S&P 500 Bearish Two More Weeks

Okay, this isn't funny any more. I just checked the BKX Bank Index. It's down 50 percent YTD. How is that even possible? The mind reels. I hope you fared okay this last week. The Commitments of Traders report from this afternoon doesn't give much hope things will get better soon. At least not the way I read it. This weekly government data on futures and options holdings gives me no new signals for next week. So my existing bearish signal for the S&P 500 and cash for gold are still in effect. (See my latest signals table for more details.) Some other highlights:

- Odds are we're not at a bottom yet, according to my read of the latest S&P 500 COT data. The small traders in S&P 500 futures and options are showing, yet again, why everyone calls them the "dumb money." While the S&P 500 fell another 48 points from this week's open to the close, the small traders significantly stepped up their net long position as a percentage of the total open interest. They went from being 1.02 standard deviations above the moving average to 1.61 standard deviations above. I have a feeling we're not going to see a bottom until these unfortunate folks lose a lot more money. The sad reality is they first hit an extreme of bullishness the week of Nov. 4 expecting the usual Christmas rally, coupled with some Obamania. That week opened at 969. This week closed at 770. That's down 20.5 percent. You'd think the bear market would have sunk in by now. Not according to these numbers.

The "smart money" commercial traders got a little bit bullish last week, but reversed course quickly and this week are back to very bearish. Their net percentage-of-open-interest position is 0.49 standard deviations below the average - down from 0.21 standard deviations above the average last Friday. That short-lived blip of optimism gives me a new delayed signal for two weeks out. My setup will go to cash for the week of March 9 - because of the two signals disagreeing with each other temporarily. It will then go back to bearish the following week.

- My gold setup is in cash for a third week in a row. The wrong-way large speculator crowd's net position is not at any extreme of bulllishness yet. In fact, it fell this week to 1.22 standard deviations above the average, from last week's 1.37 standard deviations above. But the large speculator total open interest (long plus short positions) remains highly elevated, which gives me a bearish signal. So the setup as a whole is in cash because the two signals don't agree. Incidentally, I'm re-examining my gold setups a little right now because I've identified a few possible setups that might be slightly more robust. I am quite satisfied with the existing one, but I am going back to study it against some other possible setups to make sure I'm using the very best one possible, based on my latest appreciation for things statistical.

Hope you have a good weekend. See you early next week with an update of my portfolio page and maybe more news on that new gold setup.

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