New S&P 500 Setup Bearish

Sorry I missed my promised post of earlier this week updating my take on the last Commitments of Traders data. I was busy finalizing another look at my S&P 500 trading setups based on this weekly government data that tells us how big traders are positioned in the futures and options markets. I was reviewing my best setups based on slightly rebalanced weightings for the indicators I'm using to choose the best ones. I've given a little more weight to my "walk-around" test results (i.e., how "neighbouring" setups do, with slightly altered parametre values) and to my Monte Carlo results. Turns out that those measures tend to correlate nicely with how setups did during the market disaster of the last year.

My new S&P 500 setup's specs are all now posted on my latest signals table, and you can see it for yourself on my DIY sample spreadsheet page, including the equity curves for the setup and the S&P 500. Unlike my last S&P 500 setup, which lost about 14 percent in 2008, this one was down 7.6 percent - not great, but not as bad as the market's 40.9 percent. (Those numbers are based on weekly open prices and, for my old setup, don't take into account my stops or Black Swan rule, which would have slightly reduced that loss.) With this kind of system, it's nearly impossible to design it so it will win each and every year. In fact, doing so deliberately would have a good chance of creating a non-robust system with poor future results. So one bad year doesn't worry me, especially if the setup beat the market by a wide margin. You might be wondering why I don't go backwards and look for systems that did well in 2008. Again, that kind of exercize runs the risk of cherry-picking a setup that's useless in real-life trading. In fact, the leading contender setups I looked at that were profitable last year tended to be inferior in various robustness measures.

Meanwhile, this year, my new S&P 500 setup is up 3.5 percent so far (as of Thursday's close). And the setup's compound annual growth of 17.5 percent was 72 percent greater than the market's between 2003 and 2007 (including a 0.2-percent trade friction per trade for commissions and slippage). Far more importantly to my mind, its robustness scores in walk-around, out-of-sample and Monte Carlo testing are all very strong.

What does the setup say now? It has been bearish since Dec. 1 and remains so right now - with little sign of the data being anywhere close to turning bulllish. The latest bearish signal is up 5.4 percent as of yesterday's close. You might recall the setup I was using until now was also bearish until this week, when it went to cash for a single week, and then was going back to bearish. So either way, I'd be bearish going into next week's open. Tune back in here for another update from this afternoon's COT data. Good luck today.