Larry,
I was watching Fox News last night and the had on a whole bunch of money managers with Neil Cavuto. I noticed that all of these managers seemed excessively bullish and spoke about the strong economy. Only one of those managers stated anything about recent breakdowns in the technicals of many tech stocks like Dell, etc.

You would assume that these money managers tend to know what they are talking about b/c they're obviously well known enough to get on as commentaries for Fox news. What advice would you give to someone relatively new to the COT approach to not get caught up in noise outside of the data that gives them their edge?

My point is that I am recognizing that I could make mistakes by letting outside noise of peers, other market professionals, and news to blur my view of what provides me with an edge. I have done my due dilligence and backtested the COT system so that I am comfortable with it, and I am working on my psychology to accept the risk and not just give lip service.

I recently looked back at the COT data to re-focus on my edge b/c I found myself thinking that maybe I was on the wrong side. What I found was, if I did this correctly, that some trades were five to seven months early in market direction. Now I understand that whats happened in the past may not happen in the future and that anything can happen. All we have however is historical data. Is it fair to look at this idea that the COT was that early in their trades and that we are only in month five of this current trade? I am concerned that I may be bending data to fit my preconceived notion of market direction. With this info however I could see how we may not begin to see profits on this trade until deep in 2004. Is that fair?

Another thing that I saw, if my observation is correct, is that the only Major losing trade was a Sell on 1/2/98 and it took five months before you would have received a buy signal. All other Sell signals were profitable in a matter of weeks to 3 1/2 months for the 6/2/00 trade. This sell trade has far exceeded that range, but fits into the range of the unprofitable trade in 1/2/98. Could this data suggest that this trade may be more likely to be unprofitable?

I feel comfort in the fact that many trades have taken up to seven months to see the market go in the expected direction, but I feel concern when I look at how quickly sell trades generally work and that the majorly unprofitable trade was a sell trade that took about five months to correct itself. Am I wrong to look at the data this way? Should I be looking farther back into the 70's? I understand that this could be a losing trade and I will ultimately have losses in my pursuit of making good trading decisions I just want to make sure that I'm looking at the data objectively and not letting market noise or my own psychology get in the way.

Hopefully that made some sense.
Thanks in advance for you input!
Bob

Bob,

I learned this from the master Larry.

If the COT is long I am long. If the COT is short I am short. Everything else is noise.

I think we all get those "wrong side" feelings whenever the market has an up day...

I'm convinced the data provided by the COT is profitable within a percentage range, and also has some unprofitable trades.

What if this is one of them?

From my perspective, if the Commercials flipped to net long this Friday, it would just be a decision process to cover my short positions and enter a long position.

As with many things in life this is a numbers game, and we will not win all of them. Just knowing that some will be losers and accepting that is what makes this strategy possible for me.

I don't know about whether this trade has a higher probability than normal to end unprofitable, there are so many pending catalysts in the economy right now that any one single thing could trigger a substantial decline. But at the same time the exuberance that has been shown the last couple months is pretty amazing as well...

For what it is worth, it seems were in a topping process, which can take time. This was confirmed in my opinion when Saddam's capture did absolutely nothing for the market. A small gap up on open and then a steady decline for the rest of the session to close down.

Either way this one ends, I'm ready to switch when the Commercials do.

But I do agree it can get frustrating at times !

Matt

Bob,

First of all your post is just great. It shows that you’ve done your homework and that you’re focusing on the right things. And the concerns you have are perfectly normal. So let me see if I can give you a complete answer to your questions.

I also watch Cavuto along with a lot of other financial shows. But you have to be able to watch those shows and separate the wheat from the shaft. Think what kind of bias those shows might have. They are simply in the business of selling advertising. And to sell advertising they need viewers. Are they going to get more viewers if their analysts are predominantly bullish or are they going to get more viewers if their analysts are predominantly bearish? Obviously, they do better if they have a positive and upbeat outlook. The public doesn’t short stocks. They own stocks and they want to know that everything is going to be okay. Fox is a lot better than CNBC about giving a balanced view on the market but, just the same, they also have an incentive to be optimistic. If you’ll watch Cavuto’s show on Saturday morning when Jim Rogers is on you will get a different point of view from someone who manages his own money, not some portfolio manager who only manages other people’s money.

The other thing to consider is that things always look best when the market is about to reach a top. Can you imagine how bullish those same money managers were in March of 2000? I can tell you they were about to bust a gut with enthusiasm. I would be far more concerned if those managers all of the sudden turned bearish. One extremely important thing to remember is that the majority will always end up being wrong - you can take it to the bank. That’s why I’m trying to pay close attention to what analysts are saying about gold. The only thing that will kill the gold bull is when the financial media starts hyping it and the public gets all excited about it. But we’re a long way from that happening. Right now they’re too busy hyping stocks.

You are well versed in COT history so I don’t need to go into details about what has happened in the past. One thing I hope you’ve noticed is that every COT trade has behaved differently. Some have been immediately profitable. Others have taken awhile to be profitable. A couple (like this one) have taken a long while. And a few haven’t been profitable at all. It’s good to look at the history to get some kind of feel of how the signals may play out, but one thing I can tell you for sure is that no matter how this one turns out it will be different from all the rest.

You asked if this particular signal is more likely to be unprofitable than most of the rest. I would have to say that is probably correct. The only reason I say that is that the S&P has to decline about 10% for this one to be profitable. It can do that so fast it will make you head swim. But I would have to agree that it has a higher probability of being unprofitable than most COT signals simply because it is currently showing a loss.

Now what I’m about to tell you now is the hardest part. You simply must get yourself to the point where you don’t care if any particular signal is profitable or not. I know that’s hard to do, and it may even sound absurd, but it must be done. You have to take the losers just as easily and unemotionally as you take the winners. There will be losers. And to make matters worse, there is absolutely no way to tell which signals will be winners and which will be losers. So the only logical thing to do is to take all signals and not care how any particular one turns out. Peter said it well when he wrote, “If the COT is long I am long. If the COT is short I am short. Everything else is noise.”

And that brings us to the subject of money management. You can watch the Model Portfolio and get a general idea of how I manage money within the framework of a COT system. 60% of the portfolio is short the market. And yet as of last night the portfolio was showing a only a 1.5% loss. That kind of asset allocation makes it a lot easier for me to ride out these adverse moves.

The other way you could manage money is with stops. You could just set a point where if it goes against you by a certain amount you get out of the trade. But if you do that make sure you have a plan to re-enter the market. I don’t know that the commercials won’t be net short for the next three years and this trade may turn out to be the most profitable one of all. So you would have to have a plan to re-enter and you must backtest your plan to determine that your comfortable with how it has performed in the past.

If I’ve left anything out, Bob, please let me know. You’ve brought up a subject that I love to discuss.

Larry

bob, in your note you said:

"You would assume that these money managers tend to know what they are talking about b/c they're obviously well known enough to get on as commentaries for Fox news."

you should print that up and save it. in about 3 years that statement will hit you as quaint.

when the COT strategy 4 flops from short to long, i'll flop. if it stays short, i'll stay short. this is my edge.

you need SOME strategy that gives you an edge... otherwise you're just guessing. (like the money managers on Fox new

-ja

p.s. bob - i hope you aren't offended by my joking around. when i was getting started i didn't know who to believe either. it's a learning process.

reading larry's newsletter is great start - stay with it.

Thank you everyone that responded to my questions and thoughts. I realize that I kind of knew that Fox news and other reporting channels would like to pass on good news in order to sell advertising spots. I think it was my own inexperience and phsycology getting in the way. I'm happy however that I've been able to realize that. It just seems so illogical in regards to the markets. I guess it's very logical in regards to selling ads.

Here were a few points that I recently uncovered in various publications newsletters etc that make me cringe when I hear these guys on the news. These are probably in line with a few points Larry has made in other posts..

S&P valuations are 24 times earnings with a weak dollar and rising interest rate risk.

Close to extreme lows of cash reserves in Mutual Funds

Lots of money managers talk about bulls beating the bears and possibly excessive optimism.

S&P has just got close to 1160 or the 50% retracement of its decline from March 2000 high. That'll be a strong test if it gets there.

The VXO has seen some of its lowest levels in seven yrs.

It may be too much for the market to keep up with increasingly optimistic expectations.

Thank you Larry for the information on the COT data. I have been working on preparing myself mentally to become a great trader and your insight has helped greatly. However, I have one question, you stated that you have to get yourself to a point where you don't care whether any particular trade is profitable or not. Is there anything outside of having 30 years expereince that would help you get to that point? In other words, is there some sort of mental exercise that you can do to get you there or is it just trading experience?

As for now the COT is Short, so I am definitely short.
Bob
P.S. I don't mind the jokes at all. I try not to be to serious with myself, and some comic relief is always welcome!

Bob,

The answer is in the Five Fundamental Truths and the Seven Principles of Trading at the top of this page. It’s just common sense. Let’s say you have a system that has a 70% probability of being successful (COT or any profitable system). For every 10 trades 7 are winners and three are losers. Isn’t it irrational to try to determine in advance or to even care which ones will be winners and which ones will be losers? There is no way to know in advance because there is a random distribution between wins and losses for any given set of variables that define an edge. So the only logical thing to do is to act on every trade without reservation or hesitation.

A common mistake that you’ve made is that you’ve started trading according to COT signals before you’re ready to do so. You got into to it, it started going against you, and then you began to have doubts. So the question that you need to ask yourself at this point is why were you surprised when it started going against you? You’ve done a much better job than most in studying COT history. So you know that, for instance, in early1998 there was a short trade that not only turned out to be about a 12% loss (depending on the specific strategy) but it went against the COT signal by as much as 20% before the 12% loss was taken. Do you see what I mean?

I’ve given a lot of thought as to why people can’t follow profitable systems. If you turn out to be one of the few who can you are in a distinct minority. I think it’s because people don’t really believe in the system that they’re trying to follow. They’ll say they do. They probably even think they do. But when they get losing trades they start to have doubts. And when they have doubts they’ll either bail out and search for the next “Holy Grail” or they’ll start messing with the system until it’s not even recognizable. And when they get their next losing trade they’ll mess with it again.

Above all I try to get people to find something they believe in. I don’t care if it’s COT or something else. But you’ll never believe in any system if you just take my (or anyone else’s) word for it. You have to internalize a strategy and own it yourself. Let’s say, for example, that you believe that commercial traders are going to be on the right side of the market most of the time. So you like the idea of following COT signals. But you don’t like the fact that you have to wait for the commercials to flip again before you know how much profit or loss you have. If that’s the case then you should develop your own strategy where you follow COT signals but you have an “uncle” point where you’re going to exit if it starts going against you and re-enter at another pre-determined point. But before you do it make sure you backtest the results. Some people have gotten out of the current COT short position. And that’s fine. Right now they look pretty good. But they did so without being able to quantify what they’re doing and they have no idea when they’ll get back in. If they do have an idea for re-entry, they haven’t backtested it to see if it makes sense. So they’re just kidding themselves.

Let me know if I can help in any way, Bob.

Larry

Thanks Larry!