Tuesday, December 11, 2007

Commercials Jettison Greenback

by Alex Roslin
Monday, December 10, 2007
[original story]

Bullion has settled into a narrow trading range as markets debate the future of the U.S. dollar. Meanwhile, the greenback has mounted a sweet little rally over the past two weeks. Has the buck finally bottomed after its crash to all-time lows this fall, or is this merely a soon-to-be-doomed counter-trend rally?

The data doesn’t look for the buck, which means an upside breakout for previous metals could be in the cards. The latest Commitments of Traders report issued by the U.S. Commodity Futures Trading Commission shows that the “smart money” commercial traders have again reduced their net position in U.S. dollar futures.

The commercials are now gloomier on the dollar than they’ve been since Oct. 2006 relative to their historic positioning. I’ve developed a trading system that follows the commercials when they hit specific extremes of bullishness and bearishness in their net positioning as a percentage of the total open interest.

My system first flipped to bearish on the U.S. dollar back in Oct. 2006. The latest COTs report gives me a renewed bearish signal for my dollar trading setup. (See the table posted with my original story at Kitco for more details.)

The latest COTs report also shows the “dumb money” large speculators continuing to increase their net short position in copper futures and options. This setup has been on a bearish signal since April, but the large specs have been steadily getting more pessimistic on copper since prices crashed in October. They’re still not quite at the extreme of bearishness to flip my setup to bullish, but they seem to be getting closer each week.

All my other signals remain unchanged from last week’s COTs report: bullish for silver, Canadian Gold iUnits and platinum; bearish for gold, the HUI Gold Bugs Index and USERX U.S. Gold Fund.

For more info on how my trading system works, visit my free blog COTsTimer.Blogspot.com. Good luck this week.

Monday, December 3, 2007

Data Grim for U.S. Buck

by Alex Roslin
Monday, December 3, 2007
[original article]

When The Economist ran a story on “The Panic About the Dollar” on its cover last week, some contrarian traders thought, “Get ready for a dollar bounce.” The thinking is based on what can be called the front cover indicator—by the time the major media picks up on something, the trend has usually run its course.

The Commitments of Traders reports often work in much the same way. These free government reports tell us how trillions of dollars are positioned in futures and options markets in everything from gold to copper, the SP500 and U.S. dollar.

One of the things I found when looking at this data is that it really is true—uncannily and disturbingly so—that the crowd is usually wrong in the markets. So much so, in fact, that I figured out a way to trade off this data when traders hit specific statistically significant extremes in their bullishness or bearishness. The data is actually so often consistent, there’s no need to look at actual market prices. You can trade off the COTs alone.

In copper, for example, the large speculators—these are the big investment firms and hedgies—tend to be quite badly positioned at market tops and bottoms. You could almost feel these folks wincing in pain after they hit a historically extreme net long position in the Sept. 25 COTs report, just days before the copper market peaked and subsequently crashed. The large spec positioning at the time gave me three renewed bearish signals for copper, starting the week of Sept. 25. (For more details on this and my other metals setups, see the table included with my original post of this article at Kitco.com, and to see my signals in other markets, visit my free blog COTsTimer.Blogspot.com.)

What I find interesting now is that, while copper has gotten chopped to pieces, the large specs have very steadily built back up their net short position. Now, these guys have gotten to the point where they’re quite bearish by historic standards, compared to their past positioning. If this trend on their part continues, we could have a bullish signal before long. But I should caution we’re still not near that point right now. (I should also point out that my copper trading setup, while showing market-beating returns in past results, is less statistically robust than one would like to see to trade off it alone.)

So what about the greenback? Despite the talk of a bottom for the greenback—including the contrarian signal of The Economist cover—the commercial traders in U.S. dollar index futures have now reduced their net long position to a historically extreme low. The latest COTs data gives my dollar setup a renewed bearish signal. This caps a 10-week fall in the commercial net long position, which peaked in the Sept. 18 COTs report. This renewed signal is somewhat striking because it’s the first signal of any kind for this setup since the initial bearish signal that came way back in Oct. 2006. Look out below!

All my other signals remain unchanged from last week’s COTs report: bullish for silver, Canadian Gold iUnits and platinum; bearish for gold, the HUI Gold Bugs Index and USERX U.S. Gold Fund.

Good luck this week.

Wednesday, November 28, 2007

Stocks May Revive as Funds Exit Bonds

by Alex Roslin
Wednesday, November 28, 2007
[original article]

Monday saw a stunning move in the U.S. Treasury market that had a lot of folks paying close attention. The benchmark 10-year Treasury yield, which sets the course for everything from mortgage rates to car and business loans, declined from above 4.025 percent to close the day at 3.85, an astonishing drop of over 4 percent.

That’s the kind of selloff we usually see in a volatile sector like gold or crude oil—not go-slow bonds. The decline capped a four-month fall in the 10-year yield from above 5.2 percent that started in the midst of the subprime meltdown last summer.

Meanwhile, bond prices, which trade opposite to the yield, have catapulted up, up and away. All this has been great for bondholders and, potentially, for reviving the markets and economy, as falling interest rates are wont to do. But it also signals the market’s deep preoccupation with the weakness provoked by the housing disaster, which caused a lot of money to flow out of stocks and into safe-haven bonds.

Now there comes a sign of a possible new direction for the bond market, which could in turn have big impacts on stocks and commodities. The latest Commitments of Traders report issued by the U.S. Commodity Futures Trading Commission suggests that small traders in the 10-year Treasury note have hit the brakes and suddenly ramped up their net short position in 10-year futures and options. (The 10-year Treasury is tradable with iShares Lehman 7-10 Year Treasury (IEF) and SPDR Lehman Intermediate Term Treasury (ITE).)

I’ve developed a trading setup based on following what the small traders are doing in the Treasury market. Historically, they tend to be correctly positioned at tops and bottoms in the 10-year yield. (I know it’s strange. Normally, the small traders are considered to be the “dumb money.” But my research has found that’s not true in every market!)

My trading signal flipped to bullish with the July 31 COTs report, but it has now just flipped back to bearish with the latest COTs report issued Monday, Nov. 26. This means the “smart money” believes the 10-year yield has bottomed and will now start climbing again. (That’s bearish for the Treasury note’s price.)

Meanwhile, all my other Treasuries trading setups based on the Commitments of Traders reports remain in bullish mode. That includes the entire yield curve, from the 30-year Treasury bond (tradable with iShares Lehman 20+ Year Treasury (TLT) or the SPDR Lehman Long Term Treasury (TLO)) on down to the 30-day Fed Funds contract (tradable with SPDR Lehman 1-3 Month T-Bill (BIL)).

So what does this all mean? I think the overall COTs data suggests that interest rates may not decline much further at this point (and that bond prices may soon top).

It could be a sign that money will start to flow out of high-flying bonds and back into stocks and commodities—and that the markets generally believe things are looking up.

A confirming sign of that comes from my COTs U.S. Composite Equity Index, which is based on the COTs data for the S&P 500, NASDAQ 100, Russell 2000 and Dow Jones industrials. The latest COTs report issued Nov. 26 has moved this index up smartly to 0.62, from the previous week’s 0.04. The index has been on a bullish signal since March 27, but it turned decidedly down in late September, warning of coming market trouble.

Now, it’s revived nicely and has given me a renewed bullish signal for my trading setup for the S&P 500 (tradable with S&P 500 SPDR (SPY), S&P 500 iShares (IVV) or the 200-percent leveraged Ultra ProShares S&P 500 Fund (SSO)).

Tuesday, November 27, 2007

Was Gisele Bundchen Right to Sell the Buck?

by Alex Roslin
Tuesday, Nov. 27, 2007
[original article, with table]

Anyone hoping for some market resolution last week had to be pretty disappointed. Gold mounted a spirited comeback, but gold stocks and silver looked pretty sickly, despite the U.S. dollar’s continuing smashup derby. Meanwhile, copper got its head caved in and finished the week off 20 percent since early October.

So is the shine off bullion and other commodities? Is there some kind of warning sign here for the broader economy? Why can’t the market make up its mind? And perhaps most importantly, was supermodel Gisele Bundchen right to say she didn’t want to get paid in U.S. dollars anymore, or was that actually a sign of a bottom? Or put another way: is Gisele with the “smart money” crowd or the dumb?

I think we can get some interesting answers from the latest Commitments of Traders report. (This is the data on trillions of dollars of futures and options holdings in 100 major markets issued free each week by the U.S. Commodity Futures Trading Commission.)

My overall take: the data may have been signaling a pause in a longer-term bullion bull run. Three of my gold-related trading setups based on the COTs data (for gold itself, the HUI Gold Bugs Index and USERX U.S. Gold Fund) flipped to bearish in the Sept. 25 COTs report. This was based on trading on the same side as the “smart money” commercial traders, who had turned mega-bearish. The commercials have adopted a decidedly neutral stance in the latest COTs report—neither bullish nor bearish. (See the table in my story at Kitco.com for the specifics.) So that means my existing signals still hold.

However, my setups for the XGD Canadian Gold iShares ETF and silver—based on fading the “dumb money” small traders—have remained bullish throughout this rough patch. (XGD flipped to bullish in May, and silver went bullish in July.)

In the latest COTs report, the gold small traders are still quite bearish—signaling more potential upside for XGD. Meanwhile, the silver small traders have slightly increased their net long position as a percentage of the total open interest and are now simply neutral. Since neither group of traders has yet gone to a bullish extreme in its positioning, I’m still far from getting a bearish signal in these two setups.

Meanwhile, in copper, which has pretty much collapsed in price, punching below its August low, the “dumb money” large speculators have again increased their net short position. It’s the fifth straight week of growing bearishness in their positioning since they gave a sequence of three renewed bearish signals starting with the Sept. 25 COTs report. Those bearish signals were based on the large specs getting super-exuberant about copper’s prospects. Oops!

Now, these geniuses have just moved to what I’d call a bearish tilt in their net positioning. As you can see in the table here, their position has fallen below the moving average I use for this setup. This means in effect that the setup now has what I’d call a bullish tilt because the large specs are getting increasingly bearish. We’ll see if the setup continues in that direction. It could be setting up for an eventual bottom in copper. But we’re still far from that point right now, so my existing bearish signal still holds.

And since copper is often seen as a barometer for the broader economy, the setup’s continued bearish signal obviously isn’t a very happy sign. You’d probably want to see copper stop getting cleavered before you could feel good about the economy again.

So what of the poor, unloved, beat-up old U.S. dollar? you ask. It’s definitely not looking good when a supermodel snubs you in front of the whole world. Turns out Gisele Bundchen was really onto something. Looks and smarts. The latest COTs report makes it eight straight weeks that the commercial traders have reduced their net U.S. dollar index futures position. My U.S. dollar setup has been on a bearish signal since Oct. 2006, and here—at the point where some people say a bottom for the greenback is at hand—there’s nothing on the COTs horizon to suggest that’s true. If anything, it’s more public humiliation from supermodels ahead.

For more details and signals from my setups for equities, energy, the Treasuries, currencies and agriculture, visit my free blog COTsTimer.Blogspot.com. Good luck this week.

Wednesday, November 21, 2007

Fed and Yields Headed Down

by Alex Roslin
November 21, 2007
[original story]

Monday, November 12, 2007

Don’t Bank on These Shares for Awhile


Shares of financial stocks have been hobbled and could get a whole lot cheaper

Alex Roslin
The Montreal Gazette
Monday, November 12, 2007

[Click on chart to enlarge.]

How the mighty banks have fallen. As visions of subprime meltdowns dance in investors’ heads, shares of Canada’s once-mighty banks have been hobbled, while the U.S. financial sector is in an open rout.

The widely watched KBW Bank Index, a basket of leading
U.S. banks, is in a freefall, plummeting 23 per cent since its peak last February and shooting down to almost pierce its low of 2005.

That qualifies U.S. banks as being in a bear market, usually described as a 20-percent price drop.

Even here in Canada, which so far has escaped largely unscathed from the U.S. real-estate crack-up, the benchmark S&P/TSX Financial Index peaked back in May and is down six percent.

The average Canadian bank stock is now at the same value as it was 12 months ago.

It’s all quite mystifying for a sector that has been powering steadily up ever since 2000, suffering nary a hiccup even during the 2000-02 dot-com crash.

Back in those frightful times, while the high-flying tech stocks of the Nasdaq index crumpled, shares of the Royal Bank of Canada, for example, took off from around $13.30 in January 2000 to peak at more than $60 last May. (They’ve since drooped to below $52 as of last week.)

Meanwhile, the Nasdaq, despite its remarkable recovery since 2002, is still nearly 50 per cent below its 2000 high.

But just when it seemed like nothing could thwart bank shares in their ascent, along came the U.S. housing disaster, which has left many banks facing their own stock disasters. Is there any hope now for a turn in the tide?

Probably not yet, say some market chart experts.

“There are definitely major weaknesses in that area,” said Ron Meisels, president of Montreal-based market-analysis firm P&C Holdings and a founder the Canadian Society of Technical Analysts. (Technical analysis is the study of market charts to spot price trends.)

Meisels called the performance of U.S. banks “an absolute disaster. It seems the market is telling us there are still some problems that are not yet announced. The important thing is we’re not aware of the total cost of the real-estate writedowns to the banks.”

Meisels said many long-term investors are hesitant to dump bank stocks because, in past selloffs, they’ve always eventually recovered. He said that’s a reasonable argument, but he advised closely watching a security’s 200-day moving average.

(Charts of stocks and indexes, including moving averages, can be generated at various free websites, including Yahoo! Finance and StockCharts.com.)

If the price falls decisively below the 200-day average, that’s a bad sign, he said. The S&P/TSX Financial Index has seesawed below and above that line since last July.

Especially important, he said, is whether the 200-day average is sloping upward or downward. While the TSX financial index is still pointed up, three of the big six Canadian banks have seen their 200-day averages go flat in the past one or two months, while those of the Bank of Montreal and National Bank have been in an outright decline since August.

“It’s a bad situation,” said Mark McClellan, a bond analyst with Montreal-based BCA Research who used to work for the Bank of Canada.

McClellan believes credit-rating agencies “are still early” in the process of re-evaluating bank balance sheets to account for poor-quality or defaulted U.S. housing loans.

Even when that process is done, he said, as long as U.S. house prices keep falling, the rating agencies “will have to go back and redo the ratings again.”

All this means that, while bank shares have gotten cheap, they may only be at the beginning of their decline and could get a whole lot cheaper.

“There’s probably more to come. The markets are usually forward-looking, but not this time. There’s no price transparency (to the banks’ real estate debt),” McClellan said.

While U.S. house prices are already down five percent since they peaked in June 2006, according to the S&P/Case Shiller U.S. National Home Price Index, McClellan predicted a further decline of “at least another 10 percent” over several more years.

That jives with a New York Times report in late October that cited economists predicting an additional U.S. house-price drop of 10 to 20 percent, with an eventual $2 to $4 trillion wiped out in real-estate wealth.

The good news in the horror story is the financial sector’s misery is all but certain to prompt more monetary easing from the U.S. Federal Reserve Board and Bank of Canada, McClellan said, which will push interest rates downward for everything from mortgages to car and business loans.

The Bank of Canada, in particular, is also feeling pressure to reduce rates because the soaring Canadian dollar is prompting some retailers to lower prices of U.S. imports, which should cause Canadian inflation to “plunge,” according to a recent research note from BCA Research.

Falling inflation should be good news for Canadian bonds, which would rise in value as interest rates fall, BCA Research said.

Lower inflation and interest rates should eventually also buoy Canadian bank shares, but McClellan said U.S. banks, for their part, are unlikely to end their decline until house prices south of the border have stabilized.

Looking at the charts, Meisels said Canadian banks could see a recovery bounce in coming months, but they’re still likely to underperform the broader market, particularly commodities.

The key level to watch is whether financials manage to surpass their highs of last spring, he said. If they do, Meisels said he would become more bullish on the banks, but he said he doesn’t think that’s likely.

Instead, he predicted the sector will meander up and down for the next two years. And then, he said, look out. Meisels said his research into the history of investing patterns suggests the entire market, including banks, is due for a “big shellacking” in 2010.


Ron Meisels expects the current 40-year market cycle to end in a gruesome bear in 2010 that he believes will last to 2014 and will have similarities with the last such cyclical downturn between 1973 and 1982.

If this gloomy scenario actually unfolds, he said he expects to see a further drop of about 20 percent in bank stocks from today’s levels.


BCAResearch.com: daily free market brief

StockCharts.com: free charting website

Monday, November 5, 2007

Web Can Help Investors Save

Internet brokerages are forcing mainstream institutions to reduce the fees they charge per trade in an effort to remain competitive


Monday, November 5, 2007
The Montreal Gazette

Twenty years ago, computers were the bane of the investing world when stocks had their worst one-day tumble in North American history during the 1987 market crash.

Computer trading by big institutional firms was widely blamed when the Dow Jones Industrial Average fell 22.6 per cent on Black Monday, Oct. 19, 1987.

Today, computers have dramatically changed investing for ordinary folks, too. You can use one to buy Japanese stocks or Swiss francs from your home without speaking with a live broker.

Do a Google search for investing and you’ll get over 100 million websites. Some of them might even be useful.

And like the computer-driven speculators blamed for the panic of 1987, regular investors can also now run computerized trading programs to buy and sell stocks while they play golf or sip a martini.

The Internet hasn’t only given investors endless info on the markets. It’s also forcing many brokerages to bring down trading commissions and provide more in-house research and market tools like charting and real-time data.

In the U.S. some banks have even started to offer free online trading to larger customers.

Canadian stock brokerages still badly lag the U.S. in bringing down fees, but the advent of super-cheap independent brokerages like Questrade and Interactive Brokers offering fees of under $5 a trade has forced bank-owned brokerages to re-examine their commissions.

A growing number of banks have just started to offer trades for under $10, but so far, the lower fees apply mostly to customers with larger balances of at least $100,000 or to those who trade actively (usually at least 30 times a quarter).

In September, RBC Direct Investor and BMO InvestorLine were the latest institutions to announce fees of $9.95 for a Canadian or U.S. trade to clients with at least $100,000 in holdings.

The $9.95 fee already applied to those doing over 30 trades a quarter at RBC.

Clients with less than $100,000 or fewer trades still must pay $28.95 per trade at RBC, while those wanting to place their order over the phone with a live RBC representative must pay a minimum of $43 per trade plus other possible charges depending on the number of stocks in the transaction and share price.

TD Waterhouse announced a similar fee reduction earlier in September to $9.99 for active and large customers.

“I call it asterix pricing. You better read the fine print before you jump ship and go somewhere else,” said Glenn LaCoste, president of Surviscor, a Toronto-based financial consulting firm that publishes a survey of online discount brokerages.

Despite a lot of publicity for their recent moves, the banks are actually not targeting regular Canadian investors—those executing one or two trades per month, who LaCoste said make up 95 percent of the country’s brokerage accounts—but rather the active traders and large investors who moved accounts to independent brokerages, he said.

“Banks are trying to get into that game to get those people back,” he said.

But the banks’ fee reductions are too little, too late even for many active traders. “To think that the major banks still charge $25 per trade is crazy and a rip-off,” said Matt Caruso, a professional trader in Montreal who switched to Interactive Brokers, where he pays a commission of one cent per share for Canadian stocks and can trade global markets 24 hours a day.

“I honestly feel that anyone who trades at least twice a year and knows how to use a computer should use (an independent discount brokerage).”

Where ordinary folks may eventually benefit, LaCoste said, is from better tools, research and functionality that are being added to online brokerage websites in order to attract active traders and larger accounts.

“The features for the active guys will become mainstream.”

But as for lower commissions for ordinary Canadian investors, LaCoste said you shouldn’t hold your breath.

Online investing isn’t for everyone

Which investors are best-suited to using an online discount brokerage?

People who want their hands held should probably stick to full-service brokerages like those offered by the large banks.

They can provide market advice and help you make a financial plan customized to your needs.

If you feel comfortable making your own investing decisions and like the independence and speed of buying or selling stocks, mutual funds, options and bonds with the click of a mouse, an online discount brokerage may be for you.

Remember: these brokerages have no advisors to help you navigate the markets and are essentially just order-takers that provide a cheaper way of processing transactions.

However, online discount brokerages typically also offer investors an array of in-house research and tools like charts and stock filters.

The large Canadian banks all have online discount brokerage arms, and a number of independent firms offer the service in Canada as well.

One advantage to using a brokerage offered by one of the banks used to be the ease of switching money between banking and investing accounts.

But the proliferation of online financial transactions has made it far easier to move funds between bank accounts and unaffiliated brokerages in recent years.

For some, another concern about independent brokerages is the question of what happens to an investor’s holdings in the case of bankruptcy.

Be sure to verify whether or not the brokerage is a member of the Canadian Investor Protection Fund, which was created by the investment industry to insure losses at member firms and protects investor assets up to $1 million.

Monday, September 24, 2007

U.S. Dollar Feels Pain as Loonie Flies High

Gold soars as investors shift bets

Monday, September 24, 2007
The Montreal Gazette

All eyes were on the loonie last week as it reached parity with the U.S. dollar for the first time since 1976.

The leaping loonie has provoked squeals of pain from Canadian manufacturers and exporters, who have beseeched the Bank of Canada to lower interest rates in an attempt to slow the dollar’s ascent.

Less noticed amid the hoopla are the travails of the U.S. buck. The housing meltdown and credit crisis south of the border have sent the U.S. dollar crashing like a stone, not just against the loonie, but also other major currencies like the euro, which broke to record highs in mid-September.

Even the sickly Japanese yen has ended an 18-month downtrend against the U.S. dollar, shooting up seven percent since June.

In fact, in early September, the benchmark U.S. dollar index—a closely watched average of the U.S. currency’s value against that of six major trading partners, including Canada—closed below 80 for the first time since 1992.

Last week, the dollar index hovered a hair above its 1992 intraday low of 78.43 for much of the week, then briefly pierced that low late in the week.

The 78-to-80 zone has been a highly watched psychological level of support for the U.S. dollar for years.

Until this month, it’s acted as a kind of trampoline for the index five times since 1991. Each time this floor was touched, the dollar ended up bouncing smartly back up.

But as the U.S. Federal Reserve Board sought to resuscitate the financial system by lowering interest rates last Tuesday, that put still more downward pressure on the dollar.

One reason: lower interest rates make U.S. government bonds less attractive to foreigners. That’s a problem for the dollar because about half of the $4.4-trillion U.S. federal debt is held by non-Americans, up from a third in 2001.

Why does any of this matter, especially to Canadians?

Some analysts have argued for years that the world’s chief reserve currency is headed for a collapse as the U.S. economy suffocates under mounting housing debt.

A dollar panic could force the Fed to reverse course on interest rates and hike them back up to stem any sudden capital flight from the United States.

That, of course, could kneecap the global economy as it struggles to emerge from a liquidity crisis that has rapidly spread beyond U.S. borders to Canada and other countries.

Underlining the U.S. vulnerability, Chinese government officials last week said Beijing would sell off its $900 billion in U.S. bond holdings if Washington imposes sanctions over Chinese trade practices.

Another blow to the dollar was struck last Thursday when Saudi Arabia refused to cut its interest rates in lockstep with the U.S. for the first time, saying it didn’t want to ignite domestic inflation.

The move ignited speculation that the Gulf kingdom would break its currency’s peg to the dollar, which some analysts said could provoke a stampede out of the American buck.

The dollar’s troubles were further underscored last week by the soaring price of safe-haven gold, which hit a 28-year high above $735 U.S. an ounce.

The developments had one analyst predicting a gold mania unseen since the attempted French invasion of Britain in 1797, which sent bullion prices into orbit.

In a Times of London story last week, analyst Christopher Wood, of Hong Kong brokerage firm CLSA, said gold would quadruple to above $3,400 within three years, spurred by a U.S. dollar collapse.

But some currency and gold analysts said the apocalyptic scenarios are overblown.

“Unless we see a vicious economic contraction in the U.S., the doomsday scenario of dollar weakness is not inevitable,” said Boris Schlossberg, chief currency strategist at DailyFX.com, a foreign exchange news website and brokerage.

U.S. Fed doctrine is to let the greenback slide when faced with economic turbulence, even if it means higher inflation, Schlossberg said from his New York office.

“That’s the bet the Fed has made for the last 25 years. The key thing central bankers have learned is if they can monetize these crashes, that’s better than deflation like we saw in the 1930s,” he said.

“People would rather see high prices than high unemployment.”

But Schlossberg said the U.S. isn’t the only country facing economic weakness, and when other countries start lowering interest rates, that will buoy the U.S. dollar. “The economic fundamentals in the Euro zone are not as sound as everyone believes,” he said.

“It’s quite likely the Euro is peaking here.”

As for the Canadian dollar, Schlossberg said it “has become the darling of the currency market. The market is telegraphing that the Canadian economy has decoupled from the U.S. economy because it’s the only safe liberal democracy that contains a huge amount of resources.”

However, Schlossberg also cautioned that the Canadian dollar has shot up too far too fast, and a decline in oil prices or further bad U.S. economic news could send it into a tailspin.

“The Canadian dollar tends to have very sharp reactions,” he said. “It is obviously, clearly, grossly overbought.”

Gold analyst Jon Nadler also doesn’t expect the doomsday scenario to unfold any time soon.

“The call for the death of the dollar is mostly premature,” sad Nadler, who works for Montreal-based bullion dealer Kitco.

“People wishing for four-digit gold (prices) should examine the reasons for their wish. (Such a scenario) means everything else we own has gone sour,” he said.

Nadler expects the greenback may fall a little further to 78.50, fueling a possible rise in gold to $775. But he cautioned anyone investing in gold to be ready for a vicious pullback. The historic post-war equilibrium price of gold is $400, he said, which means ample room to the downside.

“These markets move very fast,” he said. “The volatility can be expected to excite and disillusion.”

[AR: The published version of this story included charts of the U.S. dollar index, Canadian dollar, crude oil and gold since 1990.]

Wednesday, September 5, 2007

Is the Market Shakeup Over Yet?

After major tremors shook stock markets around the world this month, many shell-shocked participants have wondered whether the bloodied bulls will regain the upper hand and continue to take stocks higher

Montreal Gazette
Monday, August 27, 2007

Is it over? That’s the question shell-shocked investors are asking themselves after stock markets keeled over into a month-long tailspin in July and August.

The debacle slapped Toronto’s S&P/TSX composite index down 11 per cent, before it rebounded somewhat last week. Overseas markets got wounded even more, with London’s market whacked 13 per cent and Japan’s hobbled 16 per cent.

Some analysts are invoking fears of the 1987 and 1998 stock smash-ups. “From fear we’re morphing into panic,” said venerable analyst Harry Schultz, author of one of the top-rated U.S. market newsletters.

“The ‘other shoe’ will be falling for a long time, so investors should stop waiting for the markets to ‘calm down,’” he wrote in a column at Marketwatch.com.

His advice: park your investments in safe havens like gold and the Swiss franc.

“Quite frankly, it looked like the markets were going to crash on Thursday (Aug. 16), led down by the absolute disaster in financial stocks,” wrote Mark Arbeter, chief technical strategist with Standard & Poor’s Equity Research.

The freaked-out talk was flamed by word of blow-ups at several large U.S. hedge funds that made risky gambles in highly leveraged computer-led trading. The funds started to bleed money when liquidity vanished in the wake of the subprime real-estate crash.

But other analysts say the fears have gotten excessive. They say while there’s a decent chance the selling is still not over, a look at the charts shows the turbulence so far is just an ordinary correction within the broad five-year uptrend that has lifted markets since 2002.

“The major trendlines are still intact, so I’m still overall bullish,” said Matt Caruso, a Montreal-based independent trader who heads the local chapter of the Canadian Society of Technical Analysts. (Technical analysis is the study of market charts to spot price trends.)

Caruso isn’t diving back into the market blindly just yet. He expects more volatility in coming weeks that could send markets spiraling back down to test the mid-August lows, and perhaps even a little lower.

But he believes those levels will likely hold up, providing an opportunity to put some money to work in the markets. “I already have a list of names (of stocks) to buy. Every pullback is another opportunity to buy,” he said.

“It’s normal to have 10-per cent corrections in the markets. There was no major technical damage to the indexes. I see higher prices to come.”

Robert Drach, a Tallahassee, Fla.-based author of a long-lived investment newsletter acclaimed for its accurate market calls, is also a bull.

His reason: corporate insiders and stock exchange members are buying stocks. That’s made Drach so bullish he said he threw all his cash into the markets and got leveraged by an additional 50 per cent on Aug. 10, at the height of the market slide.

Drach cautioned he still expects a “very choppy” market until traders calm down. “The market’s not going to move up and be wonderful,” he said.

Some analysts, however, are more uneasy. Tom Bulkowski, a Keller, Tex.-based technical analyst and author of the Encyclopedia of Chart Patterns, is in cash waiting for surer signs of a bottom.

“I tend to think we will pull back from here,” he said. “It’s just a gut feeling.”

Bulkowski’s nervousness actually flies in the face of his own chart-reading and number-crunching.

He agrees the selloff hasn’t violated any important uptrend lines.

The markets also appear to have already finished correcting based on similar drawdowns in the past he has studied.

The Dow Jones industrial average, for one, has completed a textbook example of what Bulkowski calls a pullback out of an “ascending, right-angled, broadening formation.”

Past such patterns led him to forecast the Dow would bottom at around 12,497.

In fact, it touched bottom not far away—12,456—on Aug. 16, then rebounded smartly back above 13,000 last week. That should mean the correction is over, he said.

Yet, Bulkowski isn’t breathing easier. “I’m just kind of nervous right now. I guess we’ll know in a month or so. If the (Federal Reserve) decides not to cut interest rates (at its next meeting on Sept. 18), then the markets could resume the downtrend,” he said.

Another dean of technical analysis, John Murphy, is also unnerved. Even though he feels the “worst may be over for now,” he added a note of worry in a recent market brief.

“The market will have to do a lot to repair that damage,” he said. “I suspect the recent lows will be retested at some point over the next couple of months. It’s extremely important that they hold.”

One of the concerns of some analysts is the seasonal period of weakness that often trips up markets in the fall.

“We are at a critical juncture at the very beginning of the historically weakest time of the year,” wrote Jeffrey Hirsch in the latest issue of the Stock Trader’s Almanac newsletter.

“(September) is the worst month of the year by nearly all accounts,” he said, as it is the only month with a negative average performance historically.

Hirsch also noted years ending in “7” have historically been trouble for markets, with crashes in 1907, 1937 and 1987 and nasty selloffs in 1917, 1947, 1957 and 1977.

Hirsch isn’t completely pessimistic, saying the damage so far “has not been that bad,” but he warned that a deeper credit crunch “could cause a pullback of historic proportions… So much for the summer doldrums.”

[The published version of this story was accompanied by charts of the S&P 500, TSX composite index and Nikkei average showing their uptrend lines since 2003. The caption was titled “Keeping the uptrend intact” and read: “The bull market’s five-year ride had a wild turn in recent weeks. But despite the turbulence and panicked talk, major global stock indexes all survived the correction with their uptrends intact. Analysts advise watching those uptrend lines carefully in the often-volatile autumn months to see if they hold up.”]

Things Will Get Better, Not Worse—Probably

Analysts optimistic despite dire warnings

Monday, August 13, 2007
The Montreal Gazette

Markets around the world are getting their heads caved in, and investors and analysts are in a flutter about how much worse the damage could get.

The bloodbath, stoked by the U.S. housing debacle, lopped eight per cent off the value of the Standard & Poor’s 500 index and S&P/Toronto Stock Exchange composite index in just three weeks.

Some sectors like energy stocks fared worse, with leading U.S. energy-stock indexes down 15 per cent off their late July top before rebounding a little last week.

Losses from the market rout totaled an estimated $2 trillion in the United States alone, according to data compiled by Bloomberg.

The carnage has some analysts predicting an outright stock collapse, just weeks after the major stock indexes were powering to lofty new highs.

Forbes magazine last week published an article titled The Crash of 2007, which advised readers to sell most of their investments and go sailing.

“There is a really high probability that we are in the midst of a stock market crash, the first since 2002,” the writer said.

Not so fast, says Mark Arbeter, chief market technician at S&P Equity Research in New York. It’s probably too early to tell if the correction has more to run, he said, but the worst is probably over. At least for now.

“There are times when you say, ‘I don’t know and have to wait,’” he said. “(But) I think there’s a better than 50-50 chance that we have seen the worst of this.”

Matthew Pugsley, chief U.S. equity strategist at BCA Research in Montreal, agreed. “Probably most of the damage is done,” he said. “I’m not expecting a bear market right now.”

Both analysts are cautiously optimistic for differing reasons. Arbeter studies price charts and investor sentiment to arrive at his conclusions. His read is that sentiment has gotten so bearish so quickly, it’s actually a positive sign.

This is based on the contrarian notion that the crowd is usually wrong at critical market junctures.

“I think it’s constructive that investors threw everything out at the same time,” he said. “There’s been a selling capitulation. The internals got completely annihilated. There are so many people who got negative in such a hurry here. It’s like the world was coming to an end in two weeks.”

Analyst Mark Hulbert had a similar take in a column in Barron’s last Wednesday. Hulbert tracks a long list of investment newsletters to see how negative or positive they are on the markets. His finding: the newsletters were so bearish as of last Monday, they recommended only 5.4-per-cent exposure to stocks and nearly 95 per cent of portfolios to cash.

That’s a sharp contrast to what happened after the March 2000 top of the dot-com bubble, Hulbert wrote. In the weeks that followed, newsletter editors become even more steadfastly bullish in the face of the worst market crash in decades.

“That is classic market-top behavior,” Hulbert said. “Today, in contrast, we’re not seeing anything like the stubborn bullishness that was prevalent then.”

What it means, he said, is we’re not yet at the end to the five-year bull market.

Pugsley’s optimism, in contrast, is driven by market fundamentals. He believes the economy remains solid despite the woes that hit housing. He is bullish on a longer-term basis, saying he believes stock prices will be higher in 12 months than today.

“We expected a correction,” he said. “Now that we’re in one, I don’t want to get more negative. In fact, it makes me more positive because (asset) values improve.”

However, Pugsley says the coming weeks will see continued ups and downs as investors shift their anxiety from the sub-prime mess in real estate to underachieving third-quarter corporate earnings.

“The market will shift its concern from the credit market to the economy,” he said.

Pugsley predicted equities will bounce upward a little but fail to follow through and then drop to retest their early August low, possibly even breaking to a somewhat lower point.

“But I wouldn’t expect we will have sustainable new lows, barring some exogenous shock,” he said.

Wild cards that could upset this rosy scenario, he said, include a sharp spike in crude oil prices or an inflationary shock that ratchets up interest rates.

Like Pugsley, Arbeter predicts equities indexes will waft upward, fail to gain wind and then swoon to retest their early August low.

“The retest usually scares people—including myself—to death, usually on bad news,” he said. “If the market does hold at that level, that would be bullish.”

In fact, Arbeter said sentiment has gotten so dismal, an eventual recovery could catch downbeat investors by surprise—a scenario that could see them scrambling to get back into the markets and send prices to new highs in November or December.

“Conditions exist for some kind of potential upside explosion,” he said. “(But) expect a lot of volatility near-term.”

The analysts’ overall bullishness is reinforced by data from the U.S. Commodity Futures Trading Commission, which reports on futures and options holdings of investment firms, hedge funds and commodity producers.

In June, commercial hedging firms—often known as the “smart money” because of their accuracy in calling market turns—accumulated one of their highest relative net long positions in Dow Jones industrial average futures and options since the data started in 1995.

Meanwhile, large speculators—known as the “dumb money” because they are usually positioned the wrong way in the markets—built their largest net short position in NASDAQ 100 index futures and options in two years.

However, a warning sign comes from the data for the S&P 500, where small traders (who also tend to be wrong in the markets) started to place gigantic bullish bets in mid-June. In the past, that’s usually meant the S&P 500 would fall, as it did shortly after.

[Accompanying charts for this story showed the uptrends since mid-2006 of the S&P 500, FTSE, S&P/TSX composite index and Oil Services Holders, and how they've being tested or violated during the recent correction.]

At the Mercy of the Bond Market

As the yield on the 10-year U.S. Treasury note shot up by 28 basis points in the past two weeks, its effects immediately spilled across the border by bumping up interest rates in Canada

Monday, May 28, 2007
The Montreal Gazette

Start talking about bonds with most people, and they’ll probably want a siesta.

Not Mark McClellan. He’s a bond expert at Montreal-based BCA Research, and what he sees in the bond market has him wide awake.

Bond action tends to herald what’s in store for other markets—everything from home sales to gas prices, the stock market and the Canadian dollar.

So when the yield on the trend-setting 10-year U.S. Treasury note broke out of a narrow trading range and shot up 28 basis points in the last two weeks, McClellan and lots of folks on Wall and Bay Sts. paid close attention. (A basis point is one-hundredth of a percentage point.)

“There was quite a capitulation,” McClellan said. “Technically, it was pretty impressive.”

The yield rose to just under 4.9 per cent last week, up from 4.4 per cent in December.

Lenders in the U.S. and Canada closely follow the 10-year Treasury note as they set interest rates.

The U.S. bond action immediately spilled across the border, bumping Canadian consumer interest rates higher and bond prices down. (When rates go up, bond prices fall.)

In mid-May, a key Canadian bond fund, the iUnits Canadian Bond Broad Market Index Fund, suffered a serious blow when it broke below a key psychological level of support that had buoyed its price since last October.

The question now is whether the sharp and sudden spike in interest rates is just a blip or something more worrisome.

McClellan said he’s not worried—at least, not just yet. “The market has revised up growth expectations,” he said.

Strong growth and low inflation are a positive environment for the equity market. But if people start worrying about inflation, that would change.”

In fact, far from knee-capping equities, the Treasury’s move may just mean money is pouring out of safe-haven bonds into the roaring stock market, said Mark Arbeter, chief market technician at Standard & Poor’s Equity Research in New York.

“Probably what’s happening is that money is going from bonds to stocks because of the recent advances,” said Arbeter.

“Probably it means stocks are going higher, as perverse as it sounds.”

The problem will come, he said, if interest rates keep going up.

“That would hurt equities,” said Arbeter.

He and McClellan agreed a key test will come at 4.9 per cent, the Treasury note’s previous high of last January.

The yield made a run at 4.9 per cent last week, and if it blows past that number, both analysts warned of further interest-rate rises and storm clouds for other markets.

“If it gets above 4.9 per cent, it would be a bad sign for equities,” McClellan said, saying that would suggest growing fears about inflation.

“Keep an eye on inflation expectations if it gets above 4.9,” he said.

Arbeter thinks that’s just what will happen and predicts the 10-year yield will shoot up to 5.5 per cent. He pointed to action in the futures and options markets as a sign the recent bond move may have legs.

Large commercial firms that hedge in bond derivatives turned highly bearish on the 10-year Treasury note in March. These traders, whom Arbeter calls the “smart money,” tend to time the markets with uncanny accuracy.
When they sour on a market, watch out.

Arbeter said the commercial traders’ bond holdings suggest lots of institutional money is behind the Treasury move.

The rate jump may already be translating into weakness in commodities. The price of gold, which tends to lead other commodities, suffered a breakdown in May, ending a seven-month uptrend that had shot it from $563 U.S. last October to $698 in April.

At bullion dealer Kitco, analyst Jon Nadler said sentiment is gloomy.

“The mood is bearish (for gold),” he said. “Bond yields breaking out could add to the current woes. (Gold) now looks to correct.”

Arbeter agreed that higher bond yields could inflict pain on commodities while helping revive the sickly U.S. dollar, which has nose-dived vs. the loonie since March.

“It could lead to a breakout (in the greenback) or at least to stopping the bleeding,” he said.

Alex Roslin’s market blog is at http://cotstimer.blogspot.com

[Accompanying charts for this story showed the breakouts in the 10-year and 30-year Treasury yields, the breakdown in the iUnits Canadian bond ETF (symbol XBB) and the recent breakdown in the gold price.]

Timing the Markets With COTs

Who says you can’t time trades using the Commitments of Traders Reports? This COTs-based mechanical system beat the NASDAQ by 728 percentage points—with only one trade needed per year.

By Alex Roslin
Technical Analysis of STOCKS & COMMODITIES
May 2007

Ever wonder what the smart money is doing in the markets? How do the folks with the best information and deepest pockets invest their wealth? A small handful of analysts and traders has found an interesting way to tell. It’s called the Commitments of Traders Report, and its devoted fans say the report is the closest thing in the public domain to a holy grail of market forecasting they’ve found.

The COTs, as they’re known in the business, don’t make headlines like those celebrities of the world of economic indicators, the Consumer Price Index (CPI) or the unemployment numbers. But a growing legion of “commitments analysts” is glued to computers each Friday at 3:30 p.m. (Eastern time) when the Commodity Futures Trading Commission releases the latest weekly COTs numbers.

The data, which used to be available only to paying subscribers but is now free, shows how many of the world’s largest commodity-producing firms, index funds, and hedge funds are positioning trillions of dollars of futures and options bets in more than 90 markets—everything from frozen pork bellies to the Standard & Poor’s 500, orange juice, the Canadian dollar, and unleaded gas.

But this treasure trove of insider information is hard to interpret and not obviously usable in its raw form. The data doesn’t appear to correlate neatly with subsequent prices in the cash markets. What’s more, analysts don’t agree on how to act on the data.

Should traders position themselves in the same direction as the commercial hedgers? Commitments analysts often call these commercial traders the “smart money” because they are presumed to have the best market information. Or should we fade the noncommercial traders—usually known as the “large speculators” or simply the “dumb money”—who are often said to be positioned the wrong way at major market turns?

Some analysts suggest the commercials and large specs are most useful to watch when they take extreme net long or short positions, which often suggests a market turn is imminent. But when is an extreme really an extreme? Varying systems of measuring the extremes produce widely varying buy and sell signals, many of which fail to make any money at all.

One popular approach is to trade with the commercials in the physical commodities like gold and crude oil while fading the large specs in the financial markets like S&P futures and Treasuries. But it’s not clear what data this approach is based on. Analysts who have devised systems to analyze the COTs won’t reveal their methodologies publicly because they are proprietary.

And even these analysts generally say their systems don’t give trading signals per se. Instead, they suggest the COTs are best used merely as an early-warning system, which must be coupled with technical analysis to time trades.

But a closer look at the data shows a trading system can indeed be devised for the COTs. The results also suggest that following the smart money isn’t always the smartest approach. We actually need to know what the dumb money is doing—the really dumb money.

Follow the Dumb Money

One group of traders often gets overlooked in discussions on the COTs—the small traders. These guys are the hedgers and speculators whose positions are too small to be included with the commercials or large specs. They are listed under the “nonreportable” category in the COTs reports.

The small traders are the truly dumb money no one seems to care much about. But they may just be too dumb to ignore. Fading the small traders when they take extreme futures and options positions appears to be the best strategy for trading the S&P 500.

A switching strategy of fading the small traders when their net percentage-of-open-interest position was two standard deviations or more from its 22-week moving average would have resulted in a 316% profit since 1995. (This is the year the CFTC first released combined futures and options data in electronic form for free.)

That result was over two times the S&P 500’s gain of 139% in the same period. In addition, fading the small traders would have required only a dozen trades—six long and six short—or about one per year, leaving lots of time to spend your profits!

The system was based on trading on the next weekly open after the signal was given. The maximum drawdown for this system was 16%. (The figures are valid as of the week of December 4, 2006, and don’t include slippage, dividends, or commissions.)

Meanwhile, fading the large speculators would have also beat the market, but not by nearly as much. The best combination appears to have been using a 208-week (four-year) moving average and fading the large specs when their net percentage position was 1.5 standard deviations or more away. That would have led to a 59% profit since June 1999, compared to an 8% gain in the S&P. (The best result came with delaying the trade until the weekly open two weeks after the signal was given.)

The large specs were clearly dumb enough to fade, but nowhere near as dumb as the small traders!

The commercial hedgers did better. They made a 230% profit since April 1998, compared to 24% for the S&P. That amounted to a 0.5% profit per week in the market—less than the 0.54% profit of the small traders. The best result for this group came from trading with the commercials when their net percentage position is one or more standard deviations from its 156-week moving average. It was most profitable to delay the trade until the weekly open three weeks after the signal was given.

NASDAQ Timing System

On the NASDAQ, the small traders didn’t do as well. Here, the large specs truly were the dumbest money around. The best result from fading them yielded a 725% profit since May 1999. During the same period, the NASDAQ lost 4%.
The large-spec gain worked out to 1.83% per week in the market, while requiring only eight trades (seven of them profitable), or slightly less than one per year. The maximum drawdown for this trade was 9%.

This trade was taken whenever the large spec net percentage position was one standard deviation or more from its 156-week moving average. The best result came from delaying the trade until the weekly open one week after a signal was given.

The next best result for the NASDAQ was a tossup between the small specs and commercials. The best return for the small specs was a 592% return since Jan. 1997 (or 1.15% per week), compared to 79% for the NASDAQ. This result came from fading the small traders when their net percentage position was 1.5 standard deviations or more from its 20-week moving average. The trade was made on the next open after a signal was given.

As for the commercials, their best result was 469% since May 1999 (or 1.18% per week), compared to a 5% NASDAQ loss. This was from trading with the commercials when their net percentage position was one or more standard deviations from its 156-week moving average and buying at the next open after a signal was given.

Conundrum Solved

The results shed fresh light on the COTs data. Clearly, each commodity has its own personality and requires a specially tailored system of optimized trading signals. Unfortunately, analysts often cite the ups and downs of the data without a good understanding of what it means.

For example, in late 2006, the COTs data for the S&P 500 was a mess of contradictory signals. Here was an important market juncture during which many analysts fretted about a possible correction to coincide with the often-turbulent fall season of the midterm year of the U.S. presidency. What was the COTs data saying at the time?

In August, the large specs seemed to be giving a colossal sell signal on the S&P 500 as they built a record net long futures and options position. The dumb money got more and more net long through the fall of 2006. But fading the large specs would have been disastrous as the S&P rallied to multi-year highs.
In fact, the most profitable large spec timing system for the S&P 500 has been on a sell signal ever since January 2005.

As for the commercial traders, the most profitable system on the S&P 500 has been on a sell since January 2006.

What to do? The answer lies with the small traders. The really dumb money gave a timely buy signal last August when it swung to a huge net short position. (As of early March, the small traders were still on a buy.)

The data has been clearer of late for the NASDAQ composite index. In late November 2006, the large specs gave a sell signal. The small traders followed suit with a sell in December, followed by a sell from the commercials in January (after the data in the accompanying chart was compiled).

But fading the large specs has given such clearly superior returns on the NASDAQ that they’re the only traders we need to follow for this index. Case closed!

Alex Roslin is an investigative journalist and active trader in Montreal. He can be reached at roslin@videotron.ca. Watch for his COTs analysis at http://www.cotstimer.blogspot.com/. Thanks to Mike Gordon for his invaluable advice on Excel.

How to Build Your Own COTs Database

Want to crunch your own COTs data? It’s simple—and free. The hardest part is learning a bit about Microsoft Excel.

The COTs data can be imported into Microsoft Excel from the website of the Commodity Futures Trading Commission and easily updated each week. (The site has easy-to-use downloading instructions.)

Break out all the historical data for each commodity into separate worksheets. You can calculate the net position of a group of traders by subtracting its short position from its long position.

I found the highest returns consistently come from using the net percentage-of-open-interest position for each group of traders, rather than the absolute number of contracts. The percentage positions are found in columns AW through BE.

Calculate the moving average and standard deviation by using Excel’s AVERAGE and STDEV functions. In my systems, a buy or sell is signaled when the net position equals or exceeds the moving average plus or minus the standard deviation.

One time-saving trick for extending a calculation in one cell to an entire column: Click the first cell and, while holding down shift, click the last cell in your column, then press control-D.

To turn your data into a chart, click “Insert” in the upper toolbar and go to “Charts.”

Save the COT!

The Commitments of Traders reports are safe. Thanks to an overwhelming public outburst of support, the Commodity Futures Trading Commission says the 44-year-old reports won’t be discontinued. The commission announced in December 2006 it would keep publishing the data unchanged and start a new weekly report for some agricultural commodities to reflect the rise of index trading.

“The reports will continue,” says John Fenton, the commission’s director of market surveillance.

The commission sparked an outcry last June when it issued a call for comments on the reports, suggesting the data may be skewed by changing patterns in trading activity in some commodities. The notice asked for public comment on whether the reports provide a “public benefit” and should be discontinued. It said it was under no legal or regulatory obligation to keep publishing the data.

An unprecedented 4,659 responses came from 23 countries—by far the largest number the commission has received in response to such a notice in its 31-year history. (The previous record was 1,062 comments.)

The response was unanimous. Not one respondent said the reports should go. “Please, please do not discontinue this very valuable report,” one said. “Don’t you dare,” said another. “Leave it alone you knuckleheads,” the CFTC was advised. “Save the COT.”

Instead of dropping the reports, the commission decided to break out a new “index trader” category for 12 commodities, drawn from the current commercial and noncommercial groups. The new report will be tried as a pilot project for two years. The CFTC will then decide whether to expand it to other physical commodities.

Fenton acknowledges the wording of the call for comments created an unintentional controversy and promises that the COTs are here to stay.

“I would say it’s a permanent decision—as permanent as things are,” he says. “We didn’t mean to imply that we were really planning that. We didn’t consider discontinuing the reports was likely. We were trying to consider all options.”

Best Combos

The most profitable systems I found for trading the COTs on the S&P 500 and NASDAQ are listed in sidebar Figures 1 and 2 for each category of traders—commercials, large specs and small traders.

The three variables for each system are: (1) the number of weeks used to calculate the moving average and standard deviation; (2) the number of standard deviations that the net percentage-of-open-interest position must equal or exceed above or below the moving average in order to get a buy or sell signal; and (3) the timing of the trade following a signal (whether on the first open the week after the release of the COTs report, or up to three Mondays later).

We trade on the same side as the commercials and fade the small traders and large specs.

I calculate the size of my position based on the maximum drawdown for the trade and my risk threshold of 2% of total assets.

The data in sidebar Figures 1 and 2 is accurate as of early December 2006. And it’s important to remember that past results are no guarantee of future earnings.

[Accompanying this story were two tables showing the results for the best setups for the S&P 500 and NASDAQ for each of the three groups of traders.]

(c) Copyright Technical Analysis of Stocks & Commodities

POST-SCRIPT TO THIS STORY: Since this story was published, I've made some major refinements that you'll see on my blog: www.cotstimer.blogspot.com. (Click the "Latest Signals & Results" link in the navigation bar for specifics on my new S&P 500 and NASDAQ signals.)