Revised Setups Turn Bearish

I hope you had a great New Year and wish you all the best in 2008. I've just posted results from two revised setups I've developed for the S&P 500 and NASDAQ 100 on my "Latest Signals" page table. Both setups have turned bearish in the past two weeks. They're both based on fading (trading opposite to) the "dumb money" small traders when their net futures and options positions hit extremes of bullishness and bearishness, according to the Commitments of Traders data issued weekly by the U.S. Commodity Futures Trading Commission. Confused? The explanatory links to the right give background on the COTs reports.

After nearly 12 months of trading based on this data, I'm going through a year-end process of revising and updating my setups. As luck would have it, a clever reader got in touch to tell me about a program he's written that helps identify good setups based on this data, and he's been kind enough to share his fascinating results. (Thanks, Dave!)

The new setups boast both improved profitability and statistical robustness according to a number of new measures I've been studying. I'll be posting these details on my "Latest Signals" table in the coming weeks and hope to improve on all my setups.

Meanwhile, back to those new signals... My S&P 500 setup has just gone to cash with last Friday's COTs report. As I explain in the notes to the "Latest Signals" table, this new setup uses a filter based on the S&P 500 index's 50-week moving average. The average basically prevents me from going short during uptrends or from going long during downtrends. So when the small traders get excessively bullish, as they did last Friday, I get a bearish signal. But I don't sell the index short. Instead, I simply go to cash. (The setup would go short the SP500 if we got a bearish signal and the price average was sloped downward.) Essentially, we're trying to avoid fighting the price trend, which can continue in one direction longer than we often expect.

As for the NASDAQ 100, my new setup also fades the small traders. They've also just hit a historic extreme in their futures and options position. (My old setup faded the large speculators, but I found the small traders had a better record of being dumb.) This setup doesn't rely on any kind of price-based filter.

Finally, my COTs U.S. Equity Index based on these revised setups has turned decisively bearish as you might imagine. It's fallen to -0.22 from last week's 0.35, giving this index a strong bearish tilt. Nevertheless, the index so far continues to remain on a bullish signal.

You'll notice my revised table has also dropped my setups for the NASDAQ composite index and the SOX Semiconductors Index. Both of those setups were also based on the NASDAQ 100 COTs data, but I felt having three setups based on this one series of data may have been confusing and, besides, their results were nowhere near as good as my new NASDAQ 100 setup. I will, however, take another look at those setups and post new ones if I find anything worthwhile. Apologies to anyone who wanted to keep seeing that information. Good luck this week and in 2008!