Thursday, July 28, 2016

Quiet On The Trading Front - Some Longer Term Commentary Based on Commitment of Trader's Positions

I have been quiet here on the blog because there has been nothing compelling that I have seen in regards to initiating any new trades.  The last studies I ran which had any compelling back test were the bearish studies from July 11 and 12.  Prices have basically traded sideways since then.  The forward outlook from those studies was negative on average from the 2 week mark all the way to 2 months ahead.  So maybe we will see some level of selloff occur within the next several weeks, but I really don't have an opinion here.

On a longer term basis I have a few points of observation.

Since July 12, commercial traders in the CoT report have made a substantial increase in short positions in combined Dow, SP, Nasdaq futures.  They are now holding the largest net short position in about 16 months (since before the May 2015 highs).  While this doesn't mean the market will stop rising, it shows the "smart" money is betting on lower prices and/or that the market is "overvalued" here.  This type of signal is significant, but further price highs could actually add fuel to the bullish run because the smart money may cover short positions if they don't hold prices down here.

Gold futures have hit a new record net long position in large speculator contracts on this move up the last several months.  And the commercials hit record net short.  Multiplied by the $ value of each contract they may not be quite at a new $ record holding ( I havent tried to calculate this).  On the surface this occurrence seems to suggest that gold's bullish run/bull market may not run much higher before a major correction (and possibly move to new lows) occurs.  Right now I feel there is no other legit interpretation other than to exit any long gold positions on a trading basis.  Don't be caught up in the hurrah and yesterday's trend.

Oil futures made a rebound into this spring with no net new long positions in the futures market.  And interestingly, the long positions have remained near record net long levels which in the past few years have coincided with major price peaks in oil.  The only net change in positions of significance on the rally in oil was declining net short positions.  So the oil market rose on short covering only.  That is not what a textbook bottom/new bull market is "supposed" to look like.  Think of the underlying psychology there, or even the pragmatic monetary dynamic of this.  If no new long positions were added on the substantial run up, it may be that there is no funding/ability to collectively increase longs in the speculative camp.  All the bets may be cast already.  If that is so, and oil has already turned down substantially from its recent rally high, prices may have way further to go down with very little capacity for new funding to come in on the long side and support prices.  My take is that what I have just described is the approximate actual scenario.  It seems to me that oil will get crushed further in this bear market.

These dynamics would be suggestive of further US Dollar Index gains based upon intermarket relationships.  Also the futures positions of the US Dollar Index showed heavy smart/commercial interest at the lows this spring.  So a major base may have formed setting the stage for another move to new highs in the US Dollar Index in coming months.

So back to the stock market....does this mean?  I think it portends a deflationary (continuing) back drop, which in the past has been a negative environment for stocks.

That being said, my only real interest in the stock market is the shorter term moves which I can speculate on based on quantifiable past market action.  So I will continue to attempt to provide timely trading analysis whatever unfolds in future trends.


Pete

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