COTs Still Bullish Silver & Some Gold Stock... But Not All

By Alex Roslin       Nov 5 2007 1:57PM www.cotstimer.blogspot.com

Precious metals have been the place to be as the U.S. dollar continues its steady collapse and equities languish. Some analysts keep warning of an imminent correction for commodities, but the latest data from the Commitments of Traders reports is still giving a mixed view and, for my part, I remain long silver (through the SLV ETF) and gold stocks (through Canadian Gold iUnits, symbol XGD).

The latest data from the U.S. Commodity Futures Trading Commission shows the “dumb money” small gold traders getting more bearish, as they’re been doing each week since mid-September. These folks are the little investors who tend to be fairly consistently wrong just before changes in market trends. They’ve hit a reading of -0.88 in my trading setup for XGD, as you can see in the table below. A reading of “-1” would mean the small traders have hit a level of bearishness that would trigger a renewed bullish signal in my trading system based on the COTs data. So this suggests to me we likely still haven’t seen the top for gold stocks.

Same for silver. The small traders here are also fairly bearish, so I remain long.

However, in my other gold-related setups, there is a different story. My setups for gold, the HUI Gold Bugs Index and USERX Gold Fund are all based on trading on the same side as the commercial traders when they hit specific extremes of bullishness and bearishness. In the Sept. 25 COTs report, the commercials mounted a huge net short position that flipped these three setups to bearish. Where do they stand now? The commercials have slightly reduced their net shorts, but their position still maintains a heavily bearish tilt and is nowhere near flipping back to bullish. That, to me, suggests all is not completely clear.

Some readers have written me asking about the contradiction among my various precious-metals setups. Am I trying to play both sides of the fence and say I was right no matter what happens? The fact is the COTs data is hard to interpret, as anyone who’s seen the raw numbers can confirm. How to trade it has stumped leading economists and traders for many years. What do we do when the “smart money” commercial traders and “dumb money” large specs are both bearish? Most analysts have merely suggested we follow the commercials and ignore the rest. I’ve found that’s not always the best route to follow and, even when it is, it’s not clear at what point or how we should trade on the same side as the commercials.

My system is built around testing which group of traders had the best, most statistically robust returns in each market. Turns out it was best to trade with the commercials in gold and HUI, while fading the small traders was better for XGD. So what do I do when my gold setup is bullish while the XGD setup is bearish? I prefer to trade only one signal at a time in each market. This is partly for reasons of portfolio diversity. I might have two or three setups for some datasets (like gold or the NASDAQ 100, for example), but I don’t want to put all my funds in one trade, so to speak.

I choose one setup to follow at any one time, based partly on what available funds I have in my account and the statistical robustness of the various setups, and I then follow the signals of that setup in a disciplined way and with an appropriate position size depending on the largest past drawdown in that setup.

Other highlights from the latest report:

1. I’ve created a new setup for platinum, which flipped to bullish in August. Check the table below for more details about this setup.
   
   
2. My setup for the U.S. dollar index is still bearish. In fact, commercial traders have steadily reduced their net long position in U.S. dollar index futures since mid-September. As of the latest COTs report, their position has adopted a bearish tilt (falling below “0”) for the first time, suggesting the decline in the greenback is not over.

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

COTS SIGNALS FOR 2-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.