Are we feeling a little toppy yet? The way some stocks are rising is insane. It's going to be a mess when this ends. But that might not happen for a little while more, according to the Commitments of Traders report issued yesterday afternoon.The data on trader positioning in various markets shows the wrong-way small traders in S&P 500 futures and options have just tumbled off a cliff in their positioning, getting supremely more bearish. I've just updated my latest signals table with the data for this and other markets. The COT data may be bad news for the little guy, but good news for the rally, as historically markets have tended to go up when the small traders hit extremes in their bearish positioning relative to recent data. The small trader net long position hasn't been this paltry in a year and a half. Meanwhile, the "smart money" commercial hedgers, while a little less bullish this week again - their seventh consecutive week of reduced bullishness compared to recent data - still have a solidly bullish tilt in their positioning.
The data from the three-month Eurodollar contract, which gives me signals for the BKX U.S. Bank Index, is fairly ambivalent this week, although it's turned up slightly since last week, when it had really soured. The large speculator total open interest, which has a 63-percent correlation with BKX the following week, has bounced back a little after two weeks of declines. On the other hand, the small trader total open interest, with a 42-percent correlation to BKX, has declined slightly. My trading setup for BKX remains in cash for a seventh straight week because its three signals don't agree again. In gold, my trading setup remains bullish for the second straight week. But the data shows the large specs are running for cover. That's good news for my signal, which fades the large specs in their net position and total open interest. On the other hand, those datasets correlate strongly with next-week gold prices, so the COT report could be suggesting more trouble for bullion this coming week. Similar situation for natural gas. The setup is bullish, but the trader positioning, which also correlates very nicely with gas prices, has suddenly plummeted. This setup, in particular, sees lots of volatility, like gas itself, which broke down big-time this week after looking like it might want to finally bounce. I'm holding onto my hat. Finally, my setup for the 30-year Treasury bond has turned bearish for this coming week's open of trading (meaning the yield would go up). That's based on fading the small trader and large spec total open interest, which both hit extremes of excessive bullishness. The setup will remain bearish for two weeks, then go to cash or bullish. So this may not be the big bond break some people have been calling for. That said, the yield is back at the old highs of 2008 and 2009 - so who knows. Hope you did well last week and that you have a good weekend. I'll be on the road this week, so I won't have a chance to do a portfolio update and may be a little late in my next post. Apologies. I'll do my best to get it up before next Monday's open of trading. 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