Stocks May Revive as Funds Exit Bonds

by Alex Roslin
SeekingAlpha.com
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)).

Was Gisele Bundchen Right to Sell the Buck?

by Alex Roslin
Kitco.com
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.