S&P 500 Commercials Fading Rally

Not sure what to make of this market. I think the Commitments of Traders data from this afternoon is equally ambivalent. Derivatives traders in S&P 500 futures and options have gone bipolar this week. You'll recall my S&P 500 trading setup has been bearish for a few weeks. 

Last week, the "smart money" commercial traders flipped from bearish to bullish as they dramatically reduced their net short position. The commercial signal works with a three-week trade delay, but things were looking bullish. At the same time, small traders, who've been highly bullish since November in their futures and options positioning, had suddenly reduced their net long positioning last week. 

Well, things have changed. Today's data has caused both of my signals to flip. 

The commercial traders have suddenly ramped up their net short position again as the market rallied this week. They're clearly fading this bounce. Their net position as a percentage of the total interest has gone from 1.48 standard deviations above the moving average I use for the commercials signal to 1.92 standard deviations below the average. Their signal has flipped back to bearish after one week in the bullish column.

Meamwhile, the "dumb money" small traders have gone ahead and continued their capitulation that started last week. They're now 0.53 standard deviations below the moving average I use for their signal - down from 0.63 standard deviations above the average. That's caused my small traders signal to flip to bullish as the wrong-way retail crowd has also decided to fade this rally. Amazing.

Both signals work with a three-week trade delay. So where things stand right now is this: the current bearish signal will continue this coming week and the next and then - because the two signals don't agree - the setup goes to cash on the open of trading Monday, April 13.

As I noted in a comment to my post Wednesday, my current bearish S&P 500 position got stopped out that day after it hit my 8.82-percent stop level. That level comes from taking the average backtested trade gain and subtracting two standard deviations of the trade returns. The idea is to end the trade if markets appear to be acting outside historic norms. The largest past drawdown for this setup is 19.05 percent. So far, the setup loss wouldn't have been anywhere near that. But if the S&P 5oo rises to 903.43 during the life of this bearish signal - equal to a 19.05-percent loss for a bearish position - I'll invoke my Black Swan risk-control rule. That means I'd halt trading this setup for four weeks. The idea is to avoid markets when they are acting completely outside the historic norms seen in the backtesting.

On the other hand, if the S&P 500 falls below my entry price when the signal started (758.84),  I'll enter another short position for the duration of this bearish signal.

The COT data for gold is a little less eventful of late. The setup is in cash, but seems primed to enter a trade on the bullish side at the end of April. My signal based on fading the large spec total open interest remains in its fourth week of being bullish. That signal works with a seven-week trade delay. So if the other signal within this setup remains bullish, I'll go long in a few weeks.

Hope you have a great weekend. I'll update my portfolio page early next week with my recently closed S&P 500 position.

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

Tests of Short S&P 500 Stop Levels

Interesting couple of days. My two short positions for my bearish S&P 500 signal have come close to be stopped out each of the past three days. My stop levels are $72.73 for the 200-percent leveraged SDS ProShares Ultra Short S&P 500 ETF and $31.17 for the 200-percent leveraged HSD Horizons BetaPro Bear Plus S&P 500 ETF (trading in Toronto). Good luck for the rest of the week - and see you back here Friday.

Signs of Bottom? Wrong-Way Traders May Have Started Capitulation

Another nutty week! Completely fitting for the times. The Commitments of Traders data released this afternoon also has some interesting new things to say. I've now updated my latest signals table based on today's data. Some highlights:

- S&P 500: Some possibly important shifts appear to be taking root in the derivatives data for the SPX. They've caused my trading setup based on the COT reports to give a new signal - cash - to be executed with a three-week trade delay on the open of Monday, April 13. The "smart money" commercial traders have dramatically reduced their net short position as a percentage of the total open interest. Their positioning went from 0.84 standard deviations below the moving average I use for my commercials signal last week to 1.48 standard deviations above the average this week. That's flipped my commercial trader signal from bearish to bullish - with the three-week delay I mentioned earlier. The other signal that makes up this setup is based on fading the wrongway small traders - who tend to be badly positioned at market turns - when their positioning hits certain extremes. Last November, they hit a bullish extreme that put my signal for the small traders in the bearish camp. This week, they've finally broke down and got substantially less exuberant. It seems the market losses have finally sunk in. They've gone from 1.56 standard deviations above the average to 0.63 standard deviations above. Their positioning still has to fall further - down to 0.2 standard deviations above the average - in order for this signal to flip to bullish, but this week may have been an important break. They've haven't been anywhere near to this bearish since November. If we see more signs of capitulation soon, we could be close to a bottom - though whether it's an interim or longer-term bottom, I have no idea.

Gold: No change for my gold setup, which remains in its seventh straight week of being in cash as bullion meanders in what appears to be a long trading range. However, my large spec total interest signal is now in its third week of being bullish - based on fading the large speculator total long and short positioning. I trade their signal with a seven-week trade delay. The other signal within my gold setup - based on fading the large spec net positioning - has been bullish since last August. So if the two signals remain bullish a few more weeks, I expect to go long at the end of April.

Hope you have a rejuvenating weekend. I'll update my portfolio page early next week with my S&P 500 position results.

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 Rally Could be Short-Lived

A nice little rally this week, but was that really the bottom? Reading some of the latest free reports this week and last from Montreal's BCA Research makes me doubt that it is. As well, the indices are still well below their Tom DeMark Setup Trend lines on the daily charts. The monthly charts are even worse, especially for the Nikkei, S&P 500 and Dow. And what about the Commitments of Traders data? Some of the latest data from today's release doesn't give any fresh hope for a real recovery, in my opinion. I've updated my latest signals table with the calls from my trading setups based on this data.

- S&P 500: The small traders are still far too bullish, as they've been since November during the entire decline. This is a bad sign, if historic trends are any indication. Friday's data shows their net position falling ever so slightly from 1.60 to 1.56 standard deviations above the moving average as a percentage of the total open interest. The "smart money" commercial traders are still deeply bearish, though a tad less so than last week, with their net position going from 1.02 to 0.84 standard deviations below the moving average. I had a bearish signal from this trading setup from three weeks ago that takes effect on the open of trading this coming Monday, March 16. The latest bearish reading of the data means the setup will remain in bearish mode for at least the next three weeks.

- Gold: This setup remains in cash another week - the sixth straight week. But a bullish sign is that the large speculator total open interest has fallen again. It's now 1.21 standard deviations below the moving average I use for this setup, down from 0.72 standard deviations below. This signal has been bullish for two weeks in a row now, but it works with a seven-week trade delay. The other signal that makes up this combo setup - based on fading the large spec net position - is already bullish. So the setup could go from cash to bullish in six weeks' time if the large spec net position signal is bullish at that time.

Hope you have a relaxing weekend. I'll update my portfolio page early next week with the bearish S&P 500 position.

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 May Pause Before Next Leg Down: Data

Wow. What an absolute disaster of a week. The Dow and S&P 500 are now well below their 2002 lows. The Nikkei has decisively broken below its 2003 low. The FTSE is now testing its lows of the last bear market. But Canada's TSX index is, oddly, well above its 2002 bottom. Does that mean there is still some hope for the market, with Canada's outperformance representing resilient commodity demand? Maybe the commodity bull really isn't over and is just seeing one hell of a huge correction? I don't know. What I can say is Friday's Commitments of Traders report doesn't give much hope for equity bulls. I've now updated my latest signals table. Some highlights from the latest weekly data:

- S&P 500: My trading setup for the S&P 500 has been bearish since November, but this coming week it goes briefly to cash. That's based on the commercial trader net futures and options positioning during the week of Feb. 10, when it abruptly rose to a bullish extreme. It quickly fell back into bearish territory the following week, so my setup goes back to bearish on the open of Monday, March 16, and will remain so for at least the ensuing three weeks. In the latest COT report, the commercial net position as a percentage of the total open interest dropped from 0.47 to 1.02 standard deviations below the moving average I use to evaluate their positioning. Meanwhile, the "dumb money" small traders - far from turning more bearish during the latest market cataclysms - have actually become even more bullish. Amazing! In Friday's data, their net percentage-of-open-interest position went from 1.48 to 1.60 standard deviations above the average. Not good at all if you happen to be a bull. They obviously are convinced the bottom is in. But their poor past record raises questions about whether that's the case.

- Gold: My trading setup for gold based on the COT data remains in cash again this week - the fifth in a row. The two signals that make up this setup don't agree with each other again. However, some possible light at the end of the tunnel: my signal based on the large speculator total open interest (long plus short positions) has flipped to bullish. That signal has a seven-week trade delay - which means the overall setup can't go to bullish for seven more weeks. Until now, the large spec total open interest has been persistently excessively bullish during the recent gold rally. That turned the setup to cash after a three-week bullish call. Now, the large specs have suddenly pulled back from being 1.07 standard deviations above the moving average to 0.72 standard deviations below. If my other signal - based on fading the large spec net percentage-of-open-interest position, but with no trade delay - is bullish in seven weeks' time, I'll be shopping for some bullion.

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

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

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