I look at the commitments of traders data to get a quick reading of how extremely commercials and speculators are at polar opposites. The COT-Futures site ranks the relationship from 0 to 100 in relative terms — 0 is most net short in the past 18 months or so; 100 is the most net long. There is a $5 a month fee for this service. When commercials are 0-10, it's time to think about selling, because they sure are. When it's 90-100, be a buyer. Commitments data won't give you specific entry signals for short-term trades, but they put you in the right ball-park for the next significant move. It works well for the physical commodities. I haven't found them to be very meaningful for financials and currencies, because who the heck are commercials anyway in the stock market (and are they particularly bright?), and the real players in the currency markets use futures only for pocket-change.For weeks, gold, oil, sugar, and grains had all been on "tilt" at 0 (commercial selling and massive speculative buying), and the last couple of days is the result. Natural gas was sitting at a 100 reading (practically the only commodity that was) just before it made its recent big move up.

At the moment, I'm fully invested in 26 fixed names in four groups: 6, 6, 6, and 8. All I am doing right now is that whenever any two within a group diverge relative to each other by 30% from a prior fixed point in time (the previous trade date), I sell 30% of the stronger one and recycle that cash into the weaker one. When there is such a trade I reset the reference point for all the stocks in the group to that day's closing/trade price, and then just wait for the next 30% divergence from that date. There is a significant long-term compounding effect in doing this, by the way. One of the stocks is a 2x leveraged short gold stocks ETF from about when gold was $800. Despite the run-up in the metal, the ETF position has delivered three buy signals near its lows, two sell signals on up moves after buys, and is now net-profitable despite being heavily under water for a while.

Why was I confident averaging down, as it were, against gold? The commitments numbers. I knew that sooner or later gold was going to take a big hit, even if it remains in a long-term bull market. If it drops enough to get the commercials buying again (and/or specs panicking out) then I'll simply switch to the matching long ETF and play that side until the commercials go heavily short again with respect to speculators. Doesn't have to be perfectly timed. In fact you may be wrong for a while, which can help you accumulate a bigger position with a lower cost basis. Since the gold ETF, I've added three other 2x ETFs in natural gas (long), crude oil (short), and grains (long). I'm cheating in the grains — according to commitments data I should be short, but they've come off a lot and that particular position at the moment is quite small. I'm happy to add to it if grains keep coming down. The volatility of these things is great for generating the trading spreads I look for. That's why I've integrated them into my stock portfolio. Watch the commitments as a trend-change guidepost.


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