NET COMMERCIALS FLIP FLOP
by James West
forever a student of the markets
August 7, 2006

Broad Markets

Over the last two months, the stock market has been trading sideways. What has really perplexed me over this time-period is that commercials remained bearish on the market while the public’s sentiment (according to various surveys) has also been very bearish; supposedly even more bearish than sentiment readings during the 2002 bottom.

This is a market conundrum, sentiment is pointing to a major bottom while commercial positions are pointing to a major top. So which way is the market headed? I think a clue can be found in this week’s COT data.

Russell 2000 | http://www.buythebottom.com/rut.html ß look at chart to follow…

Over the last two weeks, net-commercial position for the Russell 2000 index increased by 7 066 contracts or approximately 2.44 billion dollars. The total net-commercial position for the RUT now stands at 10 257 or approx. 3.54 billion dollars. Meanwhile, net-large-trader position decreased by 5 292 contracts or approx. 1.83 billion dollars. This is yet another positive development in this market.

To give you some perspective, the highest peak in net-commercial position over the last 2 years, was on May 31, 2005, when net-commercial position stood at 13 102 or approx. 3.87 billion dollars. It is no coincidence that is when the market put in a major bottom in late April - early May. The RUT went on to rally from the 590 price-range all the way up to 680 in 3-months. After this rally, the market corrected over a two-and-a-half month period and bottomed in middle-October in the 630 range; during this bottom, net-commercial position peaked at 8 777 contracts or approx. 2.76 billion dollars. Since then the RUT rallied all the way up to 780, reached in May of 2006.

It looks like the RUT is now set / setting up for a rally. As long as net-commercial position remains somewhere in between 5 000 – 10 000 contracts the rally is coming. On the other hand, if net-commercial position slips below zero, then forget the rally and look out below!
Watch 714 (38.2% retracement) on the RUT, if we can close and hold above this level the rally is underway. However, if the RUT goes / stays below 670, all bets are off.

NASDAQ 100 | http://www.buythebottom.com/ndx.html

I will try to keep it to the point, as long as net-commercial position (yellow line) stays above 3 000 contracts (white dashed-line), I am looking for a rally in the NDX. A few weeks back, net-commercial position peaked at 12 161. The last time net-commercial position was above 12 000 contracts was – you guessed it – during the 2005 major-bottom in late April – early May.

The NDX also looks like its set / setting up for a rally. A sustain breakout above 1510 would be the first step to indicate the start of a potential rally. Once again, a break to new lows below 1450 would put the rally on pause.

Charts: RUT & NDX

Since the stock-market correction started in May, commercial buying interest is greatest in the two worst performing market-averages the Russell 2000 and the NASDAQ-100. Neither has bettered their 38.2% retracement level, and in fact, the NDX broke below its June-low on a closing basis. On the other hand, the S&P 500 and the Dow Jones are both above their 50% retracement levels. (More on this later)

© 2006 James West
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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)

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