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.

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Is the Smart Money Buying Oil?

If anyone knows fundamental supply/demand forces, seasonal patterns and the potential for curveballs, it’s commercial traders.

Commercial oil traders work with oil in their day-to-day business. It’s the only commodity they deal with. Commercial traders make up about 60 – 75% of the trading volume in futures markets. That’s why they are considered the smart money.

So, is the smart money buying oil?

The chart below plots the price of crude oil against the net futures positions of commercial traders (as reported by the Commitment of Traders report).

Commercial oil traders are almost always net short as futures are used as hedge against falling prices.

Here are the key takeaways:

  1. The smart money reduced short exposure steadily as oil prices tumbled. In itself, that’s good news.
  2. However, net short positions fell to an all-time low and are still well below the levels seen at prior oil price trough. That’s not bullish.
  3. Although oil prices managed to inch higher last week, commercial traders added to their hedges (red circle). That’s bearish.

Technical analysis shows an improving picture for the Energy Select Sector SPDR ETF (NYSEArca: XLE). Click here for detailed XLE analysis.

But oil ETFs like the United States Oil ETF (NYSEArca: USO) and iPath S&P GSCI Crude Oil ETN (NYSEArca: OIL) have yet to catch their footing.

Commercial oil traders are not yet convinced oil has found a lasting bottom. Unless we know something they don’t, it appears too early to buy.

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.

Fed Fund Rate Suggests S&P 500 Rally

Here’s yet another indicator that the Federal Reserve legally ‘manipulates’ the stock market. This chart shows the correlation between the S&P 500 and the 30-day Fed Fund Rate. Based on this unique correlation, stocks should rally (at least temporarily).

Market correlations are never married for better or for worse or until death do they part, but they are valuable tools for market forecasters.

There are dozens of correlations. Some are logical and make sense, others are exotic and off the wall.

This piece is about the correlation between the S&P 500 (SNP: ^GSPC) and the 30-day Federal Funds Rate (30 FFR).

The Federal Funds Rate (FFR) is the interest for which a depository institution lends funds maintained at the Federal Reserve to other depository institutions.

The 30 FFR reflects the average daily FFR in a particular month and is investable via the 30-day Federal Funds Futures.

The Commitment of Traders Report (COT) provides a glimpse of how traders feel about the 30 FFR, and that’s where it gets interesting.

The COT tracks positions of commercial, non-commercial and non-reportable traders. Commercial traders are considered the ‘smart money.’

Commercial traders have been piling into the 30-day Federal Funds Futures, basically betting on a higher FFR.

The FFR essentially acts as the base rate that determines all other interest rates in the US.

There generally is a direct correlation between Treasury rates and stock prices. That’s what makes the 30 FFR an interesting forward-looking indicator.

How is it forward looking?

The chart below plots the S&P 500 against the 30 FFR shifted forward approximately 30 days or four weeks (the COT reports weekly).

The green portion of the 30 FFR chart reflects the outlook for the next four weeks.

The second chart shows the long-term correlation between the S&P 500 and 30 FFR.

It’s worth noting that commercial traders’ 30 FFR long positions are near an all-time high. Therefore, up side could be limited.

For now, the Fed Funds Rate confirms what we foresaw already last week: Higher prices.

My thoughts, shared via the May 4 Profit Radar Report, were as follows: “The chart detective inside of me favors a shallow dip to 1,874 – 1,850 followed by a pop to 1,9xx (exact level reserved for subscribers) before we see a 10%+ correction.

I expected higher prices not because the charts telegraphed it, but because of a non-scientific yet incredibly effective indicator. More details can be found here:

Too Many Bears Spoil the Crash (or Correction)

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.

Insiders Expect Higher Copper Prices

Here’s a myth that just won’t die: As copper goes, so goes the economy. For those who believe that’s true, there’s hope. Insiders have rarely been as motivated to own copper. Here’s what it means for copper prices and stocks.

“Copper awaits further decline on global economic worries” was one of many copper-related headlines on and around March 18.

Financial reporting makes it appear as if anything ‘Dr. Copper’ does has either an effect on the economy or the S&P 500.

We’ll show later that this isn’t the case, but there’s hope for all the ‘sell everything because copper is down’ doomsday sayers. Why?

Because the smart money is gobbling up copper.

The chart below plots copper prices against the number of copper futures contracts held by commercial hedgers (data source: Commitment of Traders Report – COT).

Copper COT 3 14

Commercial hedgers include copper miners and distributors. They are considered the ‘smart money’ because they are actually involved in the copper trade.

Commercial hedgers have rarely shown more desire to own copper.

That should be good for copper prices, as long as support holds.

What does this mean for stocks in general and the S&P 500 (SNP: ^GSPC) in particular?

Here is a detailed analysis of the correlation between the S&P 500 (NYSEArca: SPY) and copper, along with an important near-term support level for copper: Is Copper Really a Leading Indicator for the S&P 500?

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.

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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.

 

Crude Oil Speculators Are All-time Bullish – Will This Sink Oil Prices?

Large crude oil speculators have amassed a record amount of long crude oil positions. This may mean that there are few buyers left, which may be troublesome for oil prices. Furthermore, oil prices are at technical crossroads.

The latest Commitment of Traders (COT) report shows that large speculators have never been more bullish on crude oil and are holding an all-time high exposure to the ‘black gold’ (hopefully it won’t disappointment them like actual gold).

The Commodity Futures Trading Commission (CFTC) COT reports holdings data for various energy contracts and most of them show large speculators are record long.

What does that mean for oil and gas prices?

There are two key components to the short-term oil outlook. Both of them are illustrated in the chart below, which plots WTI crude oil prices against the COT large speculator data.

When large speculators were ‘all in’ in 2011 and 2012 oil prices corrected. Not immediately but inevitably.
The red trend line magnifies the potential impact of the current sentiment extreme. Oil prices are at technical crossroads as trade hovers around this support/resistance level.
ETFs that are affected by this sentiment/technical analysis combo include:
United States Oil Fund (NYSEArca: USO)
PowerShares DB Oil Fund (NYSEArca: DBO)
Ultra DJ-UBS Crude Oil ProShares (NYSEArca: UCO) – 2x leveraged long ETF
UltraShort DJ-UBS Crude Oil ProShares (NYSEArca: SCO) – 2x leveraged short ETF
The trend line suggests that bullish and bearish forces are fighting a battle over short-term supremacy right around the 103 level.
As long as trade stays above trend line support, higher prices deserve the benefit of the doubt, but sentiment suggests that the we should see a notable correction eventually.
There’s one support level that absolutely must hold and a price target that – if reached – should be very damaging to the stock market.
A more detailed analysis of oil titled ‘Will $100+ Oil Be a Problem For Stocks & The Economy” offers an insightful longer-term outlook for oil along and reveals key support and resistance levels.