Today has been a busy day for me, including the creation of two new essays on the Forecasting Systems home page -- relating to computer generated trading systems (BioComp Profit neural networks and Nirvana OmniTrader technical trading systems).  So, now it is getting late and I am getting tired.  But, I do wish to leave you with one little gem tonight -- a key indicator for knowing when the market will really turn up. 

Every week, on Friday, the Commodity Futures Trading Commission issues what is known as the Commitment of Traders Report.  See http://www.cftc.gov/cftc/cftccotreports.htm.  This report covers virtually all U.S. commodities contracts.  And, six different figures are reported for each contract.  Three groups of traders are included: commercial hedgers, large speculaters and smaller traders.  For each of these groups, both long and short positions are reported. 

With regard to the S&P500 futures contract, the commercial hedgers are the large mutual funds who are buying and selling futures contracts to hedge against their stock portfolio.  These are companies who invest a great deal of money in research.  When they believe the market is about to drop, they will protect themselves by holding short positions in the S&P contract.  When they believe the market will rise, they buy long positions.  In effect, the sum total of their hedging posture represents the accumulated research and wisdom of most of the largest and oldest financial houses.  Historically, the net long - short position of the commercial hedgers in the S&P contract has been a very good long term leading indicator of market action.  The following chart demonstrates this relationship, since January 1996. 
   
  The top graph shows the price of the S&P contract.  Red and green dots mark the buy and sell signals.  The yellow graph in the center reads +1 when the commercial hedgers are long and -1 when they are short.  In this graph, the yellow line is treated much as a neural network signal.  The red graph at the bottom shows the profit or equity one would have accumulated trading a single S&P contract based on this one, simple indicator. 

Notice that the commercial hedgers have been short since March 2000, when the current bear market began.  They are still short today -- however the margin of difference is becoming smaller than in the past.  I think that, when their positions finally turn long, we can expect a serious rally to begin.  Even such a serious rally, I suspect, may not be the final end of the bear market.  But, I'll leave that discussion for another letter. 

Jeffrey 

BioComp Profit Neural Network S&P 500 Futures Contract "MegaSystem" Forecast: 
Tuesday's close: down from Monday's close 
Wednesday's close: down from Tuesday's close 

Nirvana OmniTrader Composite Technical Forecast for the S&P 500 Futures Contract: 
Tuesday's close: down from Monday's close 

View the Results of Previous Forecasts 

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