Monday, 29 September 2008

BKX Stop Triggered... But Not for UYG Fund

The fun does not end. Today's decimation in financials brought my trading setup for the BKX Bank Index briefly below my stop for the UYG ProShares Financials Fund (which I used to trade the signal), but it closed just above the stop at $16.24. The stop is a close below $16.09, which is calculated by taking the entry price on Sept. 22 - $22.32 - and subtracting the largest past drawdown that this setup has seen - 13.93 percent - times two because I used a 200-percent leveraged fund for the signal (and halved my position size).

Just took a look at BKX itself though. Wow, what a horror show. It has actually fallen 29.1 percent since the entry price of $82.43, which means if I owned BKX itself I'd be a seller on tomorrow's open. Somehow, due to the mysteries of leveraged funds, UYG has fallen less - 27.3 percent - than BKX. Yet another weird development for our weird times. Hope you fare well this week.

Friday, 26 September 2008

Trader Positioning Not So Pretty

I was expecting Armageddon this morning after all the crash talk if the bailout package got nixed. In fact, markets opened way better than I thought they would and are now bouncing. Does that mean an all-clear? Alas, the trader positioning numbers just out from the Community Futures Trading Commission this afternoon paint a grim picture. See my latest signals table for the nasty details of what my trading setups are saying now. An even worse picture emerges when you look at the raw numbers, more on which early next week. Gotta leave the office early for a trip to Hamilton, Ont., for a benefit of the newly formed Canadian Centre for Investigative Reporting, of which yours truly is v-p. (See the website here and more on the benefit here. Website coming shortly.) Tune back in here early next week for highlights from the latest Commitments of Traders data and my portfolio update.

Housekeeping: As you'll note from my latest signals table, I've temporarily suspended signals updates for my heating oil and platinum trading setups. This is because I'm in the middle of updating both setups in my search for more robust signals, and additional measures I've been checking showed the existing signals aren't as good as I'd like them to be. I'm presently testing combination setups - using signals from two groups of traders - to see if I can find something better. Should have more to report soon. Hope you have a good weekend!

TAGS: COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Tuesday, 23 September 2008

Trader Positioning Foretold Problems

How much of a surprise was the latest installment of the Wall St. horror picture show? The Commitments of Traders data has been signaling a huge problem for months. Trader positioning in the 30-day Fed Funds futures contract hit bullish extremes back in May (meaning they expected lower interest rates), just as markets were powering upward, crude was topping $130 (on the march to $145) and everyone was talking about how inflation was the true problem, not deflation.

In the midst of all this euphoria, the large speculators (the big investment firms and hedge funds, including possibly some of the ones now in massive trouble) knew there was a big problem and were positioning themselves accordingly. The large specs in Fed Funds built an extreme net long position as a percentage of the total open interest, and they maintained their extreme positioning for an unprecedented 14 straight weeks. That's longer than the 11 and 12 weeks they were at extreme levels during the dot-com fiasco in 2001 and 2003, as determined by my trading setup for the contract, which trades when the large specs hit extreme levels. At the time, absolutely no one was talking about the possibility of the Fed actually lowering rates. The speculation was about how soon Bernanke & Co. would start hiking. Fast forward to today, when lower rates have become a possibility or at least talk has faded about higher rates. Even now, with the extraordinary $700-billion bailout that's being discussed (more on that here), my Fed Funds setup maintains a slight bullish tilt, with the large specs sitting at 0.3 standard deviations above the moving average for this setup. Which means we're far from an all-clear.

Portfolio update: I've just updated my portfolio page with my latest positioning and closed trades results from Monday. Yeah, the results ain't pretty, but hey, that's trading. Even the best traders lose 40 percent of the time. What's important is to maintain discipline and use proper risk control so I can keep going. Good luck this week!

TAGS: Fed Funds, Bernanke, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Friday, 19 September 2008

Tidal Wave of New Signals

Wow, just the thing to top off a lunatic week: A whole mess of new signals from my trading setups based on this afternoon's Commitments of Traders data. We've got NASDAQ 100, Russell 2000 and copper going to cash, natural gas now bullish and a new signal for gold. And of course, as my posts earlier today and last Friday mention, my BKX Bank Index signal - which was short this week - also goes bullish for next Monday's open of trading. Check out my latest signals table for all the gory details. Gotta go, so hope you survived this past week, have yourself a relaxing weekend and I'll see you (no, I can't really see you) back here early next week with a portfolio update and some highlights from today's new data on trader positioning in the derivatives markets and what it all might mean.

TAGS: gold, copper, NASDAQ 100, Russell 2000, Treasuries, natural gas, 10-year Treasury, BKX, Bank Index, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

SEC Shorting Ban Briefly Freezes SKF UltraShort Financials Fund

Incredible news this morning from the SEC. It banned all short selling of financial stocks until 11:59 p.m. on Oct. 2. Trading stopped this morning for the SKF UltraShort ProShares Financials Fund, which I bought Monday and was going to hold for one week, then go long on next Monday's open, as per my signals for my BKX Bank Index trading setup. See last Friday's post for more details and my latest signals table. Don't see much news on this yet anywhere on the web, including the ProShares site - my own broker also doesn't have much info - so I checked out the SEC site.

The SEC says in a statement, "Recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets." No explanation of what standard the SEC uses to determine "sudden and excessive fluctuations" of prices or when a market is or isn't "fair and orderly." I guess in that case the housing-price run-up wasn't excessive, unfair or disorderly, nor was the dot-com bubble and blow-up, crude going from $10 to $140, etc., etc., since there was no intervention then. The SEC goes on, "Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis." Right, so the collapse of AIG, Lehman Bros., Fannie Mae, Freddie Mac, et al., doesn't serve as a "fundamental underlying basis" for concern about the health of financial stocks? Extraordinary stuff. I'm glad again to have limited my position size for this signal as per my risk-control rules so my overall risk is controlled, but I wonder what happens when the SEC ban is lifted. Should be wild.

UPDATE (12:16 p.m.):ProShares has just announced SKF shares can be redeemed, though they may not trade in line with intraday indicative values. See more here.

Signal Update: Just noticed I had left on my latest signals page a bearish signal for copper for next Monday. That signal was based on my old trading setup for copper, which I've recently revised to use an improved combination signal based on two groups of traders. The new setup remains bullish, though this afternoon's data release could change that of course. See more on that new setup in last Friday's post. See you back here after the close with my update based on this afternoon's Commitments of Traders data. Unless they ban that too.

TAGS: ProShares, SKF, BKX, Bank Index, SEC

Tuesday, 16 September 2008

Crude Stop: Briefly Hit for USO, Not Yet for HOU

The nightmare on Wall St. continues. I just noticed that my stop level for my crude oil trading setup was hit this morning, if the signal was traded with the USO U.S. Oil Fund. My stops for my setups are a close below the entry price minus the largest past drawdown that the dataset has seen. The crude oil setup's biggest past drawdown was 19.91 percent. The entry price for USO on the open of Aug. 18 was $92.64, which means the stop level would be $74.20. (Update: after I posted this, USO moved back above the stop level later in the morning.) However, I traded this signal with the HOU Horizons BetaPro leveraged crude oil fund, trading in Toronto. I also halved my position size because it's a 200-percent leveraged fund. This means my stop level is actually 39.82 percent below the entry price of $28.80, or $17.33. Right now, HOU is trading at $18.20, which means I'm still in the trade. If the stop gets triggered, I might consider going short crude oil for a short-term trade, purely on technical grounds.

TAGS: crude oil, stop, HOU, USO

Monday, 15 September 2008

New Nikkei Setup in Cash

Who says the Commitments of Traders data has lost its relevance? I've just updated my latest signals page table with the results of my newly revised trading setup for Japan's Nikkei Average. Like all my other setups, this one trades mechanically solely based on the COT data, as reported weekly by the U.S. Commodity Futures Trading Commission. The data tells us how trillions of dollars are positioned in the major markets.

My Nikkei setup, which has been in cash since the beginning of the month, trades when the small traders and large speculators (the big investment firms and hedge funds) hit extremes in their futures and options positioning. It combines two of my best signals from the small traders and large specs. With starting equity of $100 in 1995, the setup ended up with $885.60, compared to $79.70 for the Nikkei itself. It also beat the Nikkei by 69 percent since 2003 after a per-trade friction of 0.2 percent for commissions and slippage - even though the setup was in the market less than 50 percent of the time. The setup also scores quite well in measures of statistical robustness, as you can see from that table. That includes a pretty impressive 97 percent score on my series of 16 walk-around tests. I came up with the walk-around test as a way to see how well "neighbouring" setups with slightly differing parameter values do as compared to the original setup. It's a way to see if the setup does well solely because of a statistical fluke. The result means that in 16 such tests, 16 different measures scored 97 percent as well as the original setup.

I'm looking forward to trading this setup because the Nikkei is uncorrelated to other markets and thus adds diversity to my portfolio. Also, there is a relatively new ProShares leveraged short ETF for the Nikkei, EWV, that lets me trade short signals, along with the existing funds for the long side. Good luck this week!

TAGS: Nikkei, ProShares, walk-around testing, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Portfolio Update: Got Chucked

As if the last few weeks weren't brutal enough, now this. Just saw the video of Chuck Liddell getting KO'ed by Rashad Evans. Just incredible. Hmm, and what's this? Lehman Bros. down 94.8 percent. Lovely. Yikes. Unfortunately, my short signal for U.S. financials took effect only on the open - after the gap down - so I didn't benefit quite as I might have hoped. In fact, my ongoing trades are looking decidedly like Chuck after he got clipped, as you can see on my just-updated portfolio page. Good luck this week!

Friday, 12 September 2008

Data Says... Short Banks, Long Commodities

Woah. Another rough week. How long have we been saying that? Seems like forever. Trader positioning as reported this Friday by the Commodity Futures Trading Commission suggests the gloom for equities shows no signs of letting up. My BKX Bank Index trading setup turns bearish as of Monday's open. Also ominous: my 10-year Treasury setup goes bearish as of Sept. 29, as reported in last week's post. See my signals and results table linked at my latest signals page for my updates based on this afternoon's Commitments of Traders weekly data.

On the positive side, five of my six highly correlated commodities markets will be in the bullish lane as of Monday, when gold goes bullish. However, all's not sunny in commodities, either. My gold setup just got a new bearish signal from this afternoon's data; my gold setup has a two-week trade delay, which means execution of the signal is on the open of Sept. 29.

As well, natural gas, which isn't highly correlated with any of of the other commodities markets I follow, has just gone back to cash after two weeks on a bullish signal.

Election '08: I call it a toss-up between Osama and McCain, if my signals based on the Commitments of Traders data is any guide. My completely unscientific call is based on the fact that my five U.S. equities setups are neatly divided as of Monday's open of trading, with two bearish, two bullish and one in cash. Recall that the Stock Trader's Almanac folks say that a bad September and October tend to presage a loss for the incumbent party.

New copper setup: Also on my newly updated latest signals table are details of my new trading setup for copper. It's based on my best signals from two groups of traders: the commercial hedgers and the small traders (the little-guy futures and options players). Curiously enough, the best signals I found in both cases trade on the same side as the commercials and the small traders when their net positions hit extremes of bullishness and bearishness as a percentage of the total open interest. I know, I know, the small traders are normally seen as the "dumb money." But in this case, like in many others, that's not always the case. My combination setup puts on a trade only when both the commercials and small traders agree. Otherwise, it's in cash, as it's been 48 percent of the time since the data starts in 1995. Yet, it beat the market handily as the data on that table shows - for example, beating copper by 122 percent since 2003, when trade friction of 0.2 percent per trade is taken into account for commissions and slippage. Also very positive, I think, are the results of my out-of-sample and "walk-forward" tests for this setup. I came up with the walk-forward test in order to see how the setup compares to its "neighbouring" setups - i.e., those with slightly differing parameter values. A large drop-off in performance when those values are varied suggests a setup's strong results are likely just the result of a statistical fluke and probably won't be repeated in real-life trading. This setup scored 95 percent in my walk-around tests - meaning 16 neighbouring setups scored on average 95 percent as well as the original setup in 16 different measures. For more details, see the notes on my latest signals table.

Hope you have a relaxing weekend, and see you back here early next week with a portfolio update.

TAGS: gold, copper, Treasuries, natural gas, 10-year Treasury, BKX, Bank Index, out-of-sample testing, walk-around testing, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer

Friday, 5 September 2008

Data Says: BKX Going Down, Obama Tipped For Win

Brutal week. Will it hold here? Did commodities find a floor? It's interesting how banks and the Russell 2000 have held up better than the other indexes, but what does it all mean? The impassive mountain that is the Commitments of Traders data seems to just smile at it all. I've just posted my latest signals update (see the table linked at this page) based on this afternoon's trader positioning, as revealed by the U.S. Commodity Futures Trading Commission.

Only one new signal this week: my trading setup for the BKX U.S. Bank Index has gone to bearish. This signal, with a one-week trade delay (meaning I execute it for the open of trading Monday, Sept. 15), is based on trading on the same side as the large speculators in the three-month Eurodollar contract (an interest-rate proxy for global liquidity). When the large specs get very bullish in their net percentage-of-open-interest position, I go long. When they get very bearish, I go short. The signal has been bullish since the week of July 1 (with the entry on July 14), which was pretty much at that hellacious lowpoint of the summer. The fact that it's now going bearish - when technically, the market looks like it might be finding support at the July low - is really not a good sign. No, not at all. Recall, also, that my 10-year Treasury setup went bearish last week, with an execution date of Sept. 29. Something's not right.

Corrections: Just noticed I had omitted to include a bullish signal for gold from my latest signals page table, which came the week of Aug. 26 and is for execution on the open of Monday, Sept. 15. I've now added that pending signal. Sorry about that.

Election '08 Watch: The Stock Trader's Almanac people, incidentally, say that September is not only the weakest month historically, but that a weak September and October typically occur when the incumbent party loses the White House in an election year. A bullish November tends to ensue. Perhaps, at least, Osama (oops, Obama; did I really say that?!) is smiling. With BKX bearish, that makes three of my six equities short, while two are long and one is in cash. I know, I know, this isn't very scientific, but it looks like the derivatives market at this point is giving Obama a slight edge.

TAGS: BKX, Bank Index, Eurodollar, Russell 2000, Treasuries, 10-year Treasury, interest rates, Fed Funds, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer