KitcoKitco
 

Commodities Cautiously Optimistic

 

By Alex Roslin

Jul 15 2008 10:40AM
www.cotstimer.blogspot.com

   

While stocks continue to suffer their bloodbath, precious metals bulls have cleaned up in recent weeks. Gold and silver have marched back close to their March highs, while copper briefly poked to a new high in July. Is this the launch pad for a new run-up in bullion prices? Will gold stay above $1,000 this time?

Trader positioning as reported in the weekly Commitments of Traders reports is a little mixed at this point, but my read is that it has been suggesting more U.S. dollar weakness, which would translate into higher commodity prices. Here are some highlights from the recent data, as reported by the U.S. Commodity Futures Trading Commission:

  • The "smart money" commercial traders in U.S. dollar index futures sat at a bearish extreme in their positioning during all four weeks of June. They were more net short than any time since Oct. 2006 as a percentage of the total open interest. Recall that this was just as the greenback broke down from a half-year trading range between 83 and 87 and started the plunge to unprecedented lows. (On Monday the index was below 72.) In fact, the commercial traders haven’t been this negatory since May 2004 in relative terms (in comparison to their historic positioning). In mid-June, they were more than three standard deviations below the moving average I use for my U.S. dollar trading setup. By the latest COT report for the week of July 7, the commercials had backed off a little and were 1.4 standard deviations below the average, but in absolute terms they are still at the levels seen in the fall of 2006.

  • There is a strange divergence between my silver and gold data. In silver, the commercial traders have really hit the brakes, increasing their net short position to a one-year high. In fact, they haven’t been this bearish in relation to past data since Dec. 2006. Meanwhile, the large speculators in gold, whom I trade alongside, are blithely bullish—more than one standard deviation above the moving average for this setup.

  • So how to make sense of these conflicting signals? I've been trading with a new rule for a few months that helps me figure out what to do. I saw that I’ve got six highly correlated commodities setups. I take a trade only when the signal agrees with the majority of these setups. As an example, right now, four of the setups are bullish (gold, copper, platinum and crude oil), while two are bearish (silver and heating oil). This means when my silver setup went to bearish on July 7, I ignored it and happily held onto my gold long position. It is, however, possible that the short signal of the silver setup—and the fact that there are two bearish holdouts among the six setups—means some short-term volatility is in store for commodities.

  • This cautionary note is further amplified by the fact that my copper setup is turning bearish for the open of July 28. Note that the copper setup works with an eight-week trade delay, so this signal actually took place with the May 27 COT report. Since then, the setup has gone back to bullish, with a long trade due for Aug. 25.

Visit my free blog COTsTimer.Blogspot.com to see my other signals for equities, currencies, energy and Treasuries and to learn more about how my system works. Good luck this week!

COTS SIGNALS FOR 11-JUL-08

 

New signal 1

Execution date for next pending signal 2

Current signal for week of Jun. 16

COTs system profit 3

Index profit 4

COTs vs. Index profit 5

Trade delay 6

Traders to watch 7

Gold 8

-

-

Bullish

660.7

208.2

317.3

2

Large Specs

Silver

-

-

Bearish

4,775.3

274.1

1,742.0

0

Commercials

Gold Bugs Index (HUI)

-

-

Bullish

24,886

233.7

10,638

0

Small Traders

TSE Gold (XGD) 9

-

-

Bullish

1,437.4

253.9

566.0

0

Small Traders

Platinum

-

-

Bullish

950.6

350.6

271.1

8

Commercials

Copper (high grade) 10

-

28-Jul
(Bearish)*

Bullish

1,810.5

202.3

894.9

8

Small Traders

U.S. Dollar Index

-

-

Bearish

185.8

87.2

213.1

0

Commercials

* My trading setup for copper works with an eight-week trade delay following a signal. It presently has a short signal for the open of Monday, July 28, and goes long on the open of Monday, Aug. 25.

NOTES TO TABLES

  1. Visit COTsTimer.Blogspot.com to see how I trade new signals.

  2. Date for pending signals including trade delay for the setup. Execution is always on the weekly open of trading.

  3. 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.

  4. Past return from buying and holding the underlying cash market, starting from a baseline of 100.

  5. Ratio of the COTs Timer return versus the underlying market’s return.

  6. This column shows how many weeks the trade was delayed to maximize past results and statistical robustness. For example, "0" indicates that the trade was executed for the open on the Monday after the COTs report was issued. In case of holidays, calculations are based on the weekly open price. In my own trading, in case of holidays, I execute trades for the open on Tuesday.

  7. 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.

  8. My gold setup trades on the same side as the large speculators. It goes long when the large speculator net percentage-of-open-interest position is -1.2 standard deviations under its five-week moving average or above. It sells gold short when the net position is -1.2 standard deviations under its five-week moving average or below.

  9. Signals for the iShares Canadian S&P/TSX Global Gold Index Fund (XGD trading in Toronto) are based on the gold COTs data.

  10. My copper setup trades on the same side as the small traders.

Alex Roslin

***

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.