Tag Archives: s&p 500

Hidden Strength in the S&P 500

The recent action in the equity markets has been volatile and confusing to say the least. Today, we’ll focus on the S&P 500 futures and the COT buy signal generated by the recent sell off. Later in the week, we’ll examine the decoupling between the Nasdaq 100 and the S&P 500 which could very well be the most obvious clue to the bigger picture.

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Equity Rally Waves a Caution Flag

The equity markets have been THE place to be for capital appreciation over the last few years. Last year saw the Dow Jones under perform with a 9.6% return compared to the S&P 500 at 13% and the Nasdaq 100 at a whopping 19%. In spite of the impressive returns provided by the stock index futures last year, there were still periods of flatness and even outright declines. In fact, the Nasdaq had a decline of more than 10% from peak to trough at one point last year, in spite of its 19% return for the calendar year. This week, we’ll discuss a method of applying the commercial traders data from the weekly CFTC Commitment of Traders reports to the equity markets in an attempt to preserve profits gained on the long side of the markets as well as profiting from forecasted declines.

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Using the Commitment of Traders Report to Trade the Stock Indices

This has been a tumultuous week in the equity markets as news events and political leveraging have sent markets in China and Greece down by more than 5% and 11%, respectively. Here in the US,  Wednesday’s action attempted to mimic the global markets but was met by a solid bid in the S&P 500 and Dow Jones Industrial Index around the Thanksgiving lows. Meanwhile, the Russell 2000 found support near the critical 1150 level that has propped it up since late October. We published a short take in Equities.com earlier in the week projecting expected weakness in the equity markets due to the shift in the commercial traders’ position over the last couple of weeks. This has led many to ask exactly how we use these reports to forecast trading opportunities in the commodity markets. We’ll use this week’s piece to explain our approach in detail within the context of today’s equity markets.

We frequently describe the discretionary portion of our COT Signals advisory service as a three step process. First of all, we only trade in line with the momentum of the commercial traders. It has long been our belief, three generations worth, that no one knows the commodity markets like those who whose livelihood’s rest upon the proper forecasting of their respective market. This includes the actual commodity producers like farmers, miners and drillers along with the professional equity portfolio managers using the stock index futures to hedge and leverage their cash portfolios. Tracking the commercial traders’ net position provides quantitative evidence of both the long and short hedgers’ actions within an individual market. The importance of their net position lies in the collective wisdom of this trading group. Their combined access to the best information and models is summed up by their collective actions. The final part of the commercial equation lies in tracking the momentum of their position. Their eagerness to buy or, sell at a given price level is equally important as the net position. We only trade in the direction of commercial momentum. Finally, commercial trader momentum is the bottom indicator on the chart below.

Commercial traders have positioned themselves on the right side of the market for every major move this year.
Commercial traders have positioned themselves on the right side of the market for every major move this year.

The second step of this process is how we translate the weekly commitment of traders data into a day by day trading method. Commercial traders have two primary advantages over the retail trader. First of all, they have much deeper pockets and they have the ability to make or, take delivery of the underlying commodity as needed. Secondly, they have a much longer time horizon. Think, entire growing season or their fiscal year on a quarter by quarter basis. Therefore, we have to find a way to minimize risk and preserve our capital. We do this by using a proprietary short-term momentum indicator on daily data. The setup involves finding markets that are momentarily at odds with the commercial traders’ momentum. If commercial momentum is bearish, we are waiting for our indicator to return a short-term overbought situation. Conversely, if commercial traders are bullish, we wait for a market to become oversold in the short-term. The short-term momentum indicator is labeled in the second graph.

Once we have a short-term overbought or, oversold condition opposite of commercial momentum, an active setup is created. The trigger is pulled when the short-term market momentum indicator moves back across the overbought/oversold threshold. Waiting for the reversal provides two key elements to successful trading. First of all, it keeps us out of runaway markets. Markets are prone to fits of irrationality that catch even the most seasoned of commercial traders off guard. News events, weather issues and government reports can all wreak havoc unexpectedly. Waiting for the reversal also provides us with the swing high or low that is necessary to determine the protective stop point that will be used to protect the position. Everywhere there is a circle, red or blue, was a trading opportunity in the S&P 500 this year. Within each circle, the highest or lowest value was the protective stop point. It is imperative to know the protective stop prior to placing any trade. This allows the trader to determine the proper number of contracts to trade relative to their portfolio equity. Risk is always the number on concern of successful trading. Currently, the protective stop levels are 17980 in the Dow, 1189 in the Russell 2000 and 2079 in the S&P 500.

Currently, the Dow, S&P 500 and Russell 2000 all contain this same set of circumstances. Given the lofty valuations, the speed of the recent rally and recent global economic developments it seems prudent to expect a retreat from these highs. Clearly, that is what the commercial traders, who were MAJOR buyers at the October lows believe is about to happen. We’ll heed their collective wisdom as they’ve successfully called every major move in the stock market for 2014.




Commitment of Traders Resistance Caps S&P 500 Rally

The commercial traders have been on fire when comes to predicting the stock market in 2014. I suppose this makes sense since they’re the ones with access to the best information and modeling available. This explains the huge moves we’ve seen in their net positions based on the Commitment of Traders reports. Somehow their neural and social networks have put them in the right position for nearly every trade this year as you can see on the chart below.

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Diminishing Effects of Global Quantitative Easing

More specifically, this piece should be titled, “Diminishing Effects of Global Quantitative Easing in a Long Only Portfolio,” but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan’s direct equity purchases a sure thing? Have we globalized the, “Bernanke Put?” The European Central Bank, the Bank of Japan and the Peoples’ Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.

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Weekly Commodity Strategy Review 11/21/2014

Monday’s corn analysis for TraderPlanet couldn’t have been more timely. Our mechanical swing trading programs picked up the highs being made in the grains as a short selling opportunity that bore fruit right through yesterday’s exit. We discussed the Commitment of Traders report’s importance in determining resistance levels as defined by the commercial traders’ volume and execution prices.

Read, “Corn Rally Stalls Short of $4.”

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S&P 500 Rallies .5% Per Day, Sustainable?

The S&P 500 has rallied more than 12% in 24 trading sessions. This isn’t a terribly rare occurrence. Writing up a quick indicator shows me that there have been 18 observances of rallies traveling more than 10% in any rolling 24 day period. Restricting the filter to 12.5% still provides us with 9 observances while bumping it to 15% drops the return to 5 examples. The last 10% rally was in January of 2012 and the last 15% rally was in November of 2011. These last two observances were clearly during the churning process as the market had not made new all-time highs, yet.

The 18 total examples gained an average of .92% in the S&P500 futures one month later. The largest gain was 6% while the largest loss was 10%. Finally, the market ended up higher one month later exactly half of the time.

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Weekly Commodity Strategy Review 10/31/2014

Our published pieces this week for Equities.com and TraderPlanet focused on lean hog futures and soybeans respectively. The hog market fell through the support we were leaning on and stopped us out with a loss. The Commitment of Traders Report continues to suggest that long hedger buying will continue to support this market as packers ensure their future supplies at these prices.

Buying Opportunity in Lean Hog Futures

Meanwhile, the soybean market appears to have peaked. Commercial selling has been consistent through the October rally. This is exactly what we expected to happen as we near the expiration of the November soybean futures contract.

Soybean Rally Out of Gas

Our primary article this week focused on trading system development and the possibility that the new meat market hours will return a technologically outdated trading program back to its former glory in the lean hog futures market.

Mechanical Trading Program Data Issues

Finally, one piece of information about today’s markets. The Japanese government elected to inject further economic stimulus into their domestic markets in an attempt to reach their 2% inflation target and stave off 25 years of deflation in their economy.

This announcement pushed the Nikkei 225 up more than 5% for today’s trading. The S&P500 is currently higher by 1%. The overnight rally in the S&P500 pushes the rally from the October 15th lows to our current price, more than 11% higher in 11 sessions. This has only happened 3 times since 9/11. Twice in 2009 and once in November of 2011.

Fortunately, we saw that the sell off in the stock market was being used by the commercial traders to add onto their long positions. We discussed this in October Market Volatility Scared No One.

Here’s the chart from our commercial long only, mini Russell 2000 trading program. This program cleared more than $7,000 on its last trade and currently holds an open position worth more than $13,000.

COT Signals Mechanical Systems

cot trading program
Russell 2000 trading program based on the Commitment of Traders Reports.

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October Market Volatility Scared No One

Trading is a funny thing. There are times when the reasoning behind a market’s actions are spot on. There are times when the reasoning turns out to be wrong yet the directional prediction holds fast. Finally, there are times when the reasoning is dead right and the market does the exact opposite of what was expected. It appears that our September through October forecast was directionally solid. However, based on the data I’ve compiled over the last week, I believe the jump in volatility has merely shaken things up, rather than signaled a major change in market sentiment.

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Weekly Commodity Strategy Review 10/17/2014

What a crazy week this has been! Nearly a 100 point range in the S&P 500 and more than a 4.5% range in bonds!

Quantitatively speaking it’s been a pretty quiet week in our trading. The cocoa trade we discussed in TraderPlanet has consolidated throughout the week. The consolidation does allow us to adjust our stops accordingly as well as provide an additional point to add on to the trade once it starts moving in our anticipated direction.

You can recap the details in, “Commitment of Traders Report Supports Cocoa.”

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