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Big Money Update

September 27, 2009

Since the initial publishing of the Big Money analysis, on balance the predictions have been fairly accurate. I warned that Gold appeared to be a short-term false breakout–and so far that appears to be the case as it broke $1000 for a few days only to stall and fall back under. Natural Gas was listed as the most bullish and promising investment–although I cautioned readers to buy into strength and not weakness, and it has since risen nearly 40%. Oil was listed as bearish and has struggled considerably being down nearly10%. Incorrect calls were on the stock market, which rose nearly 6% following my ultra-bearish stance. Furthermore, the US dollar fell roughly 2% following my mildly bullish stance.  Financials were listed as ultra-bearish–and are flat  since the last recommendation, underperforming the S&P500 after leading for most of the rally. As a qualifier, this analysis is by no means the cornerstone of my trading, in fact the most important inputs are my proprietary DV indicators. Nonetheless, this is a non-correlated and longer-term source of information to confirm or disconfirm my analysis.

I found a nifty little site that displays a COT stochastic : http://www.insidercapital.com/BullishReview/COTINDEX.HTM The numbers are very close to the ones that I calculate, and the difference is apparently that they are seasonally corrected. Steve Briese is the trader that publishes these numbers and has been dissecting COT numbers in his newsletter for a very long time. From now on, I will source my numbers from this site to save time gathering and processing the data. As you can see below, caution is warranted in Gold, the stock market, Oil, and short-term treasuries. There is a significant level of over-investment in these areas–making the risk versus reward unfavorable. Nonetheless, it is important to wait for technical confirmation before placing any big bets. If you want a neat way to combine short-term and long-term technical analysis with this COT information to trade ETFs the simplest way is to use ETFRanks by Market Rewind http://marketrewind.blogspot.com/2009/09/etfranks-in-vs-out-of-sample.html Most of my research background is in creating stock rankings using quantitative methods, and I can quickly tell the difference between shoddy research and robust methodologies. Having a good sense of what is behind them, I know that they are loosely based on documented academic and practioner research. One of the best and quickest long-term investment strategies would be to create COT rankings and blend these with ETRanks to select the ETFs with the most favorable risk/reward.

  Big Money Report (2week-3 month outlook)  
         
    COT Stochastic (change since last week)*
  COT Analysis* Commercials Institutions Small Trader
Stock Market Very Bearish 2 (-23) 100% (+11) 36% (-22)
Gold Very Bearish 0 100% 100%
Oil Very Bearish 4% (-20) 88% (+14) 74% (15)
Gas Very Bullish 91% (-6) 8% (+5) 40% (+5)
Short term Treasury Very Bearish 5 (-2) 97% (+2) 12% (-1)
10yr Treasury Mildly Bullish 63% (+8) 30% (-4) 64% (-10)
USD Index Mildly Bullish 74% 25% (-2) 27% (7)
         
source        
http://www.insidercapital.com/BullishReview/COTINDEX.HTM  
         
* my own analysis which essentially is that commercial positions tend to be the most accurate
and high relative investment by commercials is bullish while low relative investment is bearish.
note that the predictive information contained by commercial positions is not uniformacross instruments
it is just a generalization.      
7 Comments leave one →
  1. Bill permalink
    September 28, 2009 12:48 am

    Hi David,

    I am trying to grasp the concept which you are trying to write in this blog.
    Its really helpful, would like to know more about your sep 22 post, where you trying to talk about infinte monkey creation.

    How do you calculate 50 strategy and sort the best one.
    95 % confidence – does it mean 95 % or higher in percent rank.
    In your excel are you running all 50 strategy and coming with ones which are returning 95 % on 252 day look back period.
    I am a newbie will appreciate any inputs and little example sharing..
    thanks
    Bill

    • david varadi permalink*
      September 28, 2009 9:03 am

      hi bill, a lot to explain: i will be re-visiting the time machine for different test so i will try to clarify more based on your input. However just to summarize, i was looking at using the t-score (see the wiki link) and the statistical confidence associated with it. A clearer explanation and formula can be found in “New Trading Systems and Methods” by Perry Kaufman—and is the bible for system traders. As for the strategies, i entered at a run of any length from 1 to 5 days, and exited at runs from anywhere from 1 to 5 days. Entry could occur at down runs or at up runs. Statistical confidence was calculated for each strategy.

      cheers bill—i will try to clean this up in the next post.
      dv

  2. Bill permalink
    September 28, 2009 1:29 am

    David,

    are you creating a excel for 50 strategy in this way, if so do you have 50 colums and then percent rank it.

    Buy b b b Buy
    Buy b b b Sell
    Buy b b s Sell
    Buy b b s Buy
    Buy b s s Sell
    Buy b s s Buy
    Buy b s b Sell
    Buy b s b Buy
    .
    .

  3. toptick permalink
    September 28, 2009 8:25 am

    You don’t show gasoline (RBOB), but that looks like a great spread trade: long gasoline (71% commercials) / short crude (4%). Correlation in the mid 80s.

    • david varadi permalink*
      September 28, 2009 9:05 am

      hi top, i didn’t report a lot of commodities and did not mention any combination or spread strategies—i just focused on the majors. but definitely a good suggestions—playing the 3-2-1 crack spread is bread and butter for traders, and entering positions only on COT confirmation is a great way to play it because the commercials are most likely to take these cost differentials into account.
      cheers
      dv

  4. Roger permalink
    September 28, 2009 6:38 pm

    Another site that uses COTS data for timing is COTS Timer – http://cotstimer.blogspot.com/
    Uses a somewhat different methodology and comes up with some different recommendations (e.g. it’s still bullish on the S&P 500 although less so)

    • david varadi permalink*
      September 28, 2009 7:09 pm

      thanks roger! good find, will check it out. keep in mind that there are many ways to slice and dice the data, the only reason i chose to analyze things this way is that there is research to substantiate this method. by no means am i a COT expert: i spend most of my energy on stock rankings, then on indicators—this is a fun additional source of info. that has added value for me in the past.
      dv

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