Wrong-Way Traders More Depressed, Signal More Possible Upside

No new signals for my trading setups based on Friday's Commitments of Traders report. All is quiet. See my newly updated latest signals table for details on how the setups see the data now. Also, no signals pending for Monday's open.

The S&P 500 setup is still bullish, and the latest weekly data looks more bullish than last week, with the wrong-way small traders getting much more bearish again, while the "smart money" commercial hedgers are a mite more bullish.

Natural gas, however, is looking decidedly more bearish; while the setup remains in cash, both signals that make up that setup have now clicked back into the bearish column. That could line up for a bearish trade taking effect in early October. Crazy times for that market, as usual!

Meanwhile, please take a look at my post below asking readers to write the CFTC to preserve this invaluable, free government data in its current form. (Read the comments exchange for some extra details on what's at stake.) Sorry I didn't have time for a more detailed update this week. But be sure to check out my portfolio page Monday for my updated results. And good luck this week!

Addendum on Monday morning: I just got this letter in my inbox that a reader sent to the CFTC about its proposed changes to the COT report. I had to share (with permission). Thanks to Carl and the many other readers who have written in!

To: The CFTC

We are a Netherlands-based group producing scientific research in conjuncture with the VU (the leading university in Amsterdam), doing ongoing statistical, mathematical research into correlations between traders' behaviour and market prices and other financial data. The weekly COT report is at the centre of that. When we started our research into the COT data we assumed that it would be published forever into the future.

Changing the values of the report would make our research obsolete. That means that many man-hours and computer hours would be lost. It would take a great effort to newly analyze the value of the new format and its correlation to other financial-related data. Because the greater amount of data in the new format and the fear of again changing values in the new-style report would probably keep us from committing us again to such intensive research. The new format, due to the nature of statistics, would take years to produce meaningful data.

There are many other reasons to think of why we would like the COT report to continue, such as the fact that in Europe, Asia, etc., such data are not available. The strength of the COT report lies in the continuation and accessibility of information about the biggest markets in the world. Of course, we do not oppose new data being published. We would just like to keep the old style, and we hope that it could be published simultaneously.

We feel that maybe we should have told you before about our research, so that you would have known the importance of the report to us and the institution it is around the world.

I hope to have provided some input for the discussion of the future of the report. Please feel free to contact me.

Greetings, Carl Borgen

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

Save the COT Report!

U.S. regulators claim they are improving market transparency with some big changes to the Commitments of Traders report. But the changes threaten to sharply curtain the very transparency they hope to achieve.

Please help save this valuable free data by writing a comment to the U.S. Commodity Futures Trading Commission at cotchanges@cftc.gov. The deadline is Oct. 1. More info on how to do so is at the end of this post.

The COT data comes in a free weekly report issued by the U.S. Commodity Futures Trading Commission. It details trillions of dollars in derivatives positioning in over 100 major markets - everything from crude oil to the Japanese yen, gold, frozen pork bellies, wheat and the S&P 500.

Just Raw Numbers

The data is just a bunch of raw numbers that are difficult to decipher until you look back over it for many years and start seeing patterns. Analysts like Steve Briese and Larry Williams pioneered methods to help decipher the data and increase popular understanding of its usefulness.

Taking off from their work, I crunched years of data and studied the long-term charts in search of a way to trade off it alone. This led to my COTs Timer system, a trading strategy based exclusively on this fascinating data that I offer here for free as a public service.

The strategy has a 72-percent win record since December, when I started to trade the first of a new generation of trading setups. The average has been a 5.4% gain with a 3.2-wk holding period, with a 18.3% real-time cumulative return (adjusted to remove gains due to leverage and adjusted to the maximum portfolio allocation of each setup).

Now, in the wake of the financial mess we've faced for over a year, the CFTC is rightly trying to increase market transparency. That includes making some changes to the COT report to give more details about the data, announced Sept. 2. (See the CFTC's additional explanatory notes here.)

But in so doing, the commission will actually curtail the very transparency it seeks to improve. Unless we speak up.

Historic Data Vital

The CFTC will replace two of the categories of traders in the report with four new categories. The commercial traders will now be broken down into a category for producers, merchants, processors and users, plus a separate category for swap dealers. The non-commercial category (popularly known as large speculators) will be broken down into "managed money" and "other reportables." Presumably, the third category - non-reportables (a.k.a. the small traders) - will remain untouched.

The CFTC is inviting comments on whether it should continue to publish the data for the existing categories alongside the new data. This is a vital issue for anyone who cares about this data. If we no longer get the data in the existing categories, the new numbers could be difficult or impossible to evaluate for years.

The CFTC has said it would publish historic data for the new categories going back three years. That's far from being enough for most purposes of statistical research. At a bare minimum, my calculations suggest we need at least about 10 years of data - and likely much more; as much as possible, in fact. Also, the data must cover as many diverse market conditions as possible for the data to have any statistical meaning.

In fact, the existing COT data, which goes back to 1995 for most major markets, just became useful for statistical purposes in the last few years when there were finally enough data points to research.

Comparing Apples With Oranges

The CFTC may argue that a researcher could just recreate the data for the old categories by adding together the positions of the new categories. But this is cumbersome and creates significant programming difficulties because the new data is reported in a different format.

It also raises the question of whether the new categories will exactly replicate the existing ones. For example, if we add up the positions for the new "managed money" and "other reportables" categories, will we get the same figures as for the old non-commercial category? Will the small trader category remain exactly the same? Or will we be comparing apples with oranges?

Do the changes involve any other kind of redefinition of categories or reassignment of traders? Could the new categories make such changes more likely because the old data will no longer be seen as relevant? All these things would reduce or eliminate the ability to compare the old and new data.

Email the CFTC

If you think the CFTC should continue to publish the existing categories, email the CFTC at cotchanges@cftc.gov. Please write before the deadline for comments on October 1. (Mention that you are commenting on the CFTC's proposal of Sept. 2 to amend the COT report.) If you're pressed for time or not sure what to say, you can even just email them a link to this post: Save the COT Report!

Can we make a difference? Yes! The last time the CFTC reviewed the COT report, it received an unprecedented 4,659 comments from 23 countries. It was by far the most in the agency's history in response to such a notice. The response was unanimous in support of the reports. Remarks included: "Please, please do not discontinue this very valuable report," "Don't you dare," "Save the COT" and "Leave it alone you knuckleheads." The CFTC backed down from a proposal to discontinue them. If we remind the agency of the importance of this valuable data, the cause of transparency has an excellent chance of prevailing again.

Gold Rally Over? Trouble Also Seen for Nikkei, Bond

Some new signals in my trading setups based on today's Commitments of Traders report. See my newly updated latest signals table for the gruesome details. Don't have much time for a lengthy update, but suffice to say gold bugs will not be pleased! Oops. Nikkei also goes to cash on Monday's open. Plus, an older time-delayed signal puts my 30-Year Treasury Bond setup into the bearish column, too (meaning interest rates expected to rise). Have a good weekend, and be sure to check in early next week for my portfolio update.

Correction: A version of this post I put up late Friday said incorrectly that Nikkei goes bearish on Monday. The latest signals table had it correctly. The setup goes to cash. Sorry about the error.

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

Rally Gets Boost From Bullish Data

More bullish news from this afternoon's Commitments of Traders report suggesting the rally is still probably on solid ground.

My trading setup for the S&P 500 is bullish for a second straight week. The latest data shows the wrong-way small traders getting somewhat less bearish than they were last week - but on balance they're still very negatory in their sentiment. See my newly updated latest signals table for the exact numbers. (Note that I've corrected a couple of errors on that table from last week's numbers. Apologies.) This is their sixth straight week of increasing bearishness.

Meanwhile, the commercial hedgers - who tend to be correctly positioned when markets turn - are still highly bullish, as you can see from the latest data on that table. Some other highlights from today's report:

- U.S. banks: My trading setup for the BKX U.S. Bank Index is in cash again this week - its fifth in a row. This week's data saw the setup come just a hair from going to bullish. Two of the three signals that make it up are already bullish. The hold-out signal is based on the large speculator total open interest. It has shot up 29 percent in the past three weeks, bringing the large spec positioning to 1.15 standard deviations above the moving average. It needed to get to 1.25 standard deviations above to go bullish. If the open interest had increased 3.6 percent more this week, that would have done it.

- Natural gas: Wow, what a run that was for my short signal. Today's massive reversal to the long side took away some of the gains, but I don't mind at all given what happened earlier this week and last. I figured it would be volatile, but this was craaaazy. The setup goes to cash on next week's open, and there's no clear sense if natural gas has bottomed or not, at least not from the COT data, which is pretty mixed in its outlook for the next week out at least.

- 30-Year U.S. Treasury: This setup also goes to cash on next week's open after a nice rally. It will remain in cash a week, then go bearish on the bond price (meaning bond yields would rise) for at least two weeks starting the open of trading Sept. 14.

- Crude oil: More bearish numbers from the small traders and commercial hedgers in crude oil. But there's still no clear signal at this point because of the various trade delays for their signals in my setup in this market. On next week's open, the current bullish signal - a money-loser, unfortunately - ends, and the setup goes to cash.

Hope you have a great long weekend, and be sure to check in here early next week for my portfolio page update, plus a look at the CFTC's proposed changes to the COT report. Also, be sure to check out my new FAQs page for details on my backtesting process and how COTs Timer works.

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

New FAQs Page, Portfolio Page Updated

I've just updated my portfolio page with results as of Friday's close of trading. I've also just added link to a new Frequently Asked Questions page to my Navigation bar on the right. Most of those are questions I've gotten asked numerous times, and I guess I'm just getting lazy about not wanting to repeat myself over and over! That page also includes a step-by-step breakdown of my backtesting process.

Probably Not a Top, Wrong-Way Traders Too Bearish

A depressing week in the markets has the top-callers back out in force. You can see it especially clearly in the numbers in Friday's Commitments of Traders report. See my just-updated latest signals table for the details. This week's data shows the wrong-way small traders in S&P 500 futures and options getting still more bearish in their net positioning. Friday saw them at 2.20 standard deviations below their moving average in their net position as a percentage of the total open interest. That's their most bearish in 13 months.

And you know that when the little guy gets really short - at least in this market - that's historically been a sign of more upside. Particularly when that's confirmed by the commercial hedgers being bullish. In this case, they are. My latest signals table shows them at high levels of bullishness since late June. Friday's data finds them still maintaining a solidly bullish net position. Some other highlights:

- U.S. banks: My trading setup for the U.S. BKX Bank Index, a basket of the major U.S. financials, remains in cash a fourth week. But two of its three component signals are now bullish. In Friday's numbers, the small trader total open interest has nicely turned around, pushing their signal into the bullish column.

- 30-Year Treasury Bond: My setup for the 30-Year Bond will go to cash the week of Sept. 7, then to bearish (meaning a call that interest rates would go up as the bond price trades opposite to the bond yield). This, after three weeks being bullish. Friday's data saw the small trader total open interest - which this setup fades (trades opposite to) - shoot up enough to push their signal into the bearish column.

- Natural gas: I'm holding on to my hat for another probably-insane week in this market. My setup says to be short for a week more, then to go back to cash in natural gas. Take a look at the nutso natural gas chart, and you'll see what I'm talking about. This market is craaaaazy.

- Gold: How long will this trading range last? You know the longer it does, the more whacky the breakout or breakdown will be. Well, there is some possible news to report from Friday's data. Large speculator total open interest (which I'm fading in this market) has suddenly moved significantly down, flipping their signal into the bullish column. Nothing to get too excited about just yet; that signal operates with a seven-week trade delay. So we're talking about a potential impact starting Oct. 19. The other signal in this setup has to agree at that point for there to be a trade on the long side. Right now, that other signal - fading the large spec net position - is bearish. This week's data saw the large specs still happily long. But lots can happen in seven weeks.

Good luck next week, and be sure to tune back in for my portfolio update early this coming week.

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 Smart Money Super-Pumped, Wrong-Way Traders Super-Edgy

Sure was an interesting week. Still seems like a lot of disbelieving bears out there, just waiting for this market to crack up - even as it keeps bouncing back like it did again this week. Today's Commitments of Traders report confirms just how bearish the good people out there are. Check out my just-updated latest signals table to see those numbers.

The data shows the wrong-way small traders in S&P 500 futures and options at a remarkable 2.02 standard deviations below the moving average I use to study their relative positioning. That's their most bearish in over a year. The small traders have steadily reduced their relative net positioning for seven straight weeks as a percentage of the total interest - during almost the entire rise of the market off its mid-July low. Meanwhile, the commercial hedgers, who tend to be correctly positioned at market turns, have gotten even more bullish than they were last week.

All this bodes very nicely for my bullish signal for the S&P 500 that takes effect on Monday's open of trading. I'll hold that trade for at least three weeks due to the trade delays within this setup. Some other highlights from the new data:

- Banks: Mixed news for U.S. financials. Large speculator net positioning in the three-month Eurodollar contract has completely reversed course after a four-week decline as a percentage of the total open interest. And that is bearish. Today's data shows it bumping back up, which has turned their signal bullish. However, the small trader total open interest continues to fall off a cliff, and that is bearish. My setup for the U.S. BKX Bank Index remains in cash for a third week.

- Crude oil: My trading setup for crude oil - presently bullish - stays so for two more weeks, then goes to cash. Friday's data shows the small trader net position collapsing as a percentage of the total open interest. Their signal has now gone to bearish. So if the commercial hedgers, which are already on a bearish signal, remain that way inclined a few more weeks, we could get actually a bearish call from this setup in eight weeks' time. (The small trader signal has an eight-week trade delay before execution.)

- Natural gas: My setup for natural gas goes bearish on Monday's open. Gas has already gotten destroyed for more than two weeks. (I bought a discretionary short position last week as it broke down.) My COT signal will last two weeks, after which time the setup will go either to cash or bullish. Today's data saw the small trader total open interest rally nicely, which is bullish in this market according to my backtesting. But that signal has a two-week trade delay, so it won't impact my setup right away.

Be sure to tune in early next week for my portfolio update. Have a good weekend, and rabbit feet for next week.

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

Going Long Treasury Bond and Nikkei, Cautious About Banks

The markets seem to have shrugged off that little selloff, but this week's Commitments of Traders data suggests we may not be completely out of the woods. The numbers are giving some mixed signals, with a bullish trade starting Monday for the Nikkei and positive data for the end of the month in the S&P 500 but bearishness signalled for banks. Also potentially worrisome is a bullish signal Monday for the 30-Year Treasury Bond (meaning the bond yield would fall). Bond prices have a moderately negative long-term correlation with equities and commodities (though that kind of relationship often means less in shorter-time horizons, including for the coming week). I've just updated my latest signals table with the data from Friday's COT report for the markets I'm trading with my COTs Timer system. Some highlights:

- S&P 500: The data in S&P 500 futures and options is looking up. My trading setup for this market goes bullish on the open of Monday, August 24, and the numbers remain hopeful into mid-September. The "smart money" commercial hedgers are super-bullish in their net positioning, while the wrong-way small traders are increasingly negative, as you can see from the data on my latest signals table.

- U.S. banks: More trouble for U.S. banks, if the COT data for the three-month Eurodollar contract is any indication. (That's the interest rate, not the currency.) All three of the groups of traders that make up my setup for the BKX U.S. Bank Index are now in the bearish column. Because of the varying trade delays for the three signals, there's no bearish trade just yet in that setup, which has been in cash since Aug. 10. But it's still not pretty.

- Natural gas: This ridiculously volatile commodity has sold off massively since my trading setup went to cash in early August, making new lows this week. My setup suggests this might not be the end to the correction in natural gas. It's given me a bearish signal with a one-week trade delay - meaning execution on the open of trading on Monday, August 24.

I've also just updated my portfolio page with my bond and Nikkei entries and the current result from my open long crude position. Good luck next week!

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

Cool Mention

Wow! I am blowed away. Trader and blogger Stephen Vita has listed COTs Timer among his top 10 favourite trading blogs at Blogs.com. If you don't know who Vita is, check out his free AlchemyOfTrading.com blog here. A subscription to his paid site is probably the smartest thing any trader could get, whether beginner or experienced, vegeterian or Martian or paraskavedekatriaphobic. I've never found anything to remotely compete with Vita's mix of trading smarts, hilarious commentary on the daily market grind and morons running our collective economies, and over-the-shoulder look at his decision-making as a trader and money manager. Although his approach is disretionary and COTs Timer is mechanical, I've learned TONS from him, and this trading strategy wouldn't exist in its present form without him. Thanks for your great site, Stephen. I'm humbled you'd think of me.

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!