COTs Smile On Silver

By Alex Roslin       Sep 17 2007 4:27PM www.cotstimer.blogspot.com

Gold is soaring, and so are gold stocks and silver. But have prices come too far? Is it time to take profits?

The latest Commitments of Traders report issued Friday and detailing holdings by traders in futures and options markets gives some enigmatic answers, depending on how you read them.

The “smart money” commercial traders have increased their net short position in gold for the third consecutive week. Meanwhile, the “dumb money” large specs and small traders have boosted their net long positions.

Surely, this means we should bail out, you say. Not so, according to my trading system based on the COTs reports. My setups for gold and gold stocks have yet to hit the extreme relative levels needed to trigger bearish signals.

In fact, the only signal I got from the latest COTs report was a renewed bullish signal in my silver setup. This setup is based on fading the small traders, who’ve hit an extreme bearish position in this market.

Otherwise, my existing signals all still hold: bullish gold, gold stocks and silver; bearish copper and the U.S. dollar index. For more details, see the table below.

I think the fact that there’s no signal in the gold arena underlines the importance of evaluating the COTs data against historic trends, rather than focusing on week-to-week fluctuations, which as I’ve mentioned before show precious little correlation with subsequent market prices.

Visit my blog COTsTimer.Blogspot.com to see my signals in other commodities, equities, Treasuries and currencies. Good luck in your trading and investing.

COTS SIGNALS FOR 14-SEPT-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.