my trading setup, with an execution date in three weeks' time. The "smart money" commercial hedgers are still fairly bullish too, however. So since the two signals won't be in alignment, my setup will go to cash in three weeks - i.e. on the open the week of Sept. 20.

- Nikkei: The new S&P 500 signal coincides with a bearish signal I got recently for the Nikkei that is to take effect Sept. 13.

- Crude oil: My setup for crude goes bearish on Monday's open of trading and will remain bearish for at least the next four weeks.

- BKX U.S. Bank Index: My setup for the benchmark BKX index (based on the three-month Eurodollar COT data) remains bullish for one more week, then goes either to cash or bearish. The latest COT data seems to actually be quite bullish for financials, with the large spec and small trader total open interest both moving up nicely.

- Gold: My gold setup goes bullish on Monday's open of trading.

- Natural gas: My signal for gas remains bullish for at least the next two weeks.

Hope you had a good weekend. Check back in early this week for an update to my portfolio page.

Sunday, 22 August 2010

The Fall Fall

Will there be a big fall fall, as some predict? It's starting to look like a crowded trade, as Stephen Vita has pointed out, but it's still definitely a possibility if the Commitments of Traders data is any indication. My trading setups for the S&P 500 and BKX U.S. Bank Index remain bullish for now, but the latest COT numbers released Friday have given one of the components in my BKX setup a bearish signal that takes effect with a two-week delay - i.e. the open of the week of Sept. 6. That week, my BKX setup will go to either cash or bearish, depending on what the other two component signals that make it up are saying.
I've just updated my latest signals table based on Friday's COT data from the Commodity Futures Trading Commission. You'll notice that my crude oil setup goes bearish on the open the week of Aug. 30, while my setup for the Nikkei goes bearish Sept. 13. So far, however, my S&P 500 setup remains squarely in bullish mode for the next three weeks. In fact, the "smart money" commercial hedgers have seriously ramped up their bullish net positioning, while the wrong-way small traders have gotten somewhat more bearish in the latest data (though as devotees of this blog know, that data doesn't correlate strongly with subsequent prices, so its real import is just that it's far from triggering a bearish signal).

Also of note: my natural gas setup goes from bearish last week to bullish this coming week. And my 30-year Treasury signal goes to cash.

Hope you're having a good weekend. See you early next week for an update of my portfolio page.

Sunday, 15 August 2010

Data Turns up Somewhat for Banks

After worrisome Commitments of Traders data last week, the figures reported Friday have turned up somewhat for U.S. banks. See my just-updated latest signals table for details. The large speculator total open interest in the three-month Eurodollar contract has jumped up nicely - which tends to be positive for U.S. financials - but the small trader total open interest has declined. My trading setup for the BKX U.S. Bank Index goes into its fifth week being bullish.
Meanwhile, my trading setup for the 30-year Treasury bond has gone bearish for Monday's open of trading (meaning the yield would go up). Also, my setup for natural gas is bearish next week, then flips to bullish the week after. And finally, my Nikkei setup goes to cash on Monday's open after after 10 weeks bullish. It then goes to bearish the week of Sept. 13.

For the S&P 500, my setup remains bullish a seventh consecutive week. But look at how the "smart money" commercial hedgers continue their fifth straight week of getting less relatively bullish in relation to the recent data. They're still fairly far from flipping to an officially bearish posture, by the standards of my testing. But that's where the trend is headed at this point. Meanwhile, the wrong-way small traders have suddenly gotten a lot more willing to bet on the market - usually a worrisome sign if such a trend continues and their net positioning hits an extreme of bullishness.

Sunday, 8 August 2010

Mixed News for Banks

I've just updated my latest signals table based on Friday's Commitments of Traders data. Somewhat mixed numbers for U.S. financials: My setup remains bullish for another week, but the data is ambivalent. Please note that my Nikkei setup goes to cash on the open of the week of Aug. 16, not this coming week's open as I had earlier mistakenly indicated. Sorry I don't have time for a longer post this week. Good luck this coming week, and be sure to check back in in a day or two to see my updated portfolio page.

Sunday, 1 August 2010

Rally Looks Solid... Until End of August

Good news for bulls in the latest Commitments of Traders report released Friday by the CFTC, but the data farther out suggests possible trouble starting to loom between the end of August and mid-September. I've just updated my latest signals table with all the gruesome details. Check out all that red! Some highlights:
- U.S. financials: The data is unmitigatedly positive this week for U.S. banks. My trading setup for the benchmark BKX U.S. Bank Index goes into its third week being bullish. The three-month Eurodollar contract (the liquidity measure, not the currency), which gives me signals for BKX, sees its eighth week of expanding total open interest by large speculators. That data has historically had a 63-percent correlation with next week's BKX prices. As well, the small trader total open interest has shot up to near a two-year high; that data had a 42-percent correlation with BKX.

- S&P 500: My setup goes into its fifth week being bullish and will remain so for at least the next three weeks. The "smart money" commercial hedgers are a little less bullish this week in comparison with recent data, while the wrong-way small traders are also a little less bullish. This is the kind of contradiction we often see in the COT reports, and it's one of the things that makes the data so hard to use for trading signals. For my part, I ignore week-to-week fluctuations in the S&P 500 futures and options positioning because it has historically had very little correlation with market prices. As well, I found the best signals came from following two groups of traders when both have hit extremes in positioning. As you can see on my latest signals table, this last week's COT data comes nowhere close to flipping either signal to bearish. So I'll just keep on truckin'.

- Nikkei: My Nikkei setup went bullish in early June - somewhat prematurely but with luck a low for the correction since April - and now it's just gone bearish with the trade to take effect the week of Sept. 13. Lots of people are already worrying about the usual "fall fall." Maybe they'll be right. (By the way, the long delay for the signal is based on the trade delays for the signals that make up this setup. Those delays were developed in my backtesting and reflect the optimal, most robust way I found to act on strong movements in the trader positioning seen in the COT data. For more on the hows and the whys, check my FAQs page.)

- Crude oil: My setup for crude goes into its eighth week in cash, but it's just gone bearish for the week of Aug. 30.

- Gold: My signal for bullion goes to cash on next week's open of trading after two weeks being bullish. That's based on the large speculators hitting an excess of bullishness in early June and the optimal trade delay for such developments I found in testing this data.

- Natural gas: My gas setup goes to cash after five weeks being bearish. It was a wild ride, as usual in this market - which is one of the most volatile out there. The signal was in the money big-time for most of that time, but a gas rally last week put it in the red. That's par for the course for this market. I've got no regrets. See my FAQs page for how I feel about and handle losing signals. Incidentally, the gas COT data correlates quite well with next week's gas prices, and the latest COT report saw both datasets fall off, which means the market could continue to see weakness. As well, one of the component signals of the setup has just flipped from long to short, so the setup could go back to bearish next week.

- Reader comments: Due to tons of spam in my comments boxes, I'm temporarily shutting down comments for a week or two to try to get some of it off my back. Sorry about that. Save up your questions and comments for later.

Hope you had a good weekend. Please check back here early this coming week for an update to my portfolio page.