Commercial Traders Abandon Silver at Record Pace

Commercial traders have dropped their silver exposure to the lowest level in years, according to the latest commitment of traders report.

Many commercial traders use futures to hedge existing exposure to silver. The reason many commercial traders have existing exposure is simply because they are ‘in the business’ of mining or buying/selling silver (unfortunately banks also fall into this category).

Many commercial traders could be considered insiders, and thus the ‘smart money.’

Smart investors often follow the smart money.

The chart below shows what the smart is money doing.

It was originally published in the May 25 Profit Radar Report, and plots the price of silver against the net short position of commercial traders (hedgers are generally short to hedge their existing long position).

The smart money is holding a record 62,485 contracts, the highest in years.

The dashed red lines show what effect similar short exposure had on silver prices in the past. It wasn’t good.

The last time silver was able to shrug off the same degree of short bets was early 2011, when the silver bull market was alive and well.

If silver can rally despite this extreme, it may be an indication that the bear market is over.

 

However, seasonality suggests lower prices (full silver seasonaliy chart is available to Profit Radar Report subscribers).

Sentiment and seasonality are two major driving forces. Technicals is the third. The short-term chart actually looks constructive, and would allow for higher prices.

However, if trade breaks down, sentiment and seasonality suggest (much?) further down side.

Continued analysis of the three major driving forces (technicals, sentiment & seasonality) for silver and other asset classes is available via the Profit Radar Report.

The iShares Silver Trust (NYSEArca: SLV) is the easiest way to gain silver exposure. The ProShares UltraShort Silver ETF (NYSEArca: ZSL) is one way to bet on lower silver prices.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Never Miss a Beat! >> Sign up for the FREE iSPYETF e-Newsletter

Crude Oil Analysis Update

It’s been a while since the last free crude oil analysis (March 23: Next? A Crude Awakening for Oil Bears?).

The March 23 article noted that: “Commercial traders are starting to prepare themselves for further gains. Oil seasonality also suggests higher prices. Probably more important is a trend line that’s been important for oil prices for nearly two decades (this proprietary trend line and detailed oil seasonality chart reserved for subscribers of the Profit Radar Report). A move above this trend line is likely to trigger a rally.”

This important trend line is now in the rear view mirror, and I’m able to disclose it without conflict to my paying subscribers.

The green bold line in the crude oil futures chart below represents this trend line. It originates all the way back in 1998.

Since overcoming the bold green trend line, oil prices rallied as much as 33%.

Below is a summary of observations made in the Profit Radar Report since March:

March 29: “For aggressive traders, playing the long side (buy on dips) should ultimately prove profitable.”

April 8: “A close above 54.30 should bring more follow through gains.”

 

April 15: “Crude oil broke above 54 today. The breakout has legs as long as it stays above 54.”

May 6: “Oil prices are now gnawing on the resistance zone around 60. Yesterday’s red candle high may cause a pause. Next support is around 58.50, which could be an opportunity to buy.

Oil is trading around 58.50 right now. Based on seasonality, price may test support at 56 or 54.30 between now and mid-June (proprietary oil seasonality chart available to Profit Radar Report subscribers).

Overall, I anticipate oil prices to move higher as long as support at 54.30 holds.

Based on seasonality, buying oil ETFs like the United States Oil Fund (NYSEArca: USO) or iPath Crude Oil ETN (NYSEArca: OIL) before mid-June and/or around 54 – 56 (based on crude oil prices) is a trade worth watching.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Smart Fed Fund Money Projects New S&P 500 Lows

The 30-day Federal Funds Rate (FFR) is the rate that banks charge each other for overnight loans to meet their reserve balance requirements. The FFR, in essence, acts as the base rate for all other U.S. interest rates.

With a couple of tweaks the stale FFR can be turned into a forward-looking indicator. Here are the tweaks:

  • We look at FFR sentiment provided by the commitment of traders (COT) report. We are mainly interested in the net positions of commercial traders (considered the ‘smart money’).
  • We shift the COT sentiment data forward by 4 weeks.

We used the FFR to spot onset of last year’s May rally (when everyone was looking for ‘sell in May and go away’). Fed Fund Rate Suggests S&P 500 Rally

The January 4 Profit Radar Report drew attention to the following:

Commercial traders slashed their bullish 30-day Federal Funds Rate (FFR) bets by 37,812 contracts, the largest drop since December 2012. The correlation doesn’t always work, but the biggest drop since December 2012 is noteworthy. The FFR warns of a correction.”

The chart below is an updated version of the one featured in the January 4 Profit Radar Report. It plots the S&P 500 (NYSEArca: SPY) against the net FFR position of commercial traders.

Last week’s COT report showed a solid uptick in commercial’s long positions, but 1) it remains to be seen if the trend continues up and 2) there appears to be more down side before any up tick.

The FFR harmonizes with most other indicators I follow. A more detailed S&P 500 forecast is available here: Short-term S&P 500 Forecast.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Smart Money is Leaving Gold Just as the ‘Herd’ is Jumping in

From June 2 to July 10 gold prices surged 8.7%. Commercial traders were the first to get in on this rally and the first to get out. While commercials pulled out, the ‘herd’ (or dumb money) piled in. Could this be a significant gold high?

The greater fool theory may just be playing out in the gold market.

Commercial traders (often considered the ‘smart money’) have been pulling money out of gold while investors and speculators (often considered the ‘dumb money) are piling into gold and gold ETFs.

The most popular gold ETFs are the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

The chart below plots the SPDR Gold Shares against the futures positions of commercial traders (Commitment of Traders report).

Commercials’ exposure to gold futures just dropped to the lower level since October 2012. This marked the onset of a nasty decline that accelerated in March 2013, the only other time commercials really scaled down their exposure (red lines).

Partially based on investor sentiment, the June 13 Profit Radar Report recommended to short gold (unfortunately, our sell stop was not quite triggered).

Various media outlets linked this week’s gold (and GLD, IAU) selloff with Yellen’s comments about inflation.

Those comments may have contributed to gold’s $50 drop, but it can’t be the only reason. If it were, it would imply that commercial gold traders (which started selling gold weeks ago) could actually read Yellen’s mind.

Is there another reason why gold prices sold off? Yes there is.

In fact, based on a combination of factors, the June 1 Profit Radar Report projected a gold rally to around 1,350 followed by a steep reversal.

The actual price projections, the reasons for the projection, and what’s next is discussed here:

Gold Chart at the Cusp of Breaking Down

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Contrarian Signal? Investment Advisors are Dangerously Bullish

Investors blindly following the crowd often end up getting slaughtered like a herd of sheep. That’s the very premise of contrarian signals. So what is the crowd doing now? A look at investment advisor sentiment provides a glimpse.

Investors Intelligence (II) just released the latest results of its sentiment poll. Every week II polls investment advisors and newsletter writing colleagues.

This ‘smart money bunch’ works surprisingly well as an indicator, contrarian indicator that is.

When the II crowd is excessively bullish, it’s generally time to hover around the exit. Conversely it’s usually a good time to leg into stocks when there are plenty of II bears.

Without further ado, here are this week’s results. The chart below plots the S&P 500 against the percentage of bullish advisors polled by II.

In a nutshell, 51.6% of advisors are currently bullish. This is below this year’s May 21 high of 55.2% (which foreshadowed a shallow correction).

The red lines highlight the effects prior readings above 54% had on the S&P 500 (NYSEArca: SPY). There were some great signals, but there were also some spectacular misses.

QE liquidity has certainly skewed the contrarian accuracy of this particular indicator.

The Commitment of Traders (COT) report for the S&P 500, Dow Jones Industrial, and Russell 2000 is fairly neutral.

However, commercial traders (considered the ‘smart money’) are rather bearish on the Nasdaq-100 (Nasdaq: ^IXIC) while large speculaters (the ‘not so smart money’) are predominantly bullish. COT sentiment for the Nasdaq suggests that gains may be limited.

In this QE bull market, I always take a look at a dozens of sentiment and actual money flow indicators.

What’s the message of other sentiment indicators?

I have found that sentiment surveys (such as II) combined with option traders sentiment (such as put/call ratio), and a few other off the wall (but accurate) sentiment gauges, provide a good pulse on the market.