Good Gold Almighty... But S&P 500 Not So Good

Wow - miserable week in the markets. What says the Commitments of Traders report from this afternoon? This, as habitués of this blog know, is the Commodity Futures Trading Commission's free weekly report on major positions in the main futures and options markets. It tells us how the big boys are positioned - and perhaps even some inkling of what lies in store for market prices. At least that's the theory. My two newly revised trading setups based on this data - for the S&P 500 and gold - remain on their existing signals for one week longer. And then everything changes.

The S&P 500 setup goes to cash on the open of Monday, Feb. 9. This is because of a sudden spike in the small trader open interest - typically a bullish sign. Alas, that spike lasted all of one week (the week of Jan. 20). Call it the Obama Spike. Today's data shows the small trader open interest falling enough to give a bearish signal. My S&P 500 setup is based on that open interest plus on the commercial trader net position as a percentage of the total open interest. The "smart money" commercials are bearish. In fact, they've been that way since the week of June 24, with the exception of a single week. So the setup will stay in cash for the week of Feb. 9, then go back to bearish. Yikes. Either the setup is wrong, or we are super screwed. I'm frankly rooting for the setup to be wrong. This is getting scary.

In gold, we've got one more week of bullishness, then on Feb. 9 the signal goes to cash or bearish. (Sorry for incorrect information last week saying that signal changes on Feb. 2. It's actually Feb. 9. I misread my spreadsheet.) This setup will then remain in cash or bearish for at least the next seven weeks. A warning sign: Friday's data shows the large trader open interest spiking sharply to 1.5 standard deviations above the moving average - well above the signal line to turn this particular signal bearish. I fade the "dumb money" large specs when their open interest hits bullish or bearish extremes - with a certain trade delay before executing my signal. The large spec total long and short positioning is now 46 percent above what it was the week of Dec. 9. So gold may be going to $3,000 someday soon, but don't expect a straight line. Hope you have a relaxing weekend, and see you early next week with my portfolio update and hopefully other announcements about existing or new setups. Thanks for tuning in, and good luck to us all.

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