Going Long Gold, Gas; Ominous Bank Data

I've just updated my latest signals table based on Friday's Commitments of Traders data. New signals: crude oil, which is now bullish, will turn bearish on the open of the week of April 19, and gold, until today in cash, goes bullish on tomorrow's (Monday's) open of trading. Gold looks set to remain bullish for up to five weeks based on the COT data.

Also, from last week's data, natural gas goes bullish on Monday's open, too. Gas, which has seen a bloodbath in recent weeks, could be further buoyed by the fact that the small trader and large spec net positions as a percentage of the total open interest - which both correlate strongly with natural gas prices the next week - have both jumped up nicely, as you'll note on my latest signals table.

In other news, the wrong-way S&P 500 small traders have again gotten more bearish in their futures and options positioning - fading the rally as they've done since early January. Doh! Meanwhile, the "smart money" commercial hedgers are a mite less bullish in their positioning, but still light-years from getting bearish enough to flip my trading setup to bearish. It remains bullish.

Of special interest is the three-month Eurodollar data, which gives me signals for the BKX U.S. Bank Index. The large spec total open interest correlates nicely with BKX, but it has just fallen off a cliff, as you'll see on my table. A very dramatic reversal. Oh-oh.

Hope you did well last week and continue to do so this coming week. Check in early this week for an update of my portfolio page.

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

Wrong-Way Small Traders Still Fading Rally; Gas Could Rally, Not so Much Gold

How overbought can a rally get? It turns out, very! As Stephen Vita has been pointing out, it feels a lot like Q4 1999. What do the new Commitments of Traders numbers out today tell us? I've put up the data and new signals on my latest signals table. Some highlights:

- S&P 500: The wrong-way small traders have gotten more bearish, according to this afternoon's COT report. They've in fact had a bearish tilt in their net positioning in future and options since early January - fading the entire rally. Since my trading setup for the S&P 500 trades opposite to the small traders, their latest move to get more relatively bearish should be a good sign for the rally.

On the other hand, the commercial hedgers also got a little more bearish this past week. And both sets of data correlate poorly with week-to-week fluctuations in S&P 500 prices. The main point is we're still very far from the kinds of positioning extremes needed to signal a turn in this market, at least if past data is any indication. So the setup remains long.

- Banks: The data on U.S. financials is also mixed, as you can see on that table. My setup for the BKX U.S. Bank Index remains in cash this week.

- Nikkei: My trading setup for Japan's Nikkei Average goes to cash after seven weeks being short. The setup went short in late January just as the market was selling off, so it'll wind up around even, probably with a small loss. The setup will stay in cash for a spell, then go long in late April. That's the farthest-out signal I think I've got at this point. It could suggest that the market could surprise some more and fail to implode this spring as many anticipate it will.

- Gold: Gold and other precious metals haven't kept pace with the rest of the rally. They've sold off this week while my gold setup was in cash. The setup will remain in cash next week, and the data foretells more weakness for bullion. The large speculators have cut their net position and total open interest - and both of those sets of data have correlated quite well with gold prices the following week.

- Natural gas: My setup for gas, after being in cash five weeks, is now signaling to go long in a week's time - i.e. on the open of trading the week of March 22. As I noted in last week's post, the data has started to suggest the bloodbath might be finally over for gas. Now, the setup has officially gone to the bullish column.

Hope you did nicely this week and that you have a great weekend. Check in early next week for an update to my portfolio page.

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

I'm Oily But Not Gassy

I went long crude oil this morning and closed down my gold position, in accordance with my signals based on the Commitments of Traders data. Here's what the latest COT report has to say about the markets:

- S&P 500: The "smart money" commercial traders are a little less bullish this week, as you can see on my latest signals table. But my trading setup for the S&P 500 remains long. The change in commercial positioning is so small it has no effect on my signal. As well, week-to-week fluctuations in the S&P 500 COT data have virtually no correlation with index prices. You'll also note from that table that the wrong-way small trader crowd has gotten a bit less bearish. If those trends both continue, eventually the signal will flip to bearish. But we're nowhere near that point yet.

- U.S. banks: My trading setup for the BKX U.S. Bank Index (based on the three-month Eurodollar COT data) is in cash again this week. The COT data has been flipping around like a fish in a pail recently. The large speculator total open interest has been particularly volatile. This data has a strong 63-percent correlation with the BKX the following week. Its signal has gone from bullish to bearish and now back to bullish in the past three weeks. The latest COT report shows the large spec and small trader total open interest rebounding in relation to past data, so that is a bullish portent - though the move isn't decisive enough to be a trading signal for me by itself.

- Gold: My setup for gold goes to cash on this week's open. That's because the large spec total open interest, which I fade in this market, got excessively bullish in mid-January. That caused a bearish signal for two weeks, and with a seven-week trade delay, it took effect this week. The overall setup is in cash because the other signal that makes it up - based on the large spec net position as a percentage of the total open interest - is still bullish. If that remains so, in two weeks the setup will go back to bullish.

Also of interest: The large spec total open interest, which has a nice 77-percent correlation with next week's gold price, has shot up this past week.

- Natural gas: My natural gas setup remains in cash, but Friday's data looks quite sunny. The small traders and large specs have both upped their total open interest in a major way. That's bullish because they both are the "smart money" in this market. As well, both sets of data correlate strongly with gas prices the ensuing week. It's still not enough to give my setup a bullish signal, but it could suggest the rout in gas is almost over.

Good luck this week! My portfolio page is now updated with results of my closed gold trade and open positions.

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

Crude Bullish, Gold to Cash

Just updated my latest signals table based on Friday's Commitments of Traders report. New signals for next week's open of trading in gold (cash) and crude oil (bullish). I'll be back Monday with a detailed post on the new data. Hope you did well this past week. And what a nice one it was. Have a good 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

Data Highly Bullish for S&P 500, Not So Much for Banks

U.S. banks look like they're super-vulnerable based on Friday's Commitments of Traders data, as I reported in Sunday's brief update. As you can see on my latest signals table, the large speculators and small traders in three-month Eurodollars have all of a sudden gotten massively bearish in their total open interest, reversing highly bullish positioning from the previous week. What about other markets?

- S&P 500: In this market, the "smart money" commercial hedgers have slightly reduced their hugely bullish net position as a percentage of the total open interest, but my trading setup for this market remains on its bullish call. The commercials have maintained four straight weeks with a net position over 1.8 standard deviations above the average. They haven't been this optimistic in relation to recent data since July, when they got set up nicely for the end of a month-long trading range and the six-month rally that ended in January.

- 30-Year U.S. Treasury bond: My trading setup for bonds is in cash, but it seems like it really wants to go bearish (meaning the yield would rise). The small trader total open interest, which my setup fades, has just seen a vertiginous rise this week. The small trader signal was already bearish coming into Friday. This week, the small traders are joined by my other signal representing the large speculators, whom I also fade. Their total open interest has also shot up since the previous week, giving them a bearish signal. The setup remains in cash for now because both signals operate with delays of several weeks. But if the signals remain aligned a little while longer, the setup will go short.

- Gold: Will bullion catch a bid with the rest of the market? Will it go to $3,000 - or maybe $30,000? Or $300? How anyone can predict these things is beyond me. Either way, my setup is long. This week, the COT data is looking a little shinier for gold. Going up are both the large spec total open interest and the net position relative to the open interest. Both are strongly correlated with gold prices the following week, so there's a nice chance of some strength.

My portfolio page is now updated with my current positioning and results of open trades. Good luck the rest of this 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

Banks Could Take Hit

Woah - potentially very bearish data for U.S. financials in Friday's Commitments of Traders report. Check out my latest signals table for more details. I'll be back here later with a fuller update. No bearish signal for banks just yet, but the data doesn't bode well. A bearish signal is possible in two weeks' time. As well, the data, which correlates strongly with the BKX U.S. Bank Index, suggests a risk of weakness ahead.

Data Looking Up

Will this small rebound soon exhaust itself, or is the selloff over? The Commitments of Traders data seems to be leaning toward the bullish case. My trading setup for the S&P 500 has given a bullish signal to take effect on Monday's open of trading. The latest COT data issued Friday continues to look optimistic for the S&P 500, with the "smart money" commercial hedgers remaining heavily bullish in their net positioning compared to recent data, while the wrong-way small trader crowd is again set up very bearishly.

Check out my just-updated latest signals table for more details about Friday's data and my current signals for the various markets I'm covering. In the other data:

- U.S. banks: My setup for the benchmark BKX U.S. Bank Index, which is based on the three-month Eurodollar contract (the liquidity measure, not the currency!), is in cash again this week, the second in a row. But this data is looking up this week, too. The large spec and small trader open interest, which correlate nicely with next-week BKX prices, has risen decently, according to Friday's COT report.

- Crude oil: My crude oil setup is still on track to go bullish on the open on March 8, but this week's data shows the small traders, whom my signal trades alongside, getting dramatically bearish in their net futures and options positioning in relation to recent data. That has pushed their signal to bearish. But that signal works with a delay of eight weeks. So it won't take effect for quite a while. My bullish signal will remain in effect until that point, which I will update you on as we get closer.

- Gold: My trading setup for bullion is still bullish, as it's been since Feb. 1. Moreover, this week's data has rebounded back into somwhat more bullish territory. You may have noticed that last week's COT data for gold had shown a sudden, rather significant drop in large spec net positioning and total open interest. I fade both of those datasets, but week-to-week that data correlates strongly with next week's gold prices. Friday's data, on the other hand, shows the large specs getting more net long and building back their open interest relative to recent data. Those could be bullish portents for the coming week.

Hope you did well last week. Please tune back in early this coming week for an update of my portfolio page. Good luck this 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

Banks, Natural Gas to Cash

New signals and data are now up on my latest signals table based on Friday's Commitments of Traders report. New signals to report: My trading setups for U.S. banks and natural gas both go from bullish to cash on this week's open of trading. Be sure to check out the latest signals table for more details about what the data is doing now.

In other news, my setup for the S&P 500 is still on track for turning bullish in a week's time (on Feb. 22). My gold setup remains bullish, while my setup for the Nikkei is still bearish.

My 30-year Treasury bond and crude oil setups are both in cash, although crude will go bullish on March 8. Sorry for the late update. Hope you did well last week and that you'll do even better this week. For Canadian and U.S. readers, hope you have a good holiday today. Tune in Tuesday for an update of my portfolio page.

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

Commercial Hedgers Bet Big on Rebound

What a crazy day to cap a nutso week. Feels like we're back in the dog days of early last year. So many people are sitting in front of computers with their finger on the nuclear button. But new data from the Commitments of Traders report today suggests my series of bullish signals from last week are still on track. I've updated my latest signals table based on the new figures released this afternoon. A few highlights:

- S&P 500: You have to go back to Sept. 2007 to find a time when the "smart money" commercial hedgers have been this bullish. As you'll see on that latest signals table, these guys are in heavy-duty extreme territory in their bullish net positioning. Meanwhile, the wrong-way small traders have gotten even more super-sizedly bearish. This is setting up very nicely for my long bullish trade starting on the open of trading on Feb. 22. Note that, as I explained in a special post yesterday, such big moves in trader positioning don't necessarily take effect right away. On average, in the S&P 500 data, the commercial and small trader signals were best traded with a three-week delay in my backtesting.

- U.S. banks: My second week of being bullish in this market. The data is still looking pretty hot, even if it's a hair less bullish this week.

- Crude oil: My setup remains in cash, but the data has given me a new bullish signal with a four-week delay. It's to take effect March 8, I guess somewhat in sync with the yearly seasonal trade.

- Gold: Bullion remains also bullish. The data, which correlates strongly with bullion prices, has also gotten a little more bullish Friday.

- Natural gas: My trading setup for gas is bullish a second week and will remain so next week, then cash out.

Hope you did okay last week. Please check back in early next week for an update of my portfolio page. 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

Market Tanks! Was the Smart Money Wrong?

The market is caving in today, and that prompted a trader friend to express frustration about the commercial hedgers in the Commitments of Traders data. You'll recall from my post last Friday that they got uber-bullish last week. So what gives? Are they wrong? He also noted that commercials used to have a better record a few years back.

It made me wonder if there were types of markets when the correlation has worked differently. So I checked out the numbers. Check these correlations out. Overall, contrary to conventional wisdom, the "smart money" commercial trader net position as a percentage of the total open interest has had a negative -25-percent correlation with S&P 500 weekly open prices a week later.

That's right - a negative correlation. So trading alongside the commercials week to week would have lost you piles of money. That actually makes sense, in a way. These guys accumulate positions as markets decline and vice versa. It's only when they hit extremes of positioning that I've found you can trade alongside them. And then, only if their signal happens to agree with that of another group of traders. That's why I use two signals in my own S&P 500 setup and only trade when both agree. And on top of that, the signal tends to work most reliably not right away - but with a delay of about three weeks on average.

Here's something else I found. Here are historic correlations in certain time periods between the commercial net position and S&P 500 prices a week later:

- March 1995-Nov. 1997: -71%

- Dec. 1997-Dec. 1999: +14%

- Dec. 1999-March 2003: 0%

- March 2003-June 2008: +34%

- March 2003-today: +53%

- June 2008-today: +63%

- March 1995-today: -25%

So clearly, the COT data has changed quite a bit over the various periods in how it interacts with market prices. Trading just off this information would have been a fairly random exercise. That's again why I think the data needs to be filtered with some more complex trading system. Good luck the rest of this week!