smart-money-report.com Blog

Every once in awhile I’ll read an article or a post on a Web site about how the Commitments of Traders (COT) report shouldn’t be taken very seriously. I’m amazed at how otherwise intelligent people just don’t seem to grasp the report’s significance.

Maybe I have an advantage. Years ago, when financial futures first came on the scene, it was my job to travel the country and train financial institutions on how they might be able to use the new futures contracts to hedge their risk. So I know first hand how the “smart money” uses the futures markets.

Take the S&P futures contract for example. Commercial traders have different motivations for using that contract. Some are implementing short hedges to hedge a portfolio of stocks. Some are using long hedges to lock in prices for stocks they expect to buy in the future. Some are arbitraging between futures and cash. Others are simply trading.

But no matter the motivation, in one way or another all are expressing an opinion about whether stock prices are relatively overvalued or undervalued. And it’s important to know what commercial traders think because they dominate the market. So just by virtue of their sheer size they have an important influence on market direction.

We have a wonderful recent example. As of the report of May 16, commercial traders were net short the S&P futures contract by 69,414 contracts. It was their largest net short position in almost four years. The S&P index was at 1292 at the time. We first called attention to it in the Smart Money Report that week.

The next week the commercials increased their net short position to 78,476 contracts. Last week they increased it to 79,209 contracts. It has been since the early spring of 2002 that we’ve seen such a build up in commercial shorts. It was significant then and it’s significant now.

Yesterday the S&P closed at 1258 and market pundits are scratching their heads trying to figure out what has caused the recent sharp decline. The Fed signaling that interest rate hikes are likely to continue got the blame. But the COT report has been making bearish noise for weeks. When the big guys talk, I suggest you listen.

Have you ever met with a financial planner? If you haven’t, you can expect to go through a certain process. You will be asked about your financial goals. One of your goals will likely be that you want to plan for retirement. Read the rest of this entry »

I was reading Yahuda Fruchter’s review of Bernard Baruch’s book, “My Own Story.” I love the two quotes he cites:

When as a young and unknown man I started to be successful I was referred to as a gambler. My operations increased in scope and volume. Then I was known as a speculator. The sphere of my activities continued to expand and I am presently known as a banker. Actually I have been doing the same thing all the time.

And…

That observation is particularly worth pondering… J.P. Morgan would gag at the word ‘gamble’ when I used it. Still, the truth is that there is no investment which does not involve some risk and is not something of a gamble… In our own age when Henry Ford started to make the first Model T, he was embarking on one of the most gigantic speculations of all time. We would be foolish to try to stamp out this willingness in man to buck seemingly hopeless odds. What we can try to do perhaps is to come to a better understanding of how to reduce the element of risk in whatever we undertake.

That’s it. It’s foolish to try to avoid risk beacause risk is an essential element of living. The best we can do is manage it.

I think it’s safe to say that most people would look at the stock market since early 2003 and conclude that it is a bull market. After all, a popular definition of a bull market is one where a major stock index gains at least 20%. And since the S&P 500 index rallied well over 50% from its 2002 low, it would certainly more than qualify as a bull market by that definition. However, I think making investment decisions based on that definition of a bull market can result in disappointing investment returns. Read the rest of this entry »

Mark Hulbert has been following the accuracy of market timers for as long as I can remember. He makes an astute observation in his current article posted on Market Watch (I think free registration may be required). Here are what I think are his most important points about the recent sell off in gold:

• The best bull markets are ones that attract the fewest believers as possible. When the long side of a bull market gets too crowded, the market will sell off to chase off some weak holders. After that, the market can resume its upward climb.

• Bear markets occur when investors refuse to believe that the previous bull market could be over and so they hold tight on any sell off. On the other hand, corrections in bull markets occur when investors want to sell when the market pulls back.

• During the recent sell off in gold, market timers were eager to bail out of their long positions. So gold market timers are out of the market right now.

• In 1980, when gold hit $875 an ounce gold market timers viewed the ensuing sell off as a great buying opportunity. $875 proved to be the peak of the gold market at the time and the beginning of a 20+ year primary bear market.

• The contrast between the current gold market and the one in 1980 couldn’t greater. The odds are overwhelming that the current weakness in gold is a correction within the framework of a primary bull market, and not the beginning of a bear market.

That’s as good an explanation as you will find for what’s going on in the gold market right now.

Exchange traded funds (or ETFs) are better for most investors than mutual funds. The mutual fund industry has experienced tremendous growth over that last twenty-five years or so. But it’s a new era now. It’s the era of the ETF.

What are exchange traded funds? ETFs are similar to index mutual funds. Essentially, an ETF is a portfolio of securities that is intended to provide investment results that, before fees and expenses, generally correspond to the price and yield performance of the underlying benchmark index. ETFs trade on the stock exchanges. As such, they offer features of a mutual fund in a stock-like instrument.

There are at least six important advantages that exchange traded funds have over mutual funds: Read the rest of this entry »

There are five pillars to our approach to investment success.

Number 1: Identify Major Investment Themes

In early 2003, we identified our favorable and unfavorable major investment themes for the next 10, 15, 20 years or so: Read the rest of this entry »

The Commitments of Traders report (COT) is a weekly government report that is extremely valuable in knowing what the “smart money” is doing in various futures markets. There is a report for each futures market. Although COT reports have been around for years, the average investor not only doesn’t know how to use it, most don’t even know that it exists. Read the rest of this entry »

The new Gold Miners Index ETF (GDX) that started trading last week looks like a winner. I find it very difficult to analyze gold mining stocks from a traditional fundamental analysis perspective, so I think an ETF that tracks a good gold mining index is going to be very popular.

GDX has approximately 43 mining stocks in the index. And it is very well diversified among a wide variety of mining companies. Here are the components as of 4/30/05. It not only has the big guys — Newmont, Barrick, Goldcorp — in the index, it has some small caps as well. It even has a few silver stocks.

And it has the volatility needed for big potential profits:

Over the last five years, the index has gone up 285% while the price of gold has gone up 137%, more than doubling the profit of owning gold over that period of time. I welcome this new addition to the ever-growing list of very useful exchange traded funds.

There has been a lot of hype over the commodity sell off. And, indeed, it has caused us to take profits in most of our mining stocks. But there has also been a big pull back in emerging markets:

The I-Shares emerging market ETF (EEM) is off 16% in less than three weeks. In fact, it’s getting very close to its upward trending 40-week moving average. If it holds the moving average, consolidates, and moves up enough to trigger a Parabolic SAR buy signal, there could be a real opportunity there. In other words, the emerging markets are still primary bull markets and the current sell off should be viewed as a potential buying opportunity rather than the beginning of a new bearish trend.