Natural Gas Stops & Portfolio Update

Looks like natural gas is getting demolished again this morning. Just did some quick numbers on that trade to see where it is now in relation to my stop. As you'll see on my latest signals page table, this is a helluva volatile market, which, even with my recently updated setup, still has a largest past drawdown of 29 percent. The stop is still a ways to go below, so the current trading is well within the historic volatility for this market. (Remember Amaranth?) The stop for my 200-percent leveraged natural gas position (the HNU Horizons BetaPro Fund, trading in Toronto) is $18.95. (This morning it's trading at $25.15.) I should note that this stop for HNU is actually based on a 58-percent loss, as it's a 200-percent leveraged fund and, accordingly, I used half of my maximum position size for this setup. (See that info on my latest signals page table.) For the UNG Natural Gas Fund, the stop would be 29 percent below the June 23 entry price of $61.97, or $44.00. Yeah, big losses. Like I said, this is a volatile market. That's why the position sizes have to be quite low. Otherwise, I risk getting wiped out. See more on my risk-control techniques on my how it works and glossary pages. Also check out my portfolio page, which I've just updated with my latest trade returns. Good luck this week!

TAGS: ProShares, natural gas, Horizons BetaPro, HNU, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Sucker Rally? Not According to COT Data... At Least Not Yet

Wow. That was surely one of the most nutso weeks in recent market history. My 200-percent leveraged UYG ProShares Financials Fund collapsed 22.9 percent by the intraday low Tuesday, after which it rose - wait a sec, is that right?! - yup it sure is - 46.8 percent. And what do you suppose the Commitments of Traders data was doing in the middle of all this circle-puking? I was really wondering about that considering the data was compiled Tuesday, which was the "panic day" of the week. Turns out that for the first time in a long while, there were no new signals from this afternoon's data for my trading setups based on the COT positioning. None. I love it. See my latest signals page table for some pending signals updates. Here are a few more highlights looking more closely into the data:

- Was this week's bounce for financials a sucker rally, like some people fear? Not yet, at least not according to my trading setup for the BKX U.S. Bank Index (based on the three-month Eurodollar COT data). That setup is still bullish, and as of Friday's data even more so. The "smart money" Eurodollar large speculators have increased their net long percentage-of-open-interest position and now stand 1.4 standard deviations above the moving average I use in this setup. However, also of note is that my setups for the S&P 500, NASDAQ 100 and Russell 2000 all remain in cash.

- My trading setup for Japan's Nikkei Stock Average goes to bearish on the open of trading, Monday, July 21. It flipped to bearish with the May 20 COT report, but the setup uses an eight-week trade delay, which means execution was held off until this coming Monday.

- Is crude oil done? That is definitely the consensus out there. The breakdown this week does seem pretty bad. By most technical standards, I think people would agree the uptrend is in trouble. Mind you, I don't think the technical evidence is completely clear just yet. The trendline since February for the USO U.S. Oil Fund has been violated, but the breakdown hasn't progressed to the place where I'd call it decisive just yet. My view is it would have to fall below that line by a notch beyond the Average True Range on the daily chart for me to start to feel crude is a goner (plus some other stuff, like fail on a rally attempt and make a lower low). USO is just sitting at that line right now. But for me, of course, the true arbiter is the COT data. My crude setup is still very much in bullish mode. It's based on trading opposite to the "dumb money" large speculators in crude futures and options. Their net percentage-of-open-interest position is presently 1.4 standard deviations below the moving average I use for this setup. Where are all these speculators who are supposedly driving up energy prices? They've actually been reducing their net position for three weeks now.

- My small long position in natural gas got pole-axed in this week's dramatic selloff, but my setup remains nowhere near going to bearish for the moment. Natural gas is one of the most volatile sectors you can own, so I'm in it knowing there will be ridiculous ups and downs. This week was a good example. I've also just found a new setup to use for this market and have posted the results on the latest signals page table. The setup went from starting equity of $100 to over $95,000 by the end of 2007 (when my test period ends). I think it scores quite nicely across all my robustness indicators, so I'm excited to start trading it. It combines the signals from two of my best setups, including a slight variation of the one I was trading before. Its largest past drawdown is a lot lower than that of my previous setup, and that means I can play it with a larger position. (See my how it works and glossary pages for more details on my risk-control rules - one of the most important parts of investing and trading, IMHO.)

- Also of note: commercial traders in U.S. dollar index futures have dramatically reduced their formerly massive net short position this past week. However, their move highlights the need to put this kind of development in some historic perspective. Their position still has an overall bearish tilt at 0.4 standard deviations below the moving average I use for this setup.

Hope you have a relaxing weekend, and see you early next week with my portfolio page update and hopefully another new setup or two.

TAGS: Bank Index, financials, BKX, UYG, ProShares, crude oil, U.S. dollar, Nikkei, natural gas, NASDAQ 100, NDX, S&P 500, Russell 2000, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

This. Market. Is. Totally. Insane.

I normally don't comment too much on day-to-day moves in the markets. The point of a mechanical trading system like mine is to not need to worry about it. But I must say this. This. Market. Is. Totally. Insane. I am looking at the BKX U.S. Bank Index move this morning. My UYG ProShares Financials Fund is up 16-plus percent 17 minutes into the trading day. This, after yesterday's 10-percent up move. That of course followed Monday's 14-percent loss, which was followed by the sickening yo-yo action on Tuesday. I think it's very interesting that this bounce occurred right from the level where my setup saw its previous largest past drawdown. As well, the bounce happened right around the 1998 low for BKX. Breakdowns below this floor would have been super-bad. But the fact that these levels held suggests a floor of supreme, historic importance was possibly just set. Hope you're not getting chewed up too much!

TAGS: COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, UYG, ProShares, BKX, Bank Index

Bank Index Flirts With Stop Level

Woah, what a mess. Financial stocks are caving again in this morning. On top of yesterday's disaster, today's selloff put the BKX U.S. Bank Index briefly below its stop level for my trading setup this morning. That level is set at the past largest drawdown that the setup has seen since 1995 - or 14 percent. Based on the $54.60 entry price at Monday's open on July 14, that would mean the stop price is $46.95. However, I traded this signal with the 200-percent leveraged UYG ProShares Ultra Financials Fund, which has yet to fall below the stop level and hasn't fallen proportionally as much as BKX because of the vagaries of leveraged ETFs. The UYG entry price was $18.26 and, since it's a leveraged play, I adjust my position size so that my stop is 28 percent below the entry price (two times 14 percent). So that gives me a stop price of $13.14. The price right now is holding well above that level. The last few BKX trades have mostly gone in my favour and done really well, but alas you can't win every time. Welcome to trading. I'll be watching these levels closely in coming days.

New Russell 2000 Setup in Cash

I've just posted details of my newly revised trading setup for the Russell 2000 index on my latest signals page table. This setup is in cash. My previous setup for this index has been on a bullish signal, and I'm presently long RUT myself, so I will be looking at the technicals in coming days to sell. My initial floor is any drop below the July 7 low, minus a little cushion so I don't get knocked out by the stop-runners. (I usually set my cushion at the recent largest Average True Range on the 15-minute chart.)

I'm looking forward to trading this new RUT setup. Its backtesting results are sweet, including a Sharpe ratio of 5.1 and Robust Sharpe of 4.5. Its Compound Annual Growth Rate beat the underlying index since 2003 by over 60 percent (including trade friction of 0.2 percent per trade). This again lays to rest any notion that the Commitments of Traders data has lost its utility in recent years. The setup works by combining the signals of two of my best setups from the "smart money" commercial traders when they hit specific extremes in their futures and options positioning as a percentage of the total open interest. The two setups effectively look at the data from different time frames and use different moving averages and standard deviation values. When they don't agree, which happened 54 percent of the time since 1995, the setup goes to cash. Despite this, the setup had compound annual growth of 20.3 percent (25.5 percent since 2003). In out-of-sample testing, it scored a CAGR efficiency of 93 percent and regressed annual return efficiency of 107 percent - very nice numbers.

I also filtered possible setups with a new test I've devised for robustness, which I call the "walk-around test." This exercize varies each of the parameter values in 16 different permutations. The idea is to help see to what extent the setup may have been the result of data-mining. If "neighbouring" setups with slightly differing parameter values were to produce much worse results, that would be a bad sign. It would mean the setup chosen likely wouldn't perform anywhere nearly the same in real-life conditions. In fact, the RUT setup I've chosen did very well in this test as well, with an average walk-around efficiency of 91 percent. This means that in all 16 tests - and for 16 different measures like CAGR, Sharpe score, regressed annual return and out-of-sample results - the "neighbouring" setup's result was 91 percent of the chosen setup's result on average. A promising sign. Good luck this week!

TAGS: COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, Russell 2000, CAGR, RAR, Sharpe, out of sample testing, walk-around testing

Bernanke Will Not Hike, Crude Bubble Not Done: Data

I've just updated my portfolio page with results from my COTs Timer trading system as of this morning, including a few new trades based on my latest trading signals. (See Friday's post and the table linked at my latest signals page for more details on those.) As promised, here are some more market highlights based on Friday's Commitments of Traders report. For you newbies, this is the free weekly report issued by the U.S. Commodity Futures Trading Commission that outlines trillions of dollars in futures and options positions in 100-plus markets, everything from gold to crude oil, the Dow Jones industrials and Japan's Nikkei Stock Average. My system trades these markets when the traders hit certain extremes of bullishness and bearishness that in past data have reliably led to high-probability, market-beating trades. And now for those highlights:

- Is crude oil topping? Not according to my data. The "dumb money" large speculators (these are the big investment firms and hedge funds, who are generally wrongly positioned in most markets) are far from any bullish extreme that would signal an end to the crude boom. In fact, the large specs have steadily reduced their net long position in crude oil futures and options since the end of April as a percentage of the total open interest. (See my glossary page and introduction page if you don't have a clue about what I'm talking about. I know this stuff can be confusing.) The large specs are now 1.5 standard deviations below the longer-term moving average I use for this setup. Definitely, no speculative froth here.

- Will the Federal Reserve Board keep lowering rates to relieve shattered markets or hike because of inflation fears? The COT data is unequivocal: The Fed will not hike and will probably keep cutting interest rates. The large speculators in 30-day Fed Funds contracts, who have in the past reliably predicted the course of rates, have hit multi-year extremes of bullishness in their futures and options positions (meaning they are betting rates will fall). They have been well over two standard deviations above the longer-term moving average I use for this trading setup since the end of May.

- Strange divergence between my silver and gold data. In silver, the "smart money" commercial traders have really hit the brakes, increasing their net short position to a one-year high. In fact, they haven't been this bearish in relation to past data since Dec. 2006. Meanwhile, the large speculators in gold, with whom I trade alongside, are blithely bullish - more than one standard deviation above the moving average for this setup. As a whole, four of my six highly correlated commodities setups are bullish, so I ignored my short silver signal for July 7. But the bearishness of the silver setup could mean some short-term volatility is in store.

Tune back in later today to read my update about my new Russell 2000 trading setup and to see what signal it's giving now. Good luck this week!

TAGS: COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, S&P 500, Russell 2000, Bernanke, Fed, interest rates, gold, silver, crude, NASDAQ 100, NDX

S&P 500, NASDAQ 100 Go to Cash; Banks Long: Data

Pure craziness in the markets this week, wasn't it? With crude and gold looking like they're breaking back up and the BKX U.S. Bank Index dropping to lows not seen since before the 1998 Asian crisis, not to mention insane volatility, you've got to get a little worried about all the poor folks blowing up these days. I've just updated my Latest Signals page table with this week's calls from my trading setups based on the Commitments of Traders reports. The new signals include going to cash for the S&P 500 and NASDAQ 100. Also, recall that my BKX setup, which has been very happily short since June 16, went long with last week's report; that setup has a one-week trade delay, meaning I'll go long U.S. financials on Monday's open of trading. (See my post from Tuesday, July 8 for more details on that.) I've also got some other really interesting new developments to talk about from this week's data. I'll do that with a more detailed post Monday, at which time I'll also update my portfolio page. Also early next week I hope to announce a new trading setup for the Russell 2000 index, based on combining the best signals for two groups of traders in the CFTC's weekly COT report. Hope you have a good weekend.

TAGS: COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, S&P 500, Russell 2000, gold, crude, BKX, Bank Index, NASDAQ 100, NDX

Banks Turning a Corner, Silver Too: Data

Gruesome days for financials. But the light has just appeared at the end of the tunnel. My trading setup for the U.S. BKX Bank Index has just gone bullish. This setup works with a one-week delay, so that could still spell a little more trouble for bank bulls - and more happy times for us shorts. (See my newly updated portfolio page for the results of that and other current trades based on my COTs Timer trading strategy.) I've also updated my Latest Signals page table with calls from yesterday's holiday-delayed Commitments of Traders report, as interpreted by my setups.

Does this mean the equity bust-up is over? That's much less clear. My new combination S&P 500 trading setup will be going to cash for next Monday's open, July 14. The two signals that make up that setup must both agree, or the setup goes to cash. Those two signals also work with a three-week trade delay, so I can know what they'll be saying a few weeks in advance. I can say the setup will remain in cash for at least the next three weeks. Perhaps this is an indication of a range-bound, indecisive market.

As well, my NASDAQ 100 signal has gone from cash to bearish for this week's open. This signal is based on a combination of fading the sudden excessive bullishness of the small traders and trading alongside the commercial traders, the latter with a five-week trade delay (meaning they got really bearish in the May 27 COT report). I should note, however, that this bearish signal is only going to be in force for the current week. That's because the commercial traders flipped back to bullish with the June 3 COT report, so this setup will be going either to cash or long on next week's open of trading.

Some other highlights:

- My silver trading setup has gone to bearish after a significant increase in the commercial trader net short position as a percentage of the total open interest. The "smart money" in this market is now 1.5 standard deviations below the moving average I use to study the futures and options data in this market, as reported in the weekly COT report. That's well beyond my signal line for a bearish signal. I sold my long position on the open of today's trading.

- My gold bullion and gold stocks setups remain bullish, however. With silver going bearish, four of my six highly correlated commodities markets still remain long (copper, platinum, crude oil and gold), while apart from silver, heating oil is also short. That means I will ignore my silver bearish signal as, according to my risk-control rule, a majority of setups in highly correlated markets must be aligned in the same direction to take the trade. (See more on that rule on my How It Works and Glossary pages.)

- With the soaring price of gas, you might be wondering what the COT data says about crude oil. The news isn't good, unless you happen to be long crude like I am. Despite the end of the favourable seasonable sweet spot for crude, this market is still bubbling. My crude setup works by fading - or trading opposite to - the large speculators when their futures and options net position as a percentage of the total open interest hits specific levels that have suggested good-probability trades in past testing. The large specs are anything but excessively bullish at this point. In fact, their net long position has been gradually trending downward since mid-April and they now have a decidedly bearish tilt in comparison to their recent positioning.

- My Nikkei setup is now back to bullish, based on a signal given in early May. This setup works with an eight-week trade delay, so that signal was to be acted on only this week.

One extra portfolio note: Because I last updated my portfolio page yesterday evening, it doesn't reflect a few trades that took effect this morning: sale of my silver long position and purchase of a 200-percent leveraged inverse NASDAQ 100 position.

TAGS: COT, Commitments of Traders, COTs, BKX, banks, financials, silver, gold, gold stocks, crude oil, Nikkei, CFTC, Commodity Futures Trading Commission, S&P 500, NASDAQ 100, market timing, investing

Latest Signals Up

Haven't had a chance to write up a post on today's data yet, but I updated my Latest Signals page table this afternoon with my most recent calls from my trading setups based on today's holiday-delayed Commitments of Traders release. Check back here Tuesday for a post on the new data.

Holiday Delay Until Monday

Due to the July 4 holiday, today's normally scheduled Commitments of Traders report will be released Monday, July 7, at 3:30 p.m. EST. Tune in here after that for my next weekly signals based on this interesting government data. Happy July 4 to American readers, and a good weekend to everyone else.

Fed to Lower More, Equities Not Doomed: Trader Data

Yikes. Another nutso week. Same old, same old. Doncha love it? Some really interesting movement in the trader positioning to report this week, too. I've just updated my Latest Signals table with this week's calls from my trading setups based on the Commitments of Traders data from this afternoon. Here are some highlights:

- First, the question of the day. Will the Fed pause, raise or lower? Trader positioning in the 30-day Fed Funds futures contract is quite stunning on this score. Contrary to recent expectations of a harder line from Bernanke & Co., the data strongly points to a lower Fed Funds rate. The large speculators, who have accurately called past turns in this market with remarkable consistently, are now more net long as a percentage of the total interest than at any time since the dog days of Nov. 2003. (Being long means they think rates will fall.) In fact, their positioning hasn't been as bullish as today since the dot-com bust-up back in Jan. 2001, when compared to to the moving average I use for my Fed Funds setup. Back then, they hit a peak of 3.7 standard deviations above my moving average. Today, they have gotten steadily more bullish since the end of April and now sit 2.8 standard deviations above the average. That's down from 2.9 standard deviations away last Friday, but still pretty close to the seven-year high. I'd say that means interest-rate expectations have completely overshot.

- Equities saw some grim news this week, but there's an interesting development in positioning in the Dow Jones industrial average futures and options. The large speculators, whom I fade in this market, haven't been this bearish relative to my moving average line since early Sept. 2006, as markets shrugged off a four-month selloff and broke out into a huge advance. My NASDAQ 100 setup is signaling caution (it just went to cash for next Monday's open), but perhaps the Dow data is telling us this breakdown below the March lows is overdone.

- Similar news from the data for the Russell 2000. The "smart money" commercial traders in this market suddenly did a massive about-face and have flipped to their most bullish position since Nov. 2004 relative to their recent positioning.

Have a good weekend, and be sure to tune in next week for my portfolio update based on my new signals for Monday's open (including my Nikkei bearish signal). Good luck next week!

TAGS: Commitments of Traders, COT, Dow Jones industrial average, NASDAQ 100, NDX, Russell 2000, Nikkei, Federal Funds, Fed Funds, Commodity Futures Trading Commission, CFTC, Bernanke

Filled! Long NASDAQ 100, Russell 2000 and Natural Gas

I've just updated my COTs Timer portfolio page with trades from this morning's open of trading based on my setups built around the weekly Commitments of Traders data. I went long the NASDAQ 100, Russell 2000 and natural gas and sold my short positions in the latter two markets. See Friday's post for more details on these and my other recent signals. Good luck this week.

TAGS: Commitments of Traders, COT, NASDAQ 100, NDX, Russell 2000, natural gas

Data Bullish Equities, Commodities... and Probably Treasuries

Tough times in the markets this week. Overall it looks like I was up more than I gave back. But don't breathe easy. Next week promises more turmoil, if this afternoon's Commitments of Traders release is any indication. Enthusiasts of this data will recall it exposes trillions of dollars in trader positioning in 100-plus markets, as reported weekly by the U.S. Commodity Futures Trading Commission. My COTs Timer trading system buys and sells markets when this trader positioning hits specific extremes that have historically led to high-probability returns. I've just updated my table on the Latest Signals page with the results from today's COTs update. Overall, the data is generally bullish across the board for equities and commodities. Here are some highlights:

- My trading setups for the NASDAQ 100 and Russell 2000 have both flipped to bullish. These two setups have no trade delay, so I will be executing both trades for the open of Monday's trading, June 23. In the case of the Russell, the signal comes from the fact that the commercial traders, whom I follow in this setup, have started to reduce their extreme net short position in Russell 2000 futures and options.

- While the data is generally bullish for equities, that's not so much the case for banks and Japan's Nikkei Average. My BKX setup remains in bearish mode, and in fact the large speculators in three-month Eurodollar contract futures and options haven't been this bearish since mid-June 2007 in terms of their net percentage-of-open-interest position. And we all know what hit the fan soon after that. As well, perhaps owing to upward pressure on the yen reflected in my yen setup turning bullish not long ago, the small traders in Nikkei futures and options, whom I follow for this setup, haven't been this bearish since April 2007 in relative terms compared to recent positioning.

- Natural gas: After a single week being short, this setup is back to long, with execution on Monday's open.

- Copper: This setup went to bullish from the April 22 COTs report, and with the eight-week trade delay, execution is for Monday as well. Note that my setup for heating oil calls for a short trade for Monday's open, but I will be sitting that one out. That's because the majority of my highly correlated setups to this market will be in the bullish column on Monday: crude, gold, silver, platinum and copper. My risk-control rule is to accept trades only if most of my setups in highly correlated markets are pointed in the same direction.

- 10-Year Treasuries: There's a big debate on where Treasuries are headed and where they should be given inflation trends. My 10-year note setup says to stay bullish. The commercial traders, whom this setup follows, have bumped up their net long position steadily for four weeks as a percentage of the total open interest. They're not at any extreme of bullishness, mind you, but they're fairly solidly bullish. I'd say that means a higher probability of yields falling than rising at this point.

Have a great weekend and join me back here early next week for an update on my portfolio page with trades from today's report. Good luck next week!

TAGS: Commitments of Traders, COT, Dow Jones industrial average, NASDAQ 100, NDX, Russell 2000, natural gas, copper, 10-year Treasury, Commodity Futures Trading Commission, CFTC, Nikkei

Filled! Long Silver, Short Natgas, Financials, RUT, Sold NDX

Just updated my portfolio page with trades based on my latest signals. See Friday's post below for all the details. Good luck this week!