Small Makeover for Gold Setup

My trading setup for gold based on the Commitments of Traders reports has gotten a small makeover. The new specs and results are all posted on my latest signals table. The change is that I've tweaked the parameter values for the large spec total open interest setup. The upper signal line has gone from 0.2 standard deviations above the moving average to 0.25. The lower signal line went from 0.6 standard deviations below the average to 0.65. Not a big different, but those values produced slightly better results in my walk-around testing - i.e., my check on the backtested performance of neighbouring setups that have slightly altered parameter values. A robust setup should have neighbouring setups that also performed well. Taking a look at them is an important way to reduce the risk of curve-fitting and improve the odds of good performance in actual trading. Right now, the new setup is in cash (like the old one). Now that I've finalized my testing on the S&P 500 and gold - at long last! - I'm planning to get to work on new setups for a couple of markets that aren't strongly correlated to the first two: the Nikkei and natural gas.

S&P 500 Looking Gloomy

I've been busy most of the day with some virus problems, so apologies for an abbreviated Commitments of Traders update today. My two trading setups based on this weekly derivatives data are unchanged: bearish for the S&P 500 for next week and cash for gold.

My S&P 500 setup will be going to cash on the open of trading on Monday, March 9. That signal will last all of one week, then revert to bearish for at least two more weeks... and possibly more. Three weeks out is all the signal can see. The data for the S&P 500 is uniformly bearish, except for that brief respite in a week's time. In this afternoon's COT data, the commercial traders are 0.47 standard deviations below the moving average I use for their signal. And the small traders are still far too exuberant - their net percentage-of-open-interest position 1.48 standard deviations above the average. That's down from 1.61 standard deviations the week before - but still far from falling into bearish territory. Unfortunately, the little guy doesn't seem to have lost enough money yet.

In gold, still no resolution in the standoff in my trading setup. The large specs have dropped their net position as a percentage of the total interest two weeks in a row. They now sit 1.02 standard deviations above the average. That is bullish. These guys are usually wrongly positioned at market turns. However, the large spec total open interest is still alarmingly high. It's at 1.07 standard deviations above the average. We need to see that come down dramatically at least to 0.6 standard deviations below the average to flip the entire setup back to bullish. So the overall setup remains in cash for a fourth straight week. It could mean there needs to be a pullback before gold will continue on its march to $3,000 or whatever the gold bugs are predicting these days.

Hope you have a good weekend. And be sure to check out the updated post on my portfolio page.

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

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

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

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.

S&P 500, Gold Both to Cash

My latest signals table is now updated based on Friday's Commitments of Traders data. Both of my setups - for the S&P 500 and gold - are in cash as of next Monday. I'll post a more detailed update on the data early next week - along with a portfolio update.

Good Gold Almighty... But S&P 500 Not So Good

Wow - miserable week in the markets. What says the Commitments of Traders report from this afternoon? This, as habitués of this blog know, is the Commodity Futures Trading Commission's free weekly report on major positions in the main futures and options markets. It tells us how the big boys are positioned - and perhaps even some inkling of what lies in store for market prices. At least that's the theory. My two newly revised trading setups based on this data - for the S&P 500 and gold - remain on their existing signals for one week longer. And then everything changes.

The S&P 500 setup goes to cash on the open of Monday, Feb. 9. This is because of a sudden spike in the small trader open interest - typically a bullish sign. Alas, that spike lasted all of one week (the week of Jan. 20). Call it the Obama Spike. Today's data shows the small trader open interest falling enough to give a bearish signal. My S&P 500 setup is based on that open interest plus on the commercial trader net position as a percentage of the total open interest. The "smart money" commercials are bearish. In fact, they've been that way since the week of June 24, with the exception of a single week. So the setup will stay in cash for the week of Feb. 9, then go back to bearish. Yikes. Either the setup is wrong, or we are super screwed. I'm frankly rooting for the setup to be wrong. This is getting scary.

In gold, we've got one more week of bullishness, then on Feb. 9 the signal goes to cash or bearish. (Sorry for incorrect information last week saying that signal changes on Feb. 2. It's actually Feb. 9. I misread my spreadsheet.) This setup will then remain in cash or bearish for at least the next seven weeks. A warning sign: Friday's data shows the large trader open interest spiking sharply to 1.5 standard deviations above the moving average - well above the signal line to turn this particular signal bearish. I fade the "dumb money" large specs when their open interest hits bullish or bearish extremes - with a certain trade delay before executing my signal. The large spec total long and short positioning is now 46 percent above what it was the week of Dec. 9. So gold may be going to $3,000 someday soon, but don't expect a straight line. Hope you have a relaxing weekend, and see you early next week with my portfolio update and hopefully other announcements about existing or new setups. Thanks for tuning in, and good luck to us all.

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

S&P 500 Still Slumping, Gold Good to Go... For Now

Phew, what a week. That rally in December is now but a vague memory. I keep waiting for the bounce that never follows through. Nice breakouts, however, in gold bullion, gold stocks and possibly silver, too. Hope you did okay this week. This afternoon's Commitments of Traders report has given me no new signals for next week for the two setups that I'm trading with my COT Timer trading system: the S&P 500 and gold. But there are new signals further out on the horizon. (My other setups are under construction while undergoing extra testing. See more on that here.)

In my S&P 500 setup, the data remains bearish for two more weeks and then gives me a cash signal for execution on the open of Monday, Feb. 9. The reason: small traders have just increased their total open interest (long plus short positioning in S&P 500 futures and options) to a bullish level. Historically, the best signals I've found for this market come when the small trader total open interest is at a relatively high level and the commercial traders have a high net position as a percentage of the total open interest. At this stage, the commercials are still pretty bearish - though they have reduced their net short position for the past two weeks. They now stand 0.65 standard deviations below the moving average I use for their signal. So they're still on a bearish signal, while the small trader open interest has given me a bullish signal for two weeks out. Thus, my S&P 500 setup goes to cash in two weeks since the two signals don't agree.

In my gold setup, the two signals don't agree, either. But the signals work with varying delays before they take effect. This setup will remain bullish for two more weeks, then goes to either cash or bearish for a minimum of six weeks. This, because the large trader total open interest hit an excessively bullish extreme in mid-December. Past testing shows this is a bearish development and tends to coincide with downward pressure on the gold price. However, my other signal within my gold setup remains bullish. This one is based on fading the large trader net position. Large traders have yet to hit any excessively exuberant net positioning, so that signal remains in bullish mode. Thus, the two signals I use to trade gold won't be in agreement as of Monday, Feb. 9, and I will go to cash or bearish.

Have a good weekend, and tune in early next week for my portfolio 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

Gold Glitters While S&P 500 Sags

Some volatility this week. The fun continues. The Commitments of Traders report this afternoon doesn't have much good news for the bulls. My trading setup for the S&P 500 is still in the bearish column. With the trade delays for the signals that make up that setup, it now will remain bearish until Feb. 9 at the soonest.

The commercial traders in S&P 500 futures and options are heavily net short, with a position 1.23 standard deviations below the moving average I use for their signal - though that's a slight improvement from the week before, when they were 1.74 standard deviations below the average. On the other hand, the small trader total open interest (long plus short positioning) has fallen from 0.61 to 0.79 standard deviations below the moving average - which is bearish. You typically want to see the small trader open interest go up for S&P 500 prices to rise. Think of it as rising market volume.

In gold, the other market I'm trading based on the COT data, my setup has gone to bullish this afternoon after three weeks in cash. I execute the signal on next week's open of trading. This signal is based on a combination of fading the large speculator net position (which last hit an overly bearish extreme in Aug. 2007 and has been on a bullish signal since then) and fading the large spec total open interest, the latter with a seven-week trade delay. The large spec total open interest gave a bullish signal with the Nov. 25 COT report and stayed bullish for three weeks, then went back to bearish, which it has remained since. So barring any change in the large spec net position, this signal will remain bullish for three weeks, then go back to cash.

I've temporarily stopped updating my other setups on my latest signals table because, as I've mentioned before, I'm retesting all my setups using detrended price data and Monte Carlo testing. I've completed this retesting for S&P 500 and gold so far and have two setups there I feel confident trading. I'm still doing a little more testing on gold to see if I can find an even better setup and should have some results to announce soon. Then I'll turn to the other setups. Thanks for your patience. Hope you survived the week and have a great weekend. Happy Ukrainian New Year to any fellow Ukes out there. See you early next week with a portfolio 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

Stop Levels Tweaked

I've made a change in how I calculate my stops for my trading setups based on the Commitments of Traders reports. My existing method of basing the stops on the largest past drawdown in the backtesting seemed a little unsatisfying - besides leading to the potential of huge losses, which never makes me comfortable, even if the position size is commesurately small. Instead, I'll be now using a stop based on the setup's average profit of all the trades minus two standard deviations of the trades results. The stop levels for the two new setups I've developed so far are posted on my latest signals page. (You'll notice all the other setups have no stop levels or portfolio allocations. That's because I'm not trading them right now as I'm retesting all my setups with detrended price data and the Monte Carlo test.) My maximum portfolio allocations will be adjusted to these new stop levels (i.e., never risking a loss of more than two percent of total assets in any single trade). Also, I may sometimes scale into positions by starting off with half of the maximum allocation on the entry date, then purchasing the second half one week later if the trade is profitable. Good luck this week.

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

S&P 500, Gold in Cash

I updated my latest signals table this morning based on yesterday's holiday-delayed Commitments of Traders data. Some highlights:

- My new S&P 500 setup is in cash this week for a single week. It then goes back to bearish for at least the next two weeks starting the open of trading Monday, Jan. 12. The downer signal is based on: (1) the commercial traders, who have sat at extremes of bearish net positioning since the end of November (they're highly dubious about the current rally, with their net position at 1.47 standard deviations below the moving average for this setup) and (2) a sudden drop in the small trader total open futures and options positioning in the past two weeks.

- My new gold trading setup is in cash for a second week. In this market, the large speculator total open interest has hit exuberant extremes for the past three weeks, suggesting the recent rally was a little overbought.

Disclaimer messages: Anyone who has taken a look at my new or past spreadsheets for my S&P 500 trading setup - as well as all other readers of this blog - should be sure to read the disclaimer messages I've posted more prominently on the page where the spreadsheet is posted and on every other webpage on this site. That disclaimer was already posted on every page, but I've now made it more prominent because I don't want any mistakes about the risks I'm taking when trading my signals and the fact that these aren't recommendations to readers to buy or sell anything. I'm not a certified financial advisor and created this blog as a way to track my own system development, share information about the COT data and learn from readers. The last part has actually been the best surprise from all this - meeting other people with similar interests and learning from them. Thanks to all and best wishes in 2009!

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, out-of-sample testing, walk-around testing

Holiday Delay

Happy New Year! Holiday delay again this week for the Commitments of Traders report. It'll be released Monday at 3:30 p.m. EST. I'll be back here Monday with an update on what my signals said. Have a good weekend, and best wishes in 2009!

S&P 500 Stays Bearish, NDX Traders at Exuberant Extreme

Some stocks have had a nice rally since late November - especially precious metals and real estate - but how sustainable is it? Today's holiday-delayed Commitments of Traders data pours a bit of cold water on any idea of a continuing bounce from here. My new, improved S&P 500 trading setup (see more on it here) is still on a bearish signal and will go to cash next Monday for a single week. It will then go back to bearish the week following. Other highlights from my latest signals table:

- My trading setup for the NASDAQ 100 remains in cash for the second week. Interestingly, the small traders in NASDAQ 100 futures and options have suddenly gone ballistic in their bullish positioning. They've never been so optimistic, in fact, since the beginning of the data in 1996. Their net position is now a record 3.02 standard deviations above the moving average I use for this setup, as a percentage of the total open interest. This, of course, is a bad sign. The small traders in this market tend to be wrongly positioned at market turns. Oh-oh.

- Gold, my other fully tested trading setup (see more here), has also gone to cash for this week after a five-week bullish run. This is based on the large speculator total open interest (long plus short positioning) growing to excessive extremes that in my past testing have tended to signal falls in the gold price.

- My trading setup for silver is also bearish. In fact, silver commercial traders are now 2.1 standard deviations below their moving average in their net positioning as a percentage of the total open interest.

Hope you had a good holiday week. Good luck this week and best wishes for a Happy New Year!

TAGS: S&P 500, SPX, NASDAQ 100, NDX, gold, silver, 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