Banks Back to Cash

All fairly calm in the mysterious world of the Commitments of Traders reports this week. The single changed signal is in my BKX U.S. Bank Index trading setup, which goes from bearish to cash as of Monday's open of trading.

See my latest signals table for more details on this and the other markets I'm following using the free weekly COT reports issued by the U.S. Commodity Futures Trading Commission.

New Setups: Gold, Copper and SPX

In other news, I've developed new setups for gold and copper this week using some improved and more highly automated backtesting procedures I've been working on. I'm pretty excited (knock on wood) to start using those signals because I think my new testing procedures are showing some very interesting results.

Also, I've used those to go back and take a fresh look at the S&P 500 data, and I have a slightly modified setup to announce for that data too.

Like the new setup I started using a couple of weeks ago, this one also uses just one group of traders: the commercial hedgers.

Announcing: New SPX Setup Parameter Values

It uses a 12-week moving average/standard deviation period and goes long when the COT position is 0.2 standard deviations or more above the moving average, while it goes short when the COT position is 1.2 standard deviations or more below the moving average.

Undetrended Data!

The major difference I've integrated into my backtesting in the past few weeks is that I'm now including results from undetrended (that's a mouthful!) price data from my confidence interval testing for whether the setup beat the market historically after trade commissions were deducted.

While I normally use detrended data for backtesting, I noticed some high-performing setups scored poorly in the confidence interval results when I looked at the raw undetrended data. Those setups could have a higher chance of underperforming in real-life trading, so I've been including those results in my testing.

I'll post the new gold and copper setup info shortly. Next up after all this: a new setup for crude oil.

Good luck this week.

Bank Setup Short While SPX Stays Long

U.S. financials could be headed down, according to my trading setup for the benchmark BKX U.S. Bank Index. My setup goes bearish on Monday's open of trading.

This is based on bearish positioning in the 3-month Eurodollar contract, as shown in the weekly Commitments of Traders reports issued by the U.S. Commodity Futures Trading Commission.

Meanwhile, my brand new S&P 500 setup goes into its third week of being bullish. How can one market say to go long while the other says to go short? How very strange, you say?

It could be that the BKX setup says the coming week will see a short-term decline in a broader overall rally that the SPX setup is trying to capture.

But this is also the kind of weirdness we see all the time in this very peculiar data. It's one of the reasons analysts and traders haven't been able to make heads or tails of the COT data for decades. Seemingly more often than not, the data just doesn't agree with itself.

See my latest signals table for more details on these and other markets I'm following with my COTs Timer strategy. Good luck this week.

SPX Bullish According to New Signal

It's taken a while, I know, but I've finally finished my new round of backtesting for my COTs Timer trading strategy based on the Commitments of Traders reports. My first new trading setup is for the S&P 500. And the signal went bullish last week. It continues in the bullish column this week.

See my latest signals table for details on trader positioning in this and other markets. Other signals taking effect on Monday's open: gold and the 30-year Treasury bond both go to cash.

My new S&P 500 setup is unusual for a couple of reasons. First, unlike all my other setups, it is based on a single group of traders - the commercial hedgers, sometimes known as the "smart money." My other setups use two (and in one case, three) groups of traders to arrive at signals. If all the traders don't agree, those setups remain in cash.

In contrast, my new S&P 500 setup is always either long or short. It turned out that after looking at a few million potential setups, the most statistically robust one was based on the commercial hedgers alone. (My previous SPX setup relied on both the commercial hedgers and the small traders.)

Second, my new S&P 500 setup has no trade delay, meaning the signals based on Friday's COT report get executed on the following week's open of trading. Most of my other setups include at least one component signal with a trade delay of one or more weeks. For example, my previous SPX setup used a three-week trade delay.

But after trading my COTs Timer strategy for nearly five years, I recently discovered that there was a moderate and statistically significant negative correlation between the real-time profits of a setup and how many weeks of trade delay it was based on.

I can't find anything in the data that would explain this. It's actually kind of strange. The fact is setups with longer trade delays are often the most statistically reliable in backtesting. But this is why it's important to take a mechanical trading system out for a spin on the road and see what happens. In my new round of backtesting, I am limiting my setups to those with zero to two weeks of trade delays.

I picked two weeks as my max because of my natural gas trading setup, which has achieved a 106-percent profit since I started trading it in mid-2009 while gas prices exploded and then collapsed in the same period. My gas setup uses signals with one- and two-week trade delays. You can't argue with that kind of success.

Special thanks go to Dave, a highly gifted and very generous reader who developed an amazing app that I used to do my first round of analysis of several million potential setups.

I then use a few Excel spreadsheets I've laboriously developed over the years to re-analyze the best of those, check other setups I come up with through other processes and run tests of robustness, such as Monte Carlo testing and one of my favourite testing procedures, walk-around testing, which compares how the setup performs against "neighbouring" setups with slightly varied parameter values.

See my FAQs page for more details on my backtesting process.

I'll post details on my new setup on my backtesting results table soon and a sample spreadsheet for downloading. Stand by for new setups soon for copper, gold and U.S. financials. Good luck this week.

Cash for SPX, Crude; Copper Bullish

A few signals take effect on Monday's open of trading: cash for my trading setup for the S&P 500 and crude oil and bullish for copper. See more details on trader positioning that caused these signal changes and positioning in other markets on my newly updated latest signals table.

Hope you had a good weekend. I sure did. The waves were big and powerful at Santa Teresa, Costa Rica, and we had lots of fun surfing with friends after the Reef Classic 2012 surf competition. Good luck this week.

All Quiet in COT Land

All quiet from the Commitments of Traders reports. My COTs Timer trading strategy has no signals that take effect on next week's open of trading. Existing signals all remain intact:

- bearish for one more week for the S&P 500
- cash for the BKX U.S. Bank Index, natural gas and copper
- bearish for the 30-year U.S. Treasury bond and crude oil
- bullish for gold and the Nikkei

See more details on the latest trader positioning in these markets on my latest signals table. Hope you fared well this week, and good luck next week.