COT Report: Large Gold Speculators are Giving up on Gold

It’s been a bad year for gold. In fact, it’s so bad that large gold speculators have dialed down their long gold futures exposure to the lowest level in five years. But it doesn’t look like they’ve thrown in the towel quite yet.

After an already dismal year, gold has lost another 11% in the last five weeks.

Is this the last washout sell off before a sustainable rally?

One clue is provided by the Commitment of Traders (COT) report, which tracks the long and short gold futures positions of various types of traders.

Investors basically get a peek at what the ‘smart money’ and ‘dumb money’ is doing.

The chart below plots the SPDR Gold Shares ETF (NYSEArca: GLD) against the long gold positions held by Non-commercial traders. Non-commercials are large speculators.

Even a brief glance at the chart shows that large speculators tend to find themselves on the wrong side of the trade (red and gray vertical lines).

The amount of long gold futures contracts owned by non-commercials has dropped to a five-year low.

The amount of gold tons held in the SPDR Gold ETF and iShares Gold Trust (NYSEArca: IAU) echoes the message of the above chart. The amount of gold held by gold ETFs GLD and IAU has shrunk over 30% since the beginning of the year.

Gold sentiment suggests that the worst of the decline is over. Unfortunately though, gold sentiment alone can be a haphazard indicator.

I always base my gold research on various types of indicators. Sentiment is one of them, technical analysis and seasonality another.

Quite frankly, technical analysis hasn’t produced any good buy/sell signals for gold, GLD, IAU or the UltraShort Gold ProShares (NYSEArca: GLL) recently.

However, gold has very much respected technical support and resistance. The gold chart below was previously published in the Profit Radar Report. The blue dots highlight how well technical support and resistance has worked recently (and for the entire year for that fact).

Near-term resistance is around 1,255. There’s no critical near-term support.

It appears to me that – with or without a bounce – a washout, ‘throw-in the towel’ type sell off is still missing.

We are now starting to gear up for the next long-term trade that may see a 200+ point move.

The long-term analysis for gold featured in the below article provides more details about the next 200+ gold trade.

Long-term Gold Analysis – When’s the Time to Buy Gold?

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, 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. We are accountable for our work, because we track every recommendation (see track record below).

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Disappointing Earnings May Be An Opportunity for ETF Investors, But …

The earnings season is in full swing. Most heavy hitters are slated to report earnings this week or next. Rather than overanalyzing the effect of one or two companies, this article looks at the opportunity and risk presented by the long-term earnings picture.

Even before this year’s earnings ritual started, a number of companies spoiled the third quarter earnings season. Intel, Caterpillar, FedEx and many others warned that estimates were too high.

Bloomberg reported that earnings pessimism among U.S. chief execs is the highest since the 2008 meltdown and the Wall Street Journal warns of an “earnings pothole.”

The S&P 500 has rallied as much as 37% since the October 2011 low and the stock rally has become extended. Could a bad earnings season push stocks off the edge?

De-focus On Earnings

Earnings are just one of many forces that drive stocks, in fact I consider them secondary and to some extent a contrarian indicator. Record high Q1 2010, Q1 2011, and Q1 2012 earnings were followed by dismal short-term stock performance so disappointing Q3 2012 earnings don’t automatically translate into falling stock prices.

Seasonality is favorable for most of the remaining year and key technical support for the S&P 500, Dow Jones and even the Nasdaq-100 is holding up. Let’s take a closer look at the S&P 500’s technical picture.

Since June the S&P has been climbing higher within the black parallel trend channel. The S&P’s rally stopped at 1,474.51 on September 14, which was exactly when the upper parallel channel line converged with a decade old resistance line.

Ironically that was just one day after Bernanke promised unlimited QE3. They say don’t fight the Fed, but in this instance the Fed lost to technical resistance. The decline from the September 14 high helped digest overly optimistic sentiment and put the trading odds in favor of going long.

The October 7, Profit Radar Report cautioned of lower prices, but viewed any decline as an opportunity to go long: “A digestive period that draws the S&P to 1,450 and perhaps towards 1,420 seems likely. The highest probability trade is a buy signal triggered by a move below the lower black channel line (around 1,420), followed by a move back above.”

Using trend lines to identify buying or selling opportunities worked like a charm in 2010 and 2011 (trend line breaks were a major contributor to short recommendations in April 2010 and May 2011), but starting in 2012 the S&P delivered a number a fake trend line breaks.

That’s why the above recommendation was to wait for a break below trend line support followed by a move back above before buying. The strategy worked. From here we simply elevate the stop-loss to guarantee a winning trade. We will go short only if the next important support is broken.

Long-term Earnings Message

Even as the economy continues to deteriorate, corporate earnings have slowly crept to new all-time highs. That’s right, all-time record highs.

The chart below plots operating earnings for S&P 500 companies (as reported by Standard & Poor’s) against the S&P 500 Index. Corporate earnings are the epitome of a mean reverting indicator and as predictable as a boomerang.

Every time corporate earnings get too high they reverse and the boomerang hits stocks. Nobody knows how high is too high. Right now, too many are expecting the boomerang to hit so it may take a bit longer, but we’re getting there.

Summary

Over the short-term (possibly into Q1 or Q2 2013) stocks may continue to rally (despite disappointing Q3 2012 earnings), but the long-term implications of record high earnings are deeply bearish for stocks.

The short-term opportunity for investors is to buy the SPDR S&P 500 ETF (SPY) on pullbacks (as long as they remain above key support). I don’t have a specific up side price target, but we’ll take profits when we see bearish technical divergences.

Concurrently we’ll be watching for a market top. Unfortunately, market tops aren’t a one-time event, it’s a process. Like knocking over a Coke machine, you have to rock it back and forth a few times before it falls over.

We’ll be looking at ETFs like the Short S&P 500 ProShares (SH) and UltraShort S&P 500 ProShares (SDS) once we see bearish divergences confirmed by sentiment and seasonality.

The Profit Radar Report will identify low-risk and high probability buying opportunities when they present themselves.