FSU Editorial: "Net Commercials and 2007" by James West 01/01/2007

NET COMMERCIALS AND 2007
by James West
buythebottom.com
forever a student of the markets
January 1, 2007

Volatility Index

VIX [ http://www.buythebottom.com/vix.html ]
No report was published this week.

Broad Markets

Russell 2000 [ http://www.buythebottom.com/rut.html ]
Net-commercial position increased by 61 contracts.

S&P 500 [ http://www.buythebottom.com/spx.html ]
Net-commercial position increased by 2,425 contracts.

NASDAQ 100 [ http://www.buythebottom.com/ndx.html ]
Net-commercial position decreased by 764 contracts.

Dow Jones [ http://www.buythebottom.com/indu.html ]
Net-commercial position decreased by 275 contracts.

Over the last two weeks there were several new developments in the major indexes in terms of COT data. What I found interesting is that in the Dow Jones, commercials were buyers and larger-traders were sellers. This is a classical bearish COT setup. For the Nasdaq 100, however, both commercials and large-traders were sellers while small-traders were the ones buying (or short-covering). Interestingly enough the small-trader buying does not end there, in the Russell 2000 index commercials were relatively flat over the last two weeks, as large-traders were big sellers�so that only leaves the small-traders to do the buying. This same sort of pattern reappears once more in the S&P 500, as large traders were sellers commercial buying was relatively minor, meaning that small-traders were doing most of the buying in the market.

The point that I am getting to is that small-traders are entering the stock market, while commercials remain largely negative for most markets, excluding the Russell 2000. On top of all that, the stock-market has been on a relentless rally for the past 5 and-a-half-months.

I am now largely bearish on the stock market, and would not be surprised to see a strong sell-off materialize in the early part of 2007. I am looking for an intermediate-term top but not so sure about it being a longer-term top, just yet.

Commodities

Crude Oil [ http://www.buythebottom.com/wtic.html ]
Net-commercial position decreased by 2,093 contracts. For the last month or so, oil has remained range bound in the $58 � 64 area; meanwhile net-commercial position has also remained range bound in the -11,000 to 2,000 contracts range. This is telling me that commercials are neutral in this price range, maybe because of the milder weather or perhaps for another reason, who knows�

In any case, my stance is unchanged: crude oil was setup for a rally in 2006 � which never materialized, and remains setup for a rally in 2007; that is until we see cot data to the contrary. (For example net-commercial position dropping to the -60,000 to -40,000 range)

Gold [ http://www.buythebottom.com/gold.html ]
Net-commercial position decreased by 1,336 contracts as Gold rallied from 620 to near 640. I can’thelp but remain neutral on this market until I see a clear COT setup: up or down.

Currencies

US Dollar [ http://www.buythebottom.com/usd.html ]
Net-commercial position decreased by 126 contracts. After the US Dollar index broke down, it found support near the 82.5 level. From there the index rallied to 84 during the month of December. Net-commercial position remains elevated at 15,051. The commercial setup to the upside remains largely intact even after December�s rebound; to me this is forecasting higher prices yet to come. (With a probable target at prior resistance in the 87 � 87.5 range)

Regards,
James

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Contact Information
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)