Nikkei Joins Banks, Crude and Bullion in Buy Column

Banks, crude oil and gold are still a buy. And now, so is Japan's Nikkei Average. That's the latest word from my trading system built around the derivatives data found in the weekly Commitments of Traders reports issued by the U.S. Commodity Futures Trading Commission.

I've just updated my latest signals table based on this afternoon's latest COT report. Check out those signals and the new numbers here. Here's more on how the markets are shaking based on this nifty data:

- S&P 500: The "smart money" commercial traders are still non-believers when it comes to the market rally - as they've been since the end of March. The recent market pause has seen them slightly reduce their large net short position in the past two weeks.

But as you'll see from the numbers on my latest signals table, they're still decidedly bearish in their futures and options positioning. And they've got a long way to go before their signal turns bullish. My SP500 setup is in cash a second week in a row and will remain so for at least the next three weeks.

- Banks: My setup for the BKX U.S. Bank Index - a basket of the major financial players - is bullish a third week in a row. If the SP500 setup is ambivalent, this one is real bullish. One possible warning sign: the large speculator total open interest has fallen fairly sharply this week. That's potentially bearish.

On the other hand, the small trader total open interest - which my setup trades alongside - has shot up to one of the most bullish levels in the entire history of this data. The small traders haven't been this bullish in comparison with recent data since the end of Jan. 2005. That was when BKX started a major breakout after a year-long trading range - and ultimately the beginning of a two-year bull run.

- Nikkei: My setup for Japan's Nikkei Average goes bullish for next Monday's open. It will remain bullish for the next eight weeks at least. (Beyond that, can't say. The powers of this setup go only so far!)

- Crude oil: This setup will remain bullish for two more weeks, then go to cash for three weeks. That move to cash is because of disagreement between the two signals that make up the setup and the time lags they use before a trade is executed. The commercial traders got historically bearish three weeks ago in their crude futures and options positioning - hitting an astonishing 2.51 standard deviations below the moving average. Bad sign! So the overall setup will go to cash on the open of June 22.

- Gold: Two more weeks for my long position in bullion. The wrong-way large speculators have once again this week increased their net long positioning in gold futures and options. That's four weeks of increasing bullishness in a row. Still, they now stand at a middling 1.39 standard deviations above the average - well short of the 1.9 standard deviations needed to flip their signal to bearish.

But my other signal making up this setup - based on the large spec total open interest - has been bearish for six weeks now. It works with a seven-week trade delay, so it has yet to take effect. But it will do so the week of June 22, when this setup will either go to cash or bearish - depending on what the first signal (based on the large spec net position) does. Stay tuned. So far, so good.

Overall, I've been pretty happy with how my newly revamped setups are performing this year. I'm hoping to create a new table somewhere on the site to keep track of my real-time trading results. I'm also working on a new setup for natural gas, which I hope to finish up next week. Thanks for tuning in, and I hope you fared well this week. Be sure to check in early next week when I update my portfolio page. Have a good weekend.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, Nikkei, crude oil, 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

Banks Get Boost in Latest Data Report; Crude and Gold Too

Well, so much for resolving things. Equities this week generally remained flat; at least those in the U.S. market did. Meanwhile, what to make of the explosion in commodities, emerging markets and Treasury yields? The reflation trade is starting to kick in, but how far can things go with the anemic action in U.S. financials and real estate? 

There's some good news from today's Commitments of Traders data. See my newly revised latest signals table for a breakdown of this data in key markets and which way my trading setups are leaning right now. 

My setup for the BKX U.S. Bank Index remains bullish for a second week next week. Also, my gold setup turns bullish again after a week in cash. And crude oil remains bullish, while my S&P 500 setup goes to cash.

I'll be back here early next week with a more detailed look at the data. In the interim, I invite you to check out the numbers on the latest signals table, which tell an interesting story themselves. Also early next, check in to see my latest portfolio numbers. Have a great weekend.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, Nikkei, crude oil, 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 

Delay

I've got to hit the road for an unexpected work trip and won't have time for my promised note giving more details on last Friday's Commitments of Traders numbers. Sorry about that. I invite you to check out the data on my newly improved latest signals table, which breaks down how the various trader groups are positioned in the markets I'm trading with this data. See you back here Friday, and apologies again.

Go, Go, Go for U.S. Banks and Crude Oil

What to make of such a week? Still no real hoped-for resolution to the question: Are we going up or down? Precious metals look like they've broken out, while natural gas has really gotten chainsawed. No time this afternoon to write up a detailed report on what the latest Commitments of Traders from today says about all this, but I have just updated my newly revamped latest signals page based on the new COT report.

Very interesting stuff, with plenty of new signals to keep me busy on next week's open: bullish for the BKX U.S. Bank Index and crude oil, cash for gold and for my brand new setup for Japan's Nikkei Average. I've also included breakdowns on that page of how the new numbers are lining up, so you can get more insights. 

I'll say right now the BKX bullish signal is of special interest because it comes from a setup that uses three different groups of traders to confirm the trades. Because of that, it's in cash three-quarters of the time. In fact, this setup has been in cash for 12 weeks, since March 2.

As for that new Nikkei setup, it outperformed the market in backtesting by 980 percent since 1995, including a 18.6-percent gain in 2008 (when the Nikkei crashed 43.5 percent). Sweet! The setup has just flipped from a bearish signal that ran all of one week to cash for next week's open of trading. It'll stay in cash for two weeks, then go back to bullish. I'll provide a more detailed post on all these hot new numbers early next week, plus the usual portfolio update. I'll also update my backtesting results table early next week with more details on the new Nikkei setup.

Hope you have a beautiful weekend - it's sure gotten nice and warm up here in Quebec's Eastern Townships all of a sudden, and none too soon - and to U.S. readers a fantastic long weekend.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, Nikkei, crude oil, 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 

Check Out My New Latest Signals Table

I've just rejigged my latest signals and results table to break out the information into two separate tables. I wanted to be able to give more information on the weekly Commitments of Traders data, but my table was getting quite large and unwieldy. Surf over to my latest signals and results page and check out the brand new signals table. It includes a breakdown of the positioning of traders each week and lots more new information. Hope this makes things more handy for you all. I've also increased the font size a little on the backtested results table's notes for readability purposes. See you back here after tomorrow's new COT release. Good luck for the remainder of this whacky week. Your thoughts on the new format are welcome.

Bearish Commercial Traders Refuse to Give In to Rally

Yay, the bear market is over! Phew. I survived. So did you. We're all fine. Never thought I loved bulls so much as right now. I love them so much you hate them compared to how much I love them. (If you have kids, you probably know the reference.) What's that? It might not be over yet? Oh. Great... Man, you just have to know there's a monster selloff coming here. My stops are tight, but I'm still trying to cash in on this rally. But what I know. How about the people who matter? What word from the Commitments of Traders reports? 

For you newbies, these are the Commodity Futures Trading Commission's weekly reports on derivatives positions in 100-odd markets, from the S&P 500 to the Canadian loonie, gold and frozen H1N1 bellies. I've just updated my latest signals table with the calls from my trading setups based on this data this week. Some highlights from this Friday afternoon's data update:

- S&P 500: What in God's name are the commercial hedgers up to? The smart money folks - who tend to be correctly positioned at key market junctures - still loath this rally, friends. It's just bizarre. And spooky. Today's data has them reducing their net short position somewhat, but nowhere near enough to matter in the broader scheme. They're still stuck at a depressive 0.73 standard deviations below my moving average. Yes, that's up from the previous week's 1.45 below average, but not by a lot. As I explained in a mid-week post, my currently under-water bearish signal - based in part on the commercial net short posture - is now close to hitting its stop level, which is 935.74 (for a 7.77-percent loss). I'm not in that trade because I adopted this new setup only after the signal took effect on April 20. Next week could prove critical once we get up to that level - which also coincides with the next major resistance at the January highs.

Another twist: as you'll notice from my latest signals table, my S&P 500 setup has gone to cash, to be executed in three weeks' time. This is based on the "dumb money" small traders, whom my setup fades with a three-week delay. They've gone and heavily cut back their net long position as a portion of the total open interest. They're now 1.25 standard deviations below average, down from 0.02 standard deviations above average last week. This drop is more than enough to trigger a bullish signal from the small traders. And since the two signals that make up my setup now won't be in agreement in three week's time, the setup goes to cash.

BKX Bank Index: You'll see a new setup added to my latest signals table for U.S. banks. It easily outperformed the index - including a 36.2-percent gain in 2008, when banks lost 50 percent - while being in the market just one-quarter of the time. The setup is especially robust from a statistical viewpoint in part because it combines three different groups of traders. This is the first market where I've found the most reliable results to come from a triple signal. (In other markets, three signals tends to degrade the results.) You'll see all the details on the latest signals table (including parameter values in the notes). Note that there's no data for the bank index in the COT reports. My setup is based on following traders in the three-month Eurodollars contract (not the currency, but rather a contract that follows interbank lending rates - an important measure of global liquidity.)

What's the setup saying now? It's been in cash since Dec. 8. The small trader signal (based on trading on the same side as the small trader total open interest when it hits certain extremes of volume) is now bullish. The other two signals in the setup remain bearish, but they could be showing some of those "green shoots" of life we keep hearing about. The large spec net position, which I'm also trading alongside, is now just a hair from flipping to bullish. And the large spec total open interest, which I'm trading on the same side as too, has shot up in each of the past two weeks. It's now 0.6 standard deviations above the mean, up from 0.39 last week. It needs to hit 1.25 above for that signal to go bullish.

- Crude oil: [NOTE: This section is corrected from my original post Friday. The following information applies to the crude oil COT data, not to gold as I had written in haste in my original post. Very sorry for the mix-up, and thanks to an alert reader for bringing this to my attention.] Little change in the crude oil data since last week. The commercials are still strongly bullish - though down in their positioning to 1.23 standard deviations above average, from 1.64 the week before. That's not a major change. They need to fall to 0.2 standard deviations above for my signal to go bearish. Meanwhile, the small traders, whom I also trade on the same side as in my crude oil setup, have jumped back into bullish territory this week. Their net percentage-of-open-interest position is up to 0.59 standard deviations above the average - up from 1.08 standard deviations below last week. I should note, however, that my crude setup will be going to cash next week, for a single week, before returning to bullish. That's because the commercial crude traders got quite bearish the week of March 24. With a four-week trade delay, that change in positioning will take effect next Monday's open of trading.

Sorry to run out of time before I got to my gold setup. Not much to report in that market anyway this week. I should also note that for my gold setup, I've gone back to using my previous parameter values, as you'll see from my updates notes on my latest signals table. Sorry for switching things back and forth like this, but results from some extra testing of setups using signals from three groups of traders caused some changes in the order of my best setups. Have a great weekend and a Happy Mother's Day! Tune in early next week for a portfolio page update.

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, 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 

Derivatives Data May Point to Rally Targets

Ah, lovely days to be long. The last thing I'd want to be doing right now is standing in front of this powerhouse rally. So I'm heavily long in my discretionary trading (albeit with tight stops!) But I've also been thinking about the bearish signal from my new S&P 500 trading setup based on the Commitments of Traders data. (Update Friday morning: I closed most of my long positions during yesterday's selloff, but went long natural gas.)

The S&P 500 signal took effect on the open of April 20, with a price of 868.27, and it's now 5.03 percent under water as of this morning. (I'm not in this trade because I started using this new S&P 500 setup only after the current signal took effect.) The trade is down, but it has yet to hit my stop level - a 7.77-percent loss. That stop is based on the average trade profit in backtesting minus two standard deviations. That stop would be triggered if the S&P 500 were to rise to 935.74. If that were to happen, it would effectively mean the market has gone against the typical trend that's happened in the historic data. So that could actually be an upside target for this rally. On the chart, this is around the next resistance level from the January highs. 

There's also a second, higher level I'm keeping an eye on, too - 980.01. A rally to here would mean this bearish signal has lost more than the maximum past drawdown seen in my backtesting - 12.87 percent. That would trigger my Black Swan risk-control rule - which means not trading the S&P 500 setup for four weeks. (Read more about that and my other risk-management rules here.) That 980.01 level is, incidentally, close to the next resistance level on the chart, going back to the highs in November.

Commercial Traders Love Crude - But Still Fading the Equities Rally

Another tiring week. How long have I been saying that? I should just create a short-cut key to write it faster. The market rally seems to be still intact, but who really knows. One thing is very clear: The commercial hedgers in S&P 500 futures and options - the so-called "smart money" -aren't jumping on board. They haven't reduced their net short position at all, despite this week's apparent breakouts on the charts in some areas. So that's not too good. On the other hand, thy seem to love crude oil. So if that's a tell for the direction of the market, maybe things aren't too bad. Check out my latest signals table for the word from my trading setups based on the weekly Commitments of Traders reports, which tell us how trillions of dollars in derivatives are being sloshed around in 100-plus markets. Some highlights from this afternoon's COT data:

- S&P 500: My setup for the S&P 500 remains bearish for a third week in a row. The signal seemed pretty mistaken mid-week as things took off - and I even traded the long side with some short-term discretionary plays - but as the week ended, it didn't seem so nutso after all. This week, the commercial traders have just slightly cut their relative net short positioning as a percentage of the total open interest. They're now 1.45 standard deviations below the average I use for this signal, up a little from 1.63 standard deviations below the previous week. Meanwhile, the wrong-way small traders are getting more bullish - also bad. They went from 0.1 standard deviations below average to 0.2 above. Not a big move, but not very reassuring either. They need to get a lot less net long to flip their signal to bullish.

- Crude oil: My new crude oil setup goes to bullish with execution on Monday's open of trading. This is based on a combination of super-bullish positioning by the commercial hedgers and small trader crowd (both of whom appear to be the "smart money" in this market, at least according to the timeframes I'm using to view them). In today's data, the commercials cut their net short positioning dramatically. They went from 0.57 standard deviations above average to 1.64 above - a big move. On the other hand, the small traders have suddenly slammed on the brakes, going from 1.89 standard deviations above the average down to 1.08 below it (just a hair above the signal line that would take their signal bearish, which is -1.1 standard deviations). But my setup for crude oil has trade delays for both signals (see my latest signals table for more details) - so these latest changes in positioning won't affect anything until mid-May. This bullish signal will last two weeks.

- Gold: My setup for gold remains bullish for a second week. However, an important move this week took place in the large speculator total open interest. These wrong-way folks are suddenly buying up bullion like crazy - not a bullish sign down the line. Their positioning went from 0.51 standard deviations below average to 1.49 above this week - flipping their signal to bearish. That signal works with a seven-week trade delay, so it doesn't affect anything for a little while. Just a warning sign that any coming rally might get overbought real fast.

Have a beautiful weekend and see you back here early next week with a portfolio update and, with hope, that promised BKX Bank Index trading setup. (It got delayed this week as I went back to review my existing setups a little more, including checking out the possibility of combining signals from three groups of traders to further improve reliability. Stay tuned.)

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, 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 

Tweaked S&P 500 Setup Bearish

Spent the weekend taking another look-see at my trading setups based on the Commitments of Traders data. I wanted to apply a few new optimization techniques to the existing setups made easier by some additional automation I've added to my Excel spreadsheets. The results are on the latest signals table. I've made slight adjustments to each of my three setups for the S&P 500, gold and crude oil. The backtested returns are a little weaker, but the key measures of robustness I'm looking at (see the far right hand part of the table) are superior for these new setups. The current signals for gold and crude are the same as for the old setups, but my S&P 500 signal is now bearish for its second straight week. I've also just posted a new S&P 500 spreadsheet at my DIY guide page so you can take a look for yourself.

Gold Good to Go

What a bizarre close. As Stephen Vita has been noting at his AlchemyOfTrading site (a truncated free version of which is available here), the S&P 500 has come up again to resistance at a key DeMark Setup Trend line just below 870 and, near the close today, it bounced down abruptly from there. On the other hand, the HGX Housing Index has broken out nicely above TDST daily line around 90. Next week should be interesting. The Commitments of Traders data is equally ambivalent about equities and crude oil, but it's finally giving a new signal for my trading setup for gold. (See my latest signals table for the details based on this afternoon's weekly COT data release.) Here are some highlights based on today's report:

- Eleven weeks in cash are at an end for my gold setup. It's gone bullish with execution for the open of Monday's trading. I can't tell how long the signal will stay bullish, but things look good for now. The wrong-way large speculators are nowhere being excessively long, which is bullish. Their net position as a percentage of the total open interest actually fell this week to 0.34 standard deviations above the average I use for their signal, down from 0.62 standard deviations above last week. They need to hit 1.9 standard deviations above for that signal to go bearish - so all clear for now. This signal works with no trade delay - so it's the unknowable question mark when it comes to trying to see into the future of this market beyond the coming week.

The other signal that makes up my gold setup has a seven-week trade delay. It went bullish the week of March 3 and has been so ever since, with the exception of a single week (the week of March 31). This signal is based on fading the large spec total open interest (long plus short positions in futures and options). These guys' open interest level is comfortably bearish right now - 0.51 standard deviations below the average, up a little from 0.82 standard deviations below the prior week. So unless the large spec net long position suddenly explodes, we can probably expect a bullish signal lasting a few weeks at least. Of course, with today's markets, all guesses are worthless pretty much as soon as they're written down. So ignore what I said.

- Crude oil: My setup for crude is in cash for a single week starting Monday, then goes back to bullish for the open of trading the week of May 4. Small traders, who are the "smart money" in this market (believe it or not), have been bullish on crude since early December. The commercial traders, paradoxically also the smart money, have been a little more uncertain. But the week of March 31 they really got hot on crude futures and options, moving the commercials into the bullish column. Starting May 4, the setup will remain bullish for two weeks.

- S&P 500: The smart money commercial traders remain highly dubious about the market rally. Their net position as a percentage of the total open interest has fallen to 1.63 standard deviations below the average, down from 1.02 the previous week. Meanwhile, the small traders, whom I'm fading in this setup, are quite a bit more bullish than last week's paroxysm of gloom. They've come up to just 0.01 standard deviations below the average, up from 0.50 standard deviations below. Despite this, they remain pretty far from being excessively long, too. So they're still on a bullish signal, while the commercials remain with their bearish call. The setup overall is therefore in cash again, for a third week.

I should note that if I had placed a trade based just on the commercials bearishness, I'd be out of a good chunk of money. It's an example of something I've found pretty consistently in looking at this data: a signal based just on one group of traders is typically a lot less reliable than one using two or more traders, when they agree.

Hope you have a fabulous weekend, and hope to see you here next week with a portfolio update and a new trading setup for the BKX Bank Index, based on the three-month Eurodollar COT data.

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, 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 

Apologies... Latest Signals

Apologies for my late post on last Friday's data. I just got back from a trip away and didn't have access to a computer. I've now updated my latest signals table, and as you can see there weren't any new signals from last week's data for my trading setups based on the Commitments of Traders reports. But that's not to say there weren't some interesting developments in the latest data. I'll post a more detailed look Wednesday and see you back here Friday with the word from my setups based on the next data release, including a new signal for my crude oil setup and possibly for gold bullion, too. Good luck the rest of this week!

Crude Data Warns of Volatility But Suggests More Upside

Crude oil might be due for a little more upside, but my new trading setup for black gold is also warning of possible volatility in coming weeks. I've just posted the latest signal information and backtesting results for this new setup on my latest signals table.  The setup beat the market hands-down during the bull and bear markets of 2003-08, with a compound annual return of 29.99 percent (including 0.2-percent trade friction per trade) while being in the market less than half the time - compared to a gain of 3.13 percent for crude. While crude crashed 57 percent in 2008, this setup gained nine percent through being short or in cash. 

Most recently, the setup has been bullish for the past four weeks - its first time being long since Oct. 2007. It will remain bullish one more week, then go to cash for a week and go back to long for two more weeks after that. The parameter details for the setup are all in the notes to the latest signals table. I haven't posted a spreadsheet for the setup, but might do so eventually. You can still create it for yourself using the values I've listed in those notes and plugging them into the S&P 500 spreadsheet I've posted on my DIY page. Please be careful to read all my disclaimer information before attempting to do so and before you take note of any signals or results of this setup. 

As you will see from those results, this setup didn't win 100 percent of the time - none of my setups have - and it has the potential of costing me a decent chunk of change before my stop is hit.

Some other features of this setup:

- It has a wider range for the stop level than my other two setups for the S&P 500 and gold. That means my maximum position size has been adjusted down. It's also adjusted down even more because it was a little less robust on my confidence interval measures. I'm only risking a maximum of one percent of total assets on any single trade based on this signal - as opposed to two percent for the other two setups.

- Also note that one of the two signals that make up the crude setup is based on trading on the same side as the small traders. Normally, these folks are considered to be the dumb money in the markets, who are to be faded. I've found the data suggests that's not always the wisest course of action. The small traders tend to be trend-followers, who jump on trends rather than anticipate them. In the case of my small trader signal, it works by going long with an eight-week delay after the small traders hit an extreme net position in the markets. I can't presume to know why the signal works in such a robust way, but I figure it's because eight weeks is typically enough time for the trader exuberance to have exhausted itself, for a selloff to have taken place and run its course, and for markets to be ready for another upleg. 

- Note also that, like both of my other two setups, this one relies on two groups of traders. I've found pretty consistently that relying only on one group of traders is far inferior in providing reliable returns in backtesting. For example, relying only on the commercial signal of this setup would have resulted in a 43-percent loss in 2008. The small trader signal alone would have led to a 77-percent gain, but between 2003 and 2007 the gain would have just matched the market and the confidence interval for beating the market would have been a decent but unstellar 96 percent since 1995.

NOTE: This coming week's COT update will be delayed because I'll be on the road. I hope to get to it sometime over the course of the weekend. Apologies for the delay. Good luck this week.

TAGS: crude oil, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, Monte Carlo, out-of-sample testing,walk-around testing