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COTs: Precious Metals Lose Shine

By Alex Roslin      Printer Friendly Version
Jun 11 2007 10:23AM

www.cotstimer.blogspot.com

It was a crazy week in the markets, and as usual the precious metals led the way in the craziness. Technical breakouts for silver and gold stocks failed and turned into routs. Silver bounced down off a critical line of resistance from its March and April highs, while the GDX:GLD ratio - a good tell for gold stock action - also failed at a key line of resistance from its December and February highs.

What happened? One answer lies in the Commitments of Traders reports. These free weekly government reports, issued Fridays by the Commodity Futures Trading Commission, detail trillions in futures and options holdings in 100 markets - from gold to gas, the S&P 500 and frozen pork bellies.

Friday’s report - based on data as of last Tuesday, June 5 - showed the “smart money? commercial hedgers still hadn’t overturned previous extreme bearish positioning in gold and silver.

In silver, gold and gold stocks, the commercial traders reduced their net positions to a historically neutral level (see table below). In my approach, this means the existing sell signals still apply. In copper, the “dumb money? large speculators were still fairly bullish by historic standards - not a good sign for copper prices because these guys usually get it wrong at market turns.

Should we worry about weekly fluctuations in the COTs data? I don’t think so. Anyone trying to find correlations between weekly changes in the data and market prices will quickly come to a surprising conclusion: There is virtually no correlation.

This might be puzzling to readers of the financial media, which widely reports on the COTs reports’ weekly changes in the number of contracts in various markets.

But such short-term changes have little value for trading purposes, as the lack of correlations shows. Last week, for example, the COTs data was fairly upbeat for precious metals, as the commercial traders slightly reduced their net short positions in gold and silver. We might have expected prices to rise. Of course, they didn’t.

So are the COTs reports worthless? Analysts have been befuddled about the data for years. It has to mean something, they thought. A breakthrough came when some clever analysts suggested it’s best to follow the commercials when they reach historic extremes in their net percentage-of-open-interest position. I think that’s the right approach. My own twist on it is that I found it was best to fade - or trade opposite to - the large speculators and small traders in some markets. Also, I think it’s important to backtest and validate the specific historic extremes that have led to the most consistently profitable, least-volatile trading signals in each market.

That’s why I don’t get too excited about short-term changes in the COTs data. Edwin Lefèvre said something about this in his classic Reminiscences of a Stock Operator: “The big money was not in the individual fluctuations but in the main movements… I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!?

See my blog COTsTimer.Blogspot.com for signals in equities and other markets.

COTS SIGNALS FOR 8-JUN-07

 

New signal 1

Rene-wed signal 2

COTs Timer Ratio 3

Existing signal (signal date) 4

COTs system profit 5

Index profit 6  

COTs vs. Index profit 7

Larg-est draw-down 8 

Traders to watch 9

Gold 10

-

-

-0.06

SELL
(13-Feb-07)

371.3

169.8

218.7%

11%

Commercials

Silver 11

-

-

-0.07/
0.71 12

CASH
(21-Nov-06)

482.0

258.4

186.5%

15%

Special

US Gold (USERX) 13

-

-

-0.01

SELL
(30-Jan-07)

2780.0

75.7

3673.1%

35%

Commercials

TSE Gold (XGD.TO) 14

-

-

0.01

SELL
(30-Jan-07)

465.2

241.7

192.5%

13%

Commercials

Gold Bugs Index (HUI) 15

-

-

-0.06

SELL
(13-Feb-07)

3014.1

195.8

851.1%

42%

Commercials

Copper (high grade) 16

-

-

0.59

SELL
(10-Apr-07)

741.2

287.2

258.0%

24%

Large Specs

Latest Results for USERX Gold Fund: COTs Beat USERX By 3,600%

This table gives running results and signals for the USERX U.S. Global Investors Funds U.S. Gold Fund as of last week.

COTs Report

Signal

USERX

USERX Profit

COTs Profit

12/12/1995

SELL

20.6

100.0

100.0

6/11/1996

BUY

20.5

104.1

91.1

2/25/1997

SELL

14.1

71.6

68.4

3/28/2000

BUY

3.1

15.7

183.4

5/15/2001

SELL

2.85

14.5

175.3

11/20/2001

BUY

2.66

13.5

236.7

3/30/2004

SELL

8.55

43.4

778.1

5/4/2004

BUY

6.62

33.6

990.1

10/5/2004

SELL

7.77

39.4

1205.1

1/18/2005

BUY

7.65

38.8

1365.6

1/30/2007

SELL

15.44

78.4

2657.1

6/5/2007

 

15.52

78.8

2666.3

NOTES TO TABLES

1. See my blog for important notes on how I trade new signals: COTsTimer.Blogspot.com. Click the “How It Works? link in the right-hand column.

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. I don’t usually act on such signals, unless I don’t already have a trade on. I haven’t calculated the profitability of entering trades on renewed signals.

3. The COTs Timer Ratio is the latest reading of the bullishness or bearishness of the group of traders that has historically been most profitable in this market. Unless otherwise indicated, 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. A reading between 1 and -1 means no new or renewed signal. The ratio is based on the traders’ net percentage-of-open-interest position compared to the position’s moving average divided by two standard deviations.

4. In parentheses are the dates of the COTs report that gave this signal. Note that my profit/loss calculations were based solely on taking trades on the first or second weekly open after the signal was given. (Click the “Profit/Loss Results? link on my blog to see the trade delays for each setup.) Variations in the trade delay resulted in inferior past results or losses.

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. The return doesn't include commissions, slippage or other costs.

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 cash market return.

8. Largest drawdown the setup experienced during a trading signal since the beginning of the data. 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 returns in each 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 - or trades opposite to - the large speculators and small traders.

10. Results are based on NYMEX gold and were last updated May 17, 2007. I plan to update the results for each setup at least once a year.

11. Results are based on NYMEX silver and were last updated May 17, 2007.

12. The silver setup is based on a combination of my best setups for (1) the commercial traders and (2) a composite of the large spec long position minus the commercials short position. The setup trades in the same direction as both signals. Trading only when the two signals concur produced a better average weekly profit and lower drawdown than for either signal alone and required being in the market only 60 percent of the time.

13. Signals for the U.S. Global Investors Funds U.S. Gold Fund (symbol USERX) are based on a setup correlated to the gold COTs data. Results were last updated May 29, 2007.

14. Signals for the S&P/TSE Canadian Gold iUnits ETF (symbol XGD.TO) are based on a setup correlated to the gold COTs data. XGD.TO price data available only since March 2001. Results were last updated Feb. 27, 2007.

15. Signals for the Gold Bugs Index (symbol HUI) are based on a setup correlated to the gold COTs data. HUI price data available only since June 1996. Results were last updated April 10, 2007.

16. Results are based on NYMEX copper and were last updated May 17, 2007.

17. The USERX prices are shown for the week in which the signal was given, not the entry or exit prices of the following week’s first session. USERX executed a 1:10 stock split on July 1, 1998. Before this date, the USERX values in this table were multiplied by 10 for ease of comparison.

 

Alex Roslin
Friday, June 11, 2007

 

****

Disclaimer: This report isn’t meant as financial advice or a recommendation to buy or sell any security. My system isn’t for everyone and involves substantial risk, including large drawdowns in some 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 do your own homework before trading.

Alex Roslin’s COTs Precious Metals Review - COTsTimer.Blogspot.com