Friday 27 March 2009

S&P 500 Commercials Fading Rally

Not sure what to make of this market. I think the Commitments of Traders data from this afternoon is equally ambivalent. Derivatives traders in S&P 500 futures and options have gone bipolar this week. You'll recall my S&P 500 trading setup has been bearish for a few weeks. 

Last week, the "smart money" commercial traders flipped from bearish to bullish as they dramatically reduced their net short position. The commercial signal works with a three-week trade delay, but things were looking bullish. At the same time, small traders, who've been highly bullish since November in their futures and options positioning, had suddenly reduced their net long positioning last week. 

Well, things have changed. Today's data has caused both of my signals to flip. 

The commercial traders have suddenly ramped up their net short position again as the market rallied this week. They're clearly fading this bounce. Their net position as a percentage of the total interest has gone from 1.48 standard deviations above the moving average I use for the commercials signal to 1.92 standard deviations below the average. Their signal has flipped back to bearish after one week in the bullish column.

Meamwhile, the "dumb money" small traders have gone ahead and continued their capitulation that started last week. They're now 0.53 standard deviations below the moving average I use for their signal - down from 0.63 standard deviations above the average. That's caused my small traders signal to flip to bullish as the wrong-way retail crowd has also decided to fade this rally. Amazing.

Both signals work with a three-week trade delay. So where things stand right now is this: the current bearish signal will continue this coming week and the next and then - because the two signals don't agree - the setup goes to cash on the open of trading Monday, April 13.

As I noted in a comment to my post Wednesday, my current bearish S&P 500 position got stopped out that day after it hit my 8.82-percent stop level. That level comes from taking the average backtested trade gain and subtracting two standard deviations of the trade returns. The idea is to end the trade if markets appear to be acting outside historic norms. The largest past drawdown for this setup is 19.05 percent. So far, the setup loss wouldn't have been anywhere near that. But if the S&P 5oo rises to 903.43 during the life of this bearish signal - equal to a 19.05-percent loss for a bearish position - I'll invoke my Black Swan risk-control rule. That means I'd halt trading this setup for four weeks. The idea is to avoid markets when they are acting completely outside the historic norms seen in the backtesting.

On the other hand, if the S&P 500 falls below my entry price when the signal started (758.84),  I'll enter another short position for the duration of this bearish signal.

The COT data for gold is a little less eventful of late. The setup is in cash, but seems primed to enter a trade on the bullish side at the end of April. My signal based on fading the large spec total open interest remains in its fourth week of being bullish. That signal works with a seven-week trade delay. So if the other signal within this setup remains bullish, I'll go long in a few weeks.

Hope you have a great weekend. I'll update my portfolio page early next week with my recently closed S&P 500 position.

Wednesday 25 March 2009

Tests of Short S&P 500 Stop Levels

Interesting couple of days. My two short positions for my bearish S&P 500 signal have come close to be stopped out each of the past three days. My stop levels are $72.73 for the 200-percent leveraged SDS ProShares Ultra Short S&P 500 ETF and $31.17 for the 200-percent leveraged HSD Horizons BetaPro Bear Plus S&P 500 ETF (trading in Toronto). Good luck for the rest of the week - and see you back here Friday.

Friday 20 March 2009

Signs of Bottom? Wrong-Way Traders May Have Started Capitulation

Another nutty week! Completely fitting for the times. The Commitments of Traders data released this afternoon also has some interesting new things to say. I've now updated my latest signals table based on today's data. Some highlights:

- S&P 500: Some possibly important shifts appear to be taking root in the derivatives data for the SPX. They've caused my trading setup based on the COT reports to give a new signal - cash - to be executed with a three-week trade delay on the open of Monday, April 13. The "smart money" commercial traders have dramatically reduced their net short position as a percentage of the total open interest. Their positioning went from 0.84 standard deviations below the moving average I use for my commercials signal last week to 1.48 standard deviations above the average this week. That's flipped my commercial trader signal from bearish to bullish - with the three-week delay I mentioned earlier. The other signal that makes up this setup is based on fading the wrongway small traders - who tend to be badly positioned at market turns - when their positioning hits certain extremes. Last November, they hit a bullish extreme that put my signal for the small traders in the bearish camp. This week, they've finally broke down and got substantially less exuberant. It seems the market losses have finally sunk in. They've gone from 1.56 standard deviations above the average to 0.63 standard deviations above. Their positioning still has to fall further - down to 0.2 standard deviations above the average - in order for this signal to flip to bullish, but this week may have been an important break. They've haven't been anywhere near to this bearish since November. If we see more signs of capitulation soon, we could be close to a bottom - though whether it's an interim or longer-term bottom, I have no idea.

Gold: No change for my gold setup, which remains in its seventh straight week of being in cash as bullion meanders in what appears to be a long trading range. However, my large spec total interest signal is now in its third week of being bullish - based on fading the large speculator total long and short positioning. I trade their signal with a seven-week trade delay. The other signal within my gold setup - based on fading the large spec net positioning - has been bullish since last August. So if the two signals remain bullish a few more weeks, I expect to go long at the end of April.

Hope you have a rejuvenating weekend. I'll update my portfolio page early next week with my S&P 500 position results.

Friday 13 March 2009

S&P 500 Rally Could be Short-Lived

A nice little rally this week, but was that really the bottom? Reading some of the latest free reports this week and last from Montreal's BCA Research makes me doubt that it is. As well, the indices are still well below their Tom DeMark Setup Trend lines on the daily charts. The monthly charts are even worse, especially for the Nikkei, S&P 500 and Dow. And what about the Commitments of Traders data? Some of the latest data from today's release doesn't give any fresh hope for a real recovery, in my opinion. I've updated my latest signals table with the calls from my trading setups based on this data.

- S&P 500: The small traders are still far too bullish, as they've been since November during the entire decline. This is a bad sign, if historic trends are any indication. Friday's data shows their net position falling ever so slightly from 1.60 to 1.56 standard deviations above the moving average as a percentage of the total open interest. The "smart money" commercial traders are still deeply bearish, though a tad less so than last week, with their net position going from 1.02 to 0.84 standard deviations below the moving average. I had a bearish signal from this trading setup from three weeks ago that takes effect on the open of trading this coming Monday, March 16. The latest bearish reading of the data means the setup will remain in bearish mode for at least the next three weeks.

- Gold: This setup remains in cash another week - the sixth straight week. But a bullish sign is that the large speculator total open interest has fallen again. It's now 1.21 standard deviations below the moving average I use for this setup, down from 0.72 standard deviations below. This signal has been bullish for two weeks in a row now, but it works with a seven-week trade delay. The other signal that makes up this combo setup - based on fading the large spec net position - is already bullish. So the setup could go from cash to bullish in six weeks' time if the large spec net position signal is bullish at that time.

Hope you have a relaxing weekend. I'll update my portfolio page early next week with the bearish S&P 500 position.

Saturday 7 March 2009

S&P 500 May Pause Before Next Leg Down: Data

Wow. What an absolute disaster of a week. The Dow and S&P 500 are now well below their 2002 lows. The Nikkei has decisively broken below its 2003 low. The FTSE is now testing its lows of the last bear market. But Canada's TSX index is, oddly, well above its 2002 bottom. Does that mean there is still some hope for the market, with Canada's outperformance representing resilient commodity demand? Maybe the commodity bull really isn't over and is just seeing one hell of a huge correction? I don't know. What I can say is Friday's Commitments of Traders report doesn't give much hope for equity bulls. I've now updated my latest signals table. Some highlights from the latest weekly data:

- S&P 500: My trading setup for the S&P 500 has been bearish since November, but this coming week it goes briefly to cash. That's based on the commercial trader net futures and options positioning during the week of Feb. 10, when it abruptly rose to a bullish extreme. It quickly fell back into bearish territory the following week, so my setup goes back to bearish on the open of Monday, March 16, and will remain so for at least the ensuing three weeks. In the latest COT report, the commercial net position as a percentage of the total open interest dropped from 0.47 to 1.02 standard deviations below the moving average I use to evaluate their positioning. Meanwhile, the "dumb money" small traders - far from turning more bearish during the latest market cataclysms - have actually become even more bullish. Amazing! In Friday's data, their net percentage-of-open-interest position went from 1.48 to 1.60 standard deviations above the average. Not good at all if you happen to be a bull. They obviously are convinced the bottom is in. But their poor past record raises questions about whether that's the case.

- Gold: My trading setup for gold based on the COT data remains in cash again this week - the fifth in a row. The two signals that make up this setup don't agree with each other again. However, some possible light at the end of the tunnel: my signal based on the large speculator total open interest (long plus short positions) has flipped to bullish. That signal has a seven-week trade delay - which means the overall setup can't go to bullish for seven more weeks. Until now, the large spec total open interest has been persistently excessively bullish during the recent gold rally. That turned the setup to cash after a three-week bullish call. Now, the large specs have suddenly pulled back from being 1.07 standard deviations above the moving average to 0.72 standard deviations below. If my other signal - based on fading the large spec net percentage-of-open-interest position, but with no trade delay - is bullish in seven weeks' time, I'll be shopping for some bullion.