Data Grim for U.S. Buck

By Alex Roslin       Dec 3 2007 2:06PM www.cotstimer.blogspot.com

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 below, 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.

COTS SIGNALS FOR 30-NOV-07

NOTES TO TABLES

1. Visit COTsTimer.Blogspot.com to see how I trade new signals.
   
   
2. A “renewed” signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. The results in this table are based on acting only on new signals.
   
   
3. The COTs Timer Ratio is my reading of the bullishness or bearishness of traders from the latest COTs report. A reading of 1 or more means a buy signal for the commercial traders or a sell for the large specs and small traders. A reading of -1 or less means a sell for the commercials or a buy for the large specs and small traders. The ratio is based on the traders’ net percentage-of-open-interest position compared to the position’s moving average divided by the number of standard deviations I use for this setup.
   
   
4. In parentheses are the dates of the COTs report that gave this signal.
   
   
5. Past return using the signals of my COTs Timer system, starting from a baseline 100. This is the theoretical return from buying the security on a buy signal and shorting it on a sell signal.
   
   
6. Past return from buying and holding the underlying cash market, starting from a baseline of 100.
   
   
7. Ratio of the COTs Timer return versus the underlying market’s return.
   
   
8. Largest past drawdown the setup experienced during a trading signal between the entry price and the lowest price. This was not necessarily the loss at the end of the trade. I use this figure to calculate my maximum portfolio allocation for the setup based on my 2-percent risk threshold of total assets for any one trade.
   
   
9. The group of traders that had the best historic return in this market. My signals are given when this group reaches specific extreme levels of bullishness or bearishness. Unless otherwise noted, my system trades in the same direction as the commercials and fades the large speculators and small traders.
   
   
10. The gold setup trades on the same side as the commercial traders when their net percentage-of-open-interest position is two or more standard deviations from its 18-week moving average (using the combined futures-and-options data). The same setup parameters are used for the HUI Gold Bugs Index.
    
    
11. Signals for the U.S. Global Investors Funds U.S. Gold Fund (symbol USERX) are based on the gold COTs data.
    
    
12. Signals for the HUI Gold Bugs Index are based on the gold COTs data. See note 10 for more details on this setup.
    
    
13. Signals for the S&P/TSE Canadian Gold iUnits ETF (symbol XGD.TO) are based on the gold COTs data.

Alex Roslin

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Disclaimer: This report isn’t meant as financial advice or a recommendation to buy or sell any security. Please do your own homework before trading. My system isn’t for everyone, involves substantial risk and has experienced large drawdowns in some past trades. Past results are no guarantee of future profits. I’m not a certified financial advisor. While I consider my information to be reliable and accurate, I make no guarantees. Please see COTsTimer.Blogspot.com for other disclaimer information.