Taking Profits in Banks, Going Long Crude

What a difference a week makes. The latest data from Friday's Commitments of Traders report shows some pretty massive changes in trader positioning. That has triggered a bunch of signals for my trading setups based around this free weekly government data reporting trillions of dollars in derivatives positioning in major markets.

The best way to see what really happened is to check out my latest signals table, which I've just updated with the new numbers. Now, I know from the traffic data that many readers don't actually take a look at that table week to week. I encourage you to spend a little time figuring out how it works. The raw numbers give a better picture than anything I can write. So I think it's well worth the trouble. Some highlights:

- S&P 500: Commercial hedgers are still highly bullish, small traders still quite negative. These are perfect good conditions for the bullish signal my S&P 500 trading setup has given for the open of trading Monday, Aug. 24. Due to the three-week trade delay in this setup, that signal will now last two weeks at least.

- Financials: My trading setup for the BKX U.S. Bank Index goes to cash for Monday's open after four weeks being long. What a sweet run, but time for me to get out. Large speculator net positioning and total open interest have suddenly collapsed, according to Friday's data. The only thing keeping this setup from going short is small trader total open interest, which remains defiantly buoyant, though it too has dropped considerably since the prior week.

- Crude oil: Commercial net positioning has suddenly taken a sharp downturn this past week. With the four-week trade delay for the commercial signal, the change will cap off my bullish signal for crude oil that starts on Monday's open. The signal will now run four weeks until Friday's commercial bearishness impacts. Since small traders remain bullish, the signal won't go over to short, but rather will go to cash on Sept. 7. Until then, let the black gold flow!

- Gold: Speaking of gold, my setup for the yellow metal has more bad news for gold bugs. This week could have put the setup in the long column after seven weeks in cash. But alas, no. Large speculators, whom I fade in this setup, have gone bearish based on Friday's data. This, after a year being long. Wow. Their net position as a percentage of the total open interest hasn't been this excessively bullish compared to recent data since April 2004, when a similar bullish spike foretold a selloff and half-year sideways move for bullion. Friday's move put the large spec signal firmly in the bearish column. I had thought the setup could actually finally go bullish this week, based on the large spec total open interest, which had gotten super-bearish in mid-June, setting up for a long signal around now. Oh well.

- Nikkei: My setup for Japan's Nikkei Average goes to cash next week for a single week, then returns to bullish.

Tune back in early next week for a portfolio update. Have a good weekend, and best of luck next week. Looks like we might really need it.

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

S&P 500 Setup is Bullish for End of August - Sorry!

An attentive reader just pointed out a mistake on this site regarding my S&P 500 setup. I had the signal line for the small traders set at 0.65 standard deviations below the moving average in some places and 0.6 below in others. In fact, the best backtested results came from setting the signal line at 0.6 - as it is on my sample spreadsheets on my DIY page. I had been testing both signal lines a while back, and I guess I neglected to change that on my own spreadsheet! Duh! So I've corrected this now throughout this site.

The main impact is that last Friday's Commitments of Traders data actually means my S&P 500 setup has, indeed, given a bullish signal. This, due to the increase in bearishness of the wrong-way small traders in their derivatives positioning. With the three-week trade delays in that setup, this means my S&P 500 setup will go bullish on the open of trading Monday, Aug. 24. Sorry about the mix-up - and many thanks to this reader (and to an earlier one as well a couple of weeks ago, who wrote in about the same issue, albeit less fruitfully because, at that time, I couldn't figure out what the problem was). Good luck this week!

Banks Keep on Trucking, S&P 500 Misses Going Long by a Hair

The wrong-way small traders were selling this rally in the past two weeks, and that's probably a good thing for market bulls. But they didn't sell them quite enough to help resolve the market's near-term direction. That's one of the revelations from the latest weekly Commitments of Traders reports issued this afternoon by the Commodity Futures Trading Commission. I've just updated my latest signals table with my read of the data via the prism of my trading setups based on these mysterious and magical numbers. Some highlights:

- S&P 500: The small traders got bearish in Friday afternoon's data, but still not quite enough to trigger my S&P 500 trading setup to go bullish. (It's now in cash.) Astute readers may recall the retail crowd got supremely net long in its futures and options positioning as a portion of the total open interest at the end of July. That flipped their signal over to bearish. But the commercial hedgers, the so-called smart money in this market, have been ridiculously bullish since early July. And they remain so this week, too, as you'll see from the updated numbers on my signals table. So the setup remains in cash.

- BKX U.S. Bank Index: My trading setup for U.S. banks remains long for the fourth consecutive week. That's no easy feat considering it's based on three different groups of traders, all of whom must be positioned in the same direction in the same timeframe for me to take a trade in this market. The setup has been in cash 74 percent of the time since 1995, and the last time it was in the market for four weeks was four years ago. Ride the lightning.

None of the traders in the setup are even close to the signal lines that would reverse the trade. This week, the large speculators in three-month Eurodollars, whom I'm trading alongside in this market, have gotten a bit less net long, but not nearly enough to put my setup back in cash. Their net position as a percentage of the total open interest this week is 5.5. But they've got to boost that back up above about 5.7 next week in order for their signal not to go short.

- Natural gas: It's been a wild ride, and it's coming to an end at next week's open of trading. With all the ups and downs, it sure seems like a lot more than three weeks, but hey, that's what it's like to try to hang on in one of the most volatile markets under the sun. It's one of the reasons for my smaller position size in this market. The setup goes to cash next week after three weeks bullish.

- Crude: All on track for this setup to stay bullish for at least four weeks, starting the open of trading Monday, Aug. 10. The varying trade delays of the two signals in this setup mean it will remain long four weeks minimum... and counting. The commercials and small traders - both of whom I'd trading alongside in this market - remain comfortably far from their signal lines to reverse the trade.

- Nikkei: My setup for Japan's stock average goes briefly to cash the week of Aug. 10, then back to bullish for four weeks, and now, based on today's data, back to cash after that. The large speculators, whom I trade alongside in this market, have suddenly hit the brakes in their Nikkei futures and options positioning, flipping their signal to the short side. That move won't take effect, however, for six more weeks.

Hope you did okay this week. Please tune in early next week for a portfolio update. Have a fine weekend, and for Canadian readers, a hopefully-not-rain-soaked long weekend.

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

Mixed News Next Week: Banks Still Have Fire, S&P 500 Out of Gas

New results and signals are now up on my latest signals table. The S&P 500 is going back to cash on Monday's open, and natural gas, after a nice little run, is sadly going to cash on the following Monday's open, Aug. 3. Crude is still on track for a bullish run, now to last three weeks at least, starting Aug. 10.

The BKX U.S. Bank Index is still on fire and looking hotly bullish for a third week in a row. And more bullish news for the Nikkei, too. Oh yes, and the 30-year Treasury data is starting to line up quite bullishly (meaning the yield to decline), though not ready to move yet. But another disappointing week for gold bugs: My setup has been in cash for a while, and now the data's gotten even less bullish. See you early next week with more, including a portfolio update. That should be fun! Hope you have a great weekend.

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

All Systems Go, Market Ready to Bounce

What a sweet bounce this week in the markets. Looks like good chances of more of the same next week, if my trading setups based on the Commitments of Traders reports are an indication. I've just updated my latest signals table with my readings and signals based on this Friday's latest data release from the Commodity Futures Trading Commission. A few highlights:

- S&P 500: My trading setup for SPX goes bullish on Monday's open of trading, after seven weeks in cash. It'll be a short-lived trade, lasting just one week before the setup goes to cash.

- BKX U.S. Bank Index: U.S. financials had a great ol' time this past week, and the good times look like they're still on - at least according to the data today for the three-month Eurodollar contract. (That would be the interest rate, not the currency.) That data, which gave great signals in backtesting for the U.S. Bank Index, remains bullish this coming week and has actually gotten even more so on balance, as you'll see from the figures on my latest signals table.

- Natural gas: Another long position of mine - in natural gas, based on a new trading setup I recently introduced - also did nicely last week. It remains in bullish mode this coming week, too. Large speculator and small trader total open interest remains very buoyant and shows no signs of breaking down.

- Crude oil: Derivatives positioning in black gold remains on track for a prolonged bullish period starting in mid-August (by "prolonged," I mean at least two weeks and counting). I've got a coming bullish signal for the open of Aug. 10.

- Nikkei: Small trader net positioning in Nikkei futures and options remains ridiculously elevated - actually, a bullish sign in this market. (The small traders are usually seen as the "dumb money"; in fact, that view is not based on any kind of actual testing I've ever seen and is not always correct.) Astute readers will recall that last week these folks hit an astounding 4.08 standard deviations above the moving average for their signal - an all-time record.

This week, they're down to a slightly more reasonable 2.91 standard deviations above the average - which is, nonetheless, still super-high. As you'll see on my results and signals tables, these guys operate with an eight-week trade delay, on balance, before the data has a reliable impact in Nikkei prices. So brace yourself for the possibility of some crazy action the week of Sept. 7.

What will be especially interesting is to see how the large spec net position evolves next week. That signal works with a six-week trade delay - so next week's positioning will take effect that same week in September. Wonder what will happen.

Have a good weekend, and be sure to tune in early next week for a portfolio update.

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

Banks, Energy, Nikkei Could Bounce

Looks like some major breakdowns in the markets this past week. Seems almost predestined that we're headed for a retest of the March lows - and maybe lower. But behold the news from Friday afternoon's Commitments of Traders report. It's actually quite bullish on some fronts. Crude oil and gold still look under pressure for now, but the banks, natural gas and, to some extent, the S&P 500 data are looking up. And in crude, my trading setup has turned bullish for mid-August.

Here are a few highlights from the data that I've just updated on my latest signals table.

- S&P 500: The "smart money" commercial hedgers have shot up to 2.43 standard deviations above the moving average in their net futures and options positioning as a portion of the total open interest. They haven't been this bullish compared to the past data since the end of Sept. 2007. The latest COT report shows them at their 12th most bullish positioning since the beginning of the data in 1995.

That's positive for the bulls. The caveat is that the folks I'm fading in this market, the wrong-way S&P 500 small traders, hit an extreme of bullishness the previous week - oops, bad timing, guys! - and they have yet to work off their excessive net long positioning this week. They've got to do that first before my setup can turn bullish in this market.

- Natural gas: This setup is bullish as of Monday's open and will remain so for at least two weeks. Nice timing, what with the massacre last week. People ask about the trade delays built into my trading setups based on the COT data. Both signals in this setup - based on fading the large spec net position and their total open interest - turned bullish on me the Friday before last. But there are trade delays for both signals. If I had acted on those signals this past week, I'd have been toast. The backtesting shows there's sometimes good reason to wait before acting on major moves in the COT data. I think the fact that markets don't react to the data right away - or don't do so right away in the expected direction - leads to confusion about the usefulness of the data. This last week in this market was a good real-time example. Thanks, backtesting.

- U.S. banks: My trading setup for the BKX U.S. Bank Index - based on the three-month Eurodollar contract (the interest rate, not the currency) - has gone bullish for Monday's open.

- Nikkei: This setup is still long - its sixth straight week - and now finds the small traders - whom I trade alongside in this market; no, they're not always the "dumb money" contrary to popular wisdom - boosting their net long position to an astonishing 4.08 standard deviations above the mean as a percentage of the total open interest. That's by far the most relatively bullish they've ever been. Wow. Something big could be brewing in this market over the coming weeks. Note the small traders operate with an eight-week trade delay in my Nikkei setup. So their extreme of positioning could take a little time to make itself felt. But when it happens, it could be a surprise.

-Crude oil: This setup has gone bullish, but not right away. Execution will be on the open of trading Monday, Aug. 10. See more details on the latest signals table.

Be sure to check in for an update of my portfolio page Monday. Good luck this week!

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

Data Categories Won't Change: CFTC

Got in touch with the Commodity Futures Trading Commission just now to ask about planned changes to its Commitments of Traders reports. The changes announced today, intended to promote greater transparency, include new disaggregated data for the commercial and large spec categories to better show how hedge funds and swap dealers are positioned.

But rest assured, the CFTC's Jay Huhman has emailed me. Existing categories will remain untouched, and the current reports will continue in the same format as before. The CFTC envisages releasing the extra broken-out data in a new report. Phew. Changing the categories would have likely invalidated most of the existing research into the past data - including my own - which wouldn't have had much usefulness going forward. Thanks, CFTC.

Oh-Oh... Wrong-Way Crowd Way Too Bullish

My coming S&P 500 bullish signal will be short-lived, according to the latest numbers from the weekly Commitments of Traders reports released this afternoon. You might recall that the "smart money" commercial hedgers had put on some very bullish positioning in their S&P 500 futures and options holdings last time around. (See my post from a week ago Friday for all the fascinating details.)

It turns out that bullish signal - which is to be executed on the open of Monday, July 20 - is far from being an all-clear for the market. The latest COT report shows the wrong-way small trader crowd putting on a huge net long derivatives position. So much so, in fact, that their signal in my S&P 500 trading setup has just flipped to bearish.

The small traders - that's the unfortunate little guys, who tend to get it wrong at key market turns and give all their money away to the commercial folks - bumped up their net long position as a percentage of the total open interest to 1.8 standard deviations above the moving average I use to gauge their sentiment. That's higher than any time since mid-Dec. 2008 - right before the big post-New Year bust.

Mind you, things aren't all that bad right now. The commercial traders are still big believers in the market - enough so to keep my S&P 500 setup from going all the way over to bearish. The setup will go back to cash after a week in the bullish column, as you can see from my newly updated latest signals table.

Other highlights:

- Financials: My trading setup for the BKX U.S. Bank Index isn't quite bullish, but the data has gotten nearly so. This last week, the large speculators - whom my setup for BKX trades alongside - significantly increased their total open interest, as you'll see on that latest signals table. Their signal has now gone to the bullish side. But this setup works with three different groups of traders, who all have to be aligned to get a trading call. And aligned in the same timeframe.

As it happens, all three signals are presently bullish. But the setup hasn't gone bullish because of a trade delay of two weeks for the signal based on the small trader total open interest. Two weeks ago, these guys were giving a bearish signal. If the other two signals can hold on to their bullishness for just a week longer, the overall setup will go long. But in these times, that's a big if.

- Natural Gas: After four weeks in cash, my setup for natural gas will go bullish on next Monday's open, July 13. The large specs have ratcheted up their total open interest big-time. My other signal in this setup - based on trading alongside the small trader total open interest - has been bullish four weeks. But thankfully, I don't just use a single signal for this or my other setups. My testing has found that often just hasn't been too reliable, statistically speaking. Natgas has gotten destroyed in the past couple of weeks, so I'm glad I booked a little profit and went to cash.

Good luck the rest of this week. See you back here Friday for more. And check out my portfolio page with an update on my single position's results.

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

Holiday Delay

This week's Commitments of Traders report is delayed until Monday afternoon because of the holiday in the U.S. Happy 4th of July to American readers! See you back here Monday.

Have the Commercial Hedgers Lost Their Mojo?

Have the commercial hedgers lost their smarts? It's a question one reader just raised in the comments to this post. The reader noted that the commercial traders' switch to a significantly more bullish stance in S&P 500 futures and options last week (as noted in my post of last Friday) isn't being reflected in markets so far this week. Since March, in fact, the commercials have been highly bearish on the markets, even as equities bounced upward sharply. So has the smart money lost its edge?

Firstly, one or two missed trades are nothing unusual in any trading strategy. Even the best traders typically have a 60-percent win ratio. So I think it's far too early to write the commercials off based only on a couple of days of a single signal. I've found the most robust signals based on the Commitments of Traders data typically last three or four weeks on average.

Secondly, I just did a little study and found that relying on the commercial traders in the S&P 500 the week immediately following big shifts in their positioning isn't a very useful strategy, either. My trading setup for this market works with a three-week delay for the commercial traders. Making your move on the open of trading the Monday following big shifts in the commercial net derivatives positioning would have gained 38 percent in 2008 - not bad, considering how the market tanked! - but during the 2003-07 bull, such a strategy would have gained less than half the return of the market.

Far more importantly, to my mind, even those gains would have occurred in a highly unreliable fashion. My backtesting shows a volatility-adjusted out-of-sample efficiency of just 48 percent for the compound annual return since 1995. That's a completely untradable score. It means the out-of-sample period scored just 48 percent of the in-sample backtested period. You want to see 70 percent or higher for the setup to have a chance of being reliable in real life.

But add a three-week delay before executing signals and the out-of-sample efficiency jumps to 120 percent. And throw in a second signal based on fading the small traders, again with a three-week delay, and that score jumps to 200 percent. As it happens, the small traders were already giving me a bullish signal for the S&P 500. So my own bullish signal for this setup takes effect on the open of July 20. Until then, that setup remains in cash.

Incidentally, out-of-sample testing is just one of many measures of robustness I think you've got to use in backtesting. (See my backtesting results table for some additional ones I use.) But it gives you an idea of how much of the common wisdom out there of how to use the COT data is based on little more than eyeballing some very complex data - not any actual real research. Good luck the rest of this week.

Rally Has Shaky Foundation

New U.S. house-price data is out. Looks pretty horrifying to me. People are talking up the slowdown in the rate of decline or even a turnaround.

But take a look at these charts from the S&P/Case-Shiller folks. The first one shows something like a rate-of-change indicator familiar to technical analysts. As anyone knows who studies this kind of thing, this type of indicator can stay oversold or overbought for a long time before price changes course. As well, an upturn or downturn in this indicator often doesn't register in prices for a long time, either.

The more important chart is the second one, on the next page - showing the actual house prices. No trend change there. Still down. About 33 percent since 2006.

And still more important, to my mind, is that even when the price decline meaningfully slows, that still means massive amounts of banks' leveraged assets continuing to lose value. Until house prices actually start rising, that is. I think this rally ends in tears in a big way when that starts sinking in. Yikes!

Smart Money Traders Turn Bullish on S&P 500

No new signals for this coming week from any of my trading setups based on the weekly derivatives data in the Commitments of Traders reports. But a big change in the data today signals a possible shift to a more bullish future. Or maybe just a one-week blip. Who knows? I've just updated my latest signals table based on this afternoon's new data.

Especially interesting: the "smart money" commercial hedgers have finally gotten off the couch and jumped into the S&P 500. If you're a regular here, you'll know the commercial traders haven't been exactly enamoured by the rally since March and have faded it with a large net short position in futures and options.

This week, big change. The commercials reduced their net short position significantly, triggering a bullish signal from their side in my S&P 500 setup. They haven't been this optimistic about the market since mid-March.

Note, however, my commercial signal works with a three-week trade delay. So no action until the open of trading Monday, July 20.

Another caveat: the other signal that makes up that setup - fading the small traders, who tend to be wrongly positioned at market turns - has moved closer to flipping from bullish to bearish. That's because, as you'll note on my latest signals table, these wrong-way folks have suddenly bumped up their net long position as a percentage of the total open interest. These people tend to be so wrong, in fact, backtesting suggests you could have reliably done the opposite and made good money.

So if they hit a bullish extreme in their positioning in coming weeks, that would put their signal in the bearish column. They're still not quite there yet, so things look good for the bullish side for now. Regardless, the S&P 500 setup will go bullish July 20, for at least one week.

Tune back in here early next week for a more detailed look at the other markets I'm covering with my setups and for a portfolio results update. Have a fine weekend.

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