Bullish for 13-Week T-Bill

Just updated my latest signals page. Very, very quiet this week. Just one new signal: bullish for the 13-week T-Bill (meaning the setup is calling for the yield to fall). Hope you had a good week and that you have a nice weekend. Happy Hallowe'en!

Falling T-Bill Yield Points to Sickly Market Action

Many days, there's a good tell that helps give guidance to the tone of the market. Sometimes, it's been important to watch the VIX Volatility Index. In the past few days, I often find myself looking at the 3-month Treasury Bill yield (symbol $IRX on StockCharts.com). Yesterday, it plummeted most of the day - despite the Fed move. Today, it's continued its steady collapse all day. See a daily chart here. (The intraday chart, available to subscribers, shows what I'm saying better.) Not a good sign.

The Little Bounce That Couldn't

Looked like a nice bounce coming into the open, but it's fading pretty fast. Two good tells right now are the HGX Philadelphia Housing Index, which quickly broke below the lows of yesterday and last week, and the ratio between the 200-percent leveraged UYG ProShares Financials Fund and the BKX Bank Index (which you can view in StockCharts.com by using the symbol UYG:$BKX). The latter is a way to check sentiment by seeing how the leveraged fund is doing short-term against the index. UYG:$BKX also quickly broke down this morning. Good luck this week.

Interesting...

Source: Seattle Bubble Blog

Nikkei to Cash, Gold Bearish

Sheesh. Hope you survived the week in one piece! We're just 100 points on the S&P 500 from the Oct. 2002 low of 777. Amazing. Below that, support is sketchy on the charts. Mark Arbeter, chief technician at S&P's Equity Research, just wrote in a note that there's a support line off the 1932 lows - that's right, 1932! - around 600 to 700. His colleague, Sam Stovall, chief investment strategist at their shop, says when the S&P 500 has retraced over 61.8 percent of the prior bull, the full giveback was 96 to 119 percent, with an average of 110 percent in the five instances since 1929. That would equate to a move to 700 on the S&P 500 - though the small sample size doesn't give us much validity statistically speaking.

My latest signals table is now updated with the latest data based on this afternoon's Commitments of Traders report, which my trading setups are all built around. New signals: Nikkei goes from bearish to cash, and gold goes to bearish. Please note that my new Black Swan Risk-Control Rule is now in effect for all my trading setups based on the Commitments of Traders data issued weekly by the U.S. Commodity Futures Trading Commission. (See my "How It Works" page for details.) Trading new signals will resume Nov. 17. Have a good weekend.

TAGS: S&P 500, gold, Nikkei, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Black Swan Rule Tweaked

Slight change to my Black Swan Rule - my new risk-control rule to deal with fat-tail risk. If the portfolio declines six percent in any four-week period, instead of closing all trades on the next weekly open, I will close all losing trades on the next weekly open and close winning trades if they experience a drawdown of greater than two percent. As I explained in a post yesterday, the new rule went into effect this week and I closed out all my trades, including one that was doing nicely. But in retrospect, I think it's better to give winning trades a little room to run. I explain the new rule and my other risk-control rules on my "How It Works" page

Bad Market! Time-Out

My newly created Black Swan Rule went into effect for all my trading setups this week. As I posted last week here, I've adopted this new risk-control rule in order to limit losses when markets are acting out of sorts in relation to the historic data. The rule is this: in any four-week period, if my portfolio experiences a loss greater than six percent (calculated using the weekly close values), I will close all trades on the next weekly open and cease trading new signals for four weeks. Think of it as a time-out for a badly behaving market. That was the case as of Friday's close. So my rule is to close all current trades and cease trading new signals. I will resume following new signals with the Commitments of Traders report for the week of Nov. 11. I will still keep updating my latest signals table and posting as usual during this time. Good luck this week.

Derivatives Data Bulls Banks & Crude

Hope you fared well this week. A few new signals today from my trading setups based on the Commitments of Traders data. Today's update on derivatives positions gives me bullish signals for the BKX Bank Index and crude oil, while my S&P 500 setup is going from a bearish signal back to cash. Note, however, that I'll be ignoring the two new bullish signals because both of those setups are on a four-week time-out due to my new Black Swan risk-control rule. (See this post earlier this week for more details.) See my latest signals table for more from the latest COT data. I hope to provide a more detailed update early next week. Have a good weekend.

TAGS: S&P 500, BKX, crude oil, COT, Commitments of Traders, derivatives, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Black Swans: New Rule to Control the Risk of Fat Tails

If there ever was a Black Swan type of market, this is it. Statisticians call it a "fat tail." It's the kind of horror story that catches a lot of traders by surprise - markets doing crazy things that have little historical precedent and blowing all our data out of the water. Trader Nassim Nicholas Taleb wrote an excellent book about it called The Black Swan: The Impact of the Highly Improbable. He argued that markets don't work according to conventional rules of statistics and that surprising events - like we're seeing in today's markets - happen much more often than statistics would predict.

This brings me to a new risk-control rule I've been contemplating for a few weeks. It's my twist on a common trading rule: when your portfolio drops over six percent in a month, stop trading for the rest of the month. Until recently, I understood this rule to be mostly a psychological rule for a trader who is feeling messed up because of a string of losses that screw with your head and cause you to make more bad trades. I didn't see how it applies to mechanical trading.

In fact, I now see its real utility for me can be to control Black Swan risk. Here is my twist on this new rule I will be using. I call it the Black Swan Rule. It has two parts. One applies to the whole portfolio, the other to individual trading setups. (1) In any four-week period, if my portfolio experiences a loss greater than six percent (calculated using the weekly close value), I will close all losing trades on the following weekly open and close winning trades if they experience a drawdown of greater than two percent. I will also cease trading new signals for four weeks. (2) As well, I will cease trading any setup for four weeks that was stopped out because of a loss greater than the setup's past maximum drawdown. The idea is to give markets time to settle down and allow the data to come back into usual alignment.

The question is how to apply this rule now given the recent market craziness. I determined that my rule would have called for me to cease trading Sept. 22 for four weeks, with trading to resume next Monday. That would have helped me avoid much of the recent hurricane sweeping the markets. But since I didn't have this rule at that time, I am obviously still trading. In the latest four-week period, my portfolio saw a greater-than-six-percent decline as well. What to do? Here's my solution: I will check the situation after this week's close. If the last four-week period again shows a decline over six percent, I'll execute the Black Swan Rule for four weeks. For more details on all my risk-control rules, see my "How It Works" page. Good luck the rest of this week.

S&P 500, Nikkei Bearish Signals Stopped Out

While in Canada we enjoyed a long Thanksgiving weekend, I see this morning that big moves yesterday in U.S. and overseas markets would have caused my trading setups for the S&P 500 and Nikkei to be stopped out. Those setups had given bearish signals for this week's open (see last Friday's post, below), but I won't be putting on those trades this morning (our weekly open in Canada) as the moves on Monday took them beyond their stop levels as of the day's close. I would have sold the two positions on today's open. In fact, I may consider short-term trades in the opposite direction (long) in those markets during the duration of those signals, based purely on technical price action. Good luck this week.

Bearish Signals for S&P 500, Nikkei, Crude

Thank God that's over. Stephen Vita put it well just now on his Alchemy of Trading site: "I'm exhausted, and I'm sure you are too. In the great scheme of things this bounce doesn't mean much at all, but I'm going to pray that the nightmare has at least stabilized and we can get back to the business of trading without a gun to the head. People have been shattered by these markets, and I feel for them. This weekend maybe things will be clearer."

So where do things stand now with the Commitments of Traders data? I'm almost scared to look. Indeed, there's more bad news from this afternoon's weekly data on trader positioning in the major derivatives markets. I've just updated my latest signals table with the signals from my trading setups based on this data. Not pretty. Here are some highlights:

- My S&P 500 setup has given a bearish signal for next week's open. This is a signal that will last only one week, then goes back to cash next week. What this setup looks for is bullish and bearish extremes of positioning from the "smart money" commercial hedgers combined with extremes in the total open interest among the "dumb money" small traders - who are faded, or traded opposite to. The setup has a three-week trade delay. The sell signal for next week reflects a sharp spike in the small trader open interest in mid-September, which gave a bearish signal. After that, the small traders go back to a bullish signal. But with the exception of a single week, the commercial hedgers have been on a bearish signal since the end of June.

- My Nikkei setup has given a bearish signal for next week after being in cash for six weeks. The bearish signal will last two weeks before it goes back to cash.

- My setup for crude oil has gone to bearish as well after being stopped out on a bullish signal earlier this week. This new bearish signal will last a single week before going to cash or bullish. Don't know which right now. However, I will ignore the crude bearish signal due to my risk-control rule that says I'll take a new trade only if the majority of my highly correlated commodities setups are leaning in that direction, which they aren't. As of Monday, gold and silver are bullish, while copper and platinum are in cash.

Hope you have a relaxing weekend, and good luck next week to us all.

TAGS: S&P 500, Nikkei, crude oil, COT, Commitments of Traders, derivatives, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Derivatives Data Shows No All-Clear for Equities, But is Positive for Precious Metals

They're throwing everything at the credit crunch including the kitchen sink, but the horror show just won't end. That's scary. Here is the way my trading setups see the latest weekly data last Friday from the Commitments of Traders report showing trader positioning in the infamous derivatives markets:

- My S&P 500 trading setup has been in cash for all but one week since early July. It will be giving a bearish signal for a single week during the week of Oct. 13, then goes back to cash. So this setup suggests we're far from an all-clear.

- Large speculators in the Dow Jones industrials - the wrongway traders who are positioned badly at market turns - have built up an extreme bullish position in Dow futures and options, reinforcing my bearish signal in this market. Not a good sign either.

- Commercial hedgers in gold futures and options are massively bullish for the second week in a row - now 1.26 standard deviations above my moving average for this setup. This of course reinforces my bullish signal in that market. Silver commercials have been at similar extremes of bullishness in their net positioning since early August as a percentage of the total open interest.

Portfolio update: I've just updated my portfolio page with results from ongoing and recently closed trades. Not a happy picture, but hey, that's trading. As I've said before, even the best traders win just 60 percent of the time. The key for me is to remain disciplined about following signals and my risk-control rules so I can stay in the market. (More on the latter here.)

TAGS: S&P 500, Dow Jones industrials, silver, gold, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Crude Oil Stops

USO and the HOU Horizons BetaPro crude oil fund, trading in Toronto, are both trading below my stop levels this morning for my crude oil setup. I will sell my HOU position after the close today if the price ends the day below $17.33. See more on my crude setup stops in this post.

New Signals: NDX Bullish, Banks to Cash

Latest signal table updated now (including bullish signal for NDX and cash for BKX). Will be back early next week with more details. Have a relaxing weekend.

New Platinum Setup in Cash

New trading setup for platinum is in cash. I've posted details of this new setup on my latest signals table. Here is how my commodities setups stack up this week: two are bullish (silver and crude oil), one is bearish (gold) and two are in cash (copper and platinum). Because of my risk-control rule for highly correlated markets - which these five are - I would not trade any new signal this week from this group. My rule needs a majority of the markets to be leaning in the same direction for me to take a new trade. Some other highlights from last Friday's Commitments of Traders data release on trader positioning in derivatives markets:

- My S&P 500 setup has given a brief, one-week bearish signal effective the week of Oct. 13. It will remain in cash until then, and will go back to cash for at least one week after. So no all-clear from that setup.

- The large speculators in Dow Jones industrials futures and options have suddenly jammed up their net position as a percentage of the total open interest to a mighty extreme of bullishness. They haven't been this bullish relative to past data since the end of March - just before the market topped. Not a good sign.

- No data this week from traders in the Russell 2000, likely because the number of traders fell below the minimum 20 for reporting purposes.

- Large specs have massively ramped up their net long positioning in gold futures and options. It's now 1.3 standard deviations above the moving average - well above the bullish signal line. The setup has a bullish signal from two weeks ago, which takes effect on next Monday's open, Oct. 6, due to the setup's three-week trade delay.

- Commercial traders in silver have also been reducing their net short position to extreme bullish levels - also 1.3 standard deviations above the average.

Platinum: My new setup for platinum combines signals from two groups of traders: the large speculators (hedge funds, big investment firms), whom I trade opposite to when they hit extremes in their positioning, and the total open interest of the small traders (meaning their long position plus their short position), which I trade opposite to as well. In other words, the setup goes long when the large specs are at an extremely bearish positioning in the futures and options markets AND the small traders' total open interest falls to an extremely low volume. Out-of-sample and walk-around testing results are on that table as well. See more about my walk-around testing in the table notes.

TAGS: silver, gold, copper, crude oil, S&P 500, Dow Jones industrials, Russell 2000, platinum, COT, Commitments of Traders, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing