S&P 500 Heading Lower: Data

Does it feel like a major coil is about to spring in the markets, or is it just me? A lot of markets have been in a tightening trading range since late November. Which way will they go? I get the feeling that the sentiment out there is for equities to start to really rally. But that's not what I'm getting from this afternoon's Commitments of Traders data. I've just updated my latest signals table with the new signals from my trading setups based on this weekly derivatives data. Some highlights:

- My S&P 500 trading setup has gone back from cash to bearish for the start of next week's trading. And at this point, the setup will remain bearish until the end of the month. Small trader open interest (long plus short positioning) remains deflated - typically a bearish sign in my past testing.

I should note, however, that the latest reading places the small trader total open interest at 0.608 standard deviations below the moving average I use for this setup - up slightly from 0.680 standard deviations below the average the week before. The signal line is 0.6 standard deviations below the average. So that means the open interest has built to just shy of the point where it would trigger a bullish signal. Mind you, this signal operates with a three-week trade delay, so the earliest any new signal could take effect is the week of Feb. 2.

The second setup I use to get my signal for the S&P 500 is based on the small trader net position as a percentage of the total open interest. This second signal is definitely bearish - falling to 1.74 standard deviations below the average, down from 1.47 standard deviations last week. So not a good sign for the equity market.

- My trading setup for gold is in cash for the third week in a row. Large speculator net positioning has climbed gradually since it collapsed in August, when a bullish signal was triggered. It hasn't yet climbed to what my setup considers any kind of bullish extreme. But the other signal I use for this setup - based on the large speculator total open interest - has been on a bearish signal for the past four weeks. This is owing to a 31-percent increase in the large spec total open interest in the past month - typically a sign of downward pressure on the price of gold. So since the two signals don't agree, the overall setup is in cash.

- My BKX U.S. Bank Index setup has gone to bullish for next week's open of trading, after three weeks in cash. I will not be trading this signal because I'm temporarily retesting all my setups using detrended price data and Monte Carlo testing, as I've explained in previous posts. (The same is true for all the setups I'm talking about in this post, except for gold and the S&P 500, which I've finished testing. See more on all this here.) I'll take the new signal under advisement, however. In my non-COTs trading, I am long Canadian financials. But I'd never buy BKX at this point if I was strictly trading it short-term off the charts (as of Friday's close that is; who knows what Monday brings). Looks terrible. In fact, it's not far from a possible short candidate based strictly on the short-term technicals.

- The NASDAQ 100 data has left my trading setup for this index in cash for another week - the fourth in a row - but breaking down the data shows an unpretty picture. The commercial net position has collapsed to a nearly-two-year low as a percentage of the total interest. Meanwhile, the wrong-way small trader crowd is still ridiculously bullish. After hitting more than three standard deviations above their moving average three weeks ago, their relative position has climbed down somewhat, but this week it was still 1.73 standard deviations above the mean.

- My crude oil setup is in cash for the sixth week running. Nice fakeout this week caught lots of folks in a sucker move, but crude didn't crash this long and this hard without some surprises remaining. The COT data seems pretty ambivalent about crude, too.

Have a relaxing weekend and see you here next week with more updates.

TAGS: S&P 500, SPX, gold, crude oil, NDX, NASDAQ 100, BKX, Bank Index, 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