S&P 500 Bearish, Data Mixed for Gold

No new signals this week for my trading setups for the S&P 500 and gold based on the Commitments of Traders reports, but the data is saying some interesting things. This afternoon's new data keeps both setups in their existing signals: bearish for the S&P 500 and cash for gold. (Be sure to read my post from this morning about my new S&P 500 setup.)

- For the S&P 500, the new setup is based on trading alongside the commercial traders when they hit extremes of futures and options positioning - and fading the small traders. The commercial traders have dramatically reduced their net short position as a percentage of the total open interest since its bearish extreme in late November, when it hit 2.8 standard deviations below the moving average I use for that signal. The commercials have jumped from being 0.5 standard deviations below the average last week to 0.2 standard deviations above the average now. That signal has now gone bullish (with a trade delay of three weeks).

But my other signal for this setup - based on trading opposite to the small traders - remains bearish. That's because these guys remain one standard deviation above the moving average for that setup and are still far from working off the bullish excess in their positioning that they've displayed since the week of the U.S. presidential election, when they suddenly shot up to 1.96 standard deviations above the average - a huge jump from 0.2 standard deviations below that average the week previous. Until the small traders get more burned, this signal won't go to bullish. At best, the setup will go to cash in three weeks' time due to the commercial signal not agreeing with the small traders' call.

- For gold, the large speculators, whom this setup fades, have steadily built up a net long positioning that is starting to approach extreme territory, but we're not there yet. That signal is now 1.4 standard deviations above the average, but needs to hit 1.9 standard deviations for it to flip the signal to bearish. However, the other signal for this setup - based on fading the large spec total open interest (long plus short positioning) - reveals that the large spec total positioning has been at a bullish extreme for several weeks - 0.9 standard deviations above the average this week. Thus, this signal is bearish. So the combined setup is in cash for a second week this week. No joy.

Hope you did okay this week and have a good weekend and Happy Valentine's Day. See you next week, and be sure to check my portfolio page with an update.

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