An unusual development has come to my attention this weekend in an important market indicator that could change our current strategy for trading the broad stock market. Readers may recall that in a recent blog I had mentioned that COT (Commitments of Traders) charts for the S&P 500 had been showing very high Commercial long positions. That was significant because the Commercial traders (smart money) are rarely (if ever) wrong, and it would be unwise to bet against them. This has recently been tempering my enthusiasm for selling short the broad stock market even though strong technical and cycle data have been pointing to an imminent significant correction (and possibly even a market meltdown). Over the last several weeks it seemed like the accommodative moves by the European Central Bank (lower interest rates and more QE) and the Federal Reserve (deciding to raise interest rates only twice instead of four times this year) were attempts by governments and "big money" to prop up the markets and avert a possible stock market crash before the U.S. presidential election later this year. The recent strong Commercial long position in the S&P 500 seemed to support this idea. The unusual development right now is that last week these Commercial traders liquidated nearly all of their long positions in the S&P 500. This could mean that "big money" is aware of the technical and cycle factors pointing to a significant correction now and that they don't feel they can push the market to "breakout" just yet and are thus backing off their long positions. Perhaps they want to allow a severely overbought market to unwind a bit and will attempt to push it higher later in the year. Whatever the reason was for abandoning their bullish stance, we can now be more confident in any short position we might want to establish over the next several weeks. Still on the sidelines of the broad stock market.
Speaking of COT charts, the Commercial trader positions for gold and silver are still very bearish so the corrections that started last week in these metals may have a ways to go before bottoming. We may get a short-term bounce this week because of last week's steep price drops, but such a bounce may not get very far. Cycle studies (and COT charts) are suggesting a longer and deeper correction. Holding my short positions in gold and silver.
Crude oil prices also dropped steeply last week which was good for our short position in this commodity. An ideal target for this correction would be around $35 (May contract chart), but prices may not get that far. I would at least like to see crude get closer to $36 before taking profits in this trade. Once this subcycle correction bottoms (this week or next), we will watch how high the next rally gets to determine whether or not the medium-term cycle in crude is turning bullish. If the next rally cannot exceed the recent high of $42.49, the cycle will stay bearish and prices would likely start to move under $30. A break above that high, however, would project higher prices into the summer. It is too early to tell which way it will go. Holding my short position in crude for now.