S&P COT results...

Commercial longs: 417,089
Commercial shorts: 410,930
Net long: 6,159
% long: 50%

Assuming the S&P closes down for the week, Strategy No. 2 flips to long. Strategies 3 & 4 do not.

Larry

Is the reason the other strategies stay short due to volume rule filters?

So SPX opened 1141 and closed 1131 so strategy #2 goes long, right?
h

Strategy 2 flipped because the commercials are net long and the S&P closed lower than the previous week.

“Officially” Strategy 3 (Strategy 4 uses the same rules) did not flip because it requires that the S&P be lower than the previous week and that the commercials be net long by 51% or more. When I did the back test I used rounded numbers. So 50.5 or more rounded to 51. I show the latest figures to be 50.4. So it does not round to 51%. Therefore, Strategy 3 hasn’t flipped yet.

Now, let me make something very clear. Don’t get hung up on the difference between 50.4 and 50.5. Understand the spirit of the rule. When I developed Strategy No. 3, I was simply trying to reduce the number of false signals by adding the extra filter. I wanted to reduce the number of times that the commercials barely flipped one way or the other only to flip right back again within a short period of time. There is nothing magic about a rounded number to 51. I could have use other numbers and probably would have had results that were just as good, maybe better.

The reason that I have four strategies posted is to allow for some discretion in specifically how someone may want to enter and exit COT signals. And, as I’ve said before, at any given time I may use a combination of any of them. I have been partial to the strategies that require weakness before I flip because of my belief that the market really needs a correction. We got the start of one this week, but I would like to see more. So I’m not sure specifically how I’m going to handle this in the days and weeks ahead. If we get weakness next week I may cover some shorts and wait and see what happens with next Friday’s report. So you could call it a combination of Strategies 2 and 3. But I’m still thinking about it.

If you decide to follow the specific rules according to Strategy 3, the risk you’re taking is the market could take off to the upside and not give you a chance to get long or cover shorts. Possible benefits are that you may get a better price or the commercials could flip back to being short again without you having to make a switch. Frankly, it’s a tough decision. I’m sure I’ll have more to say about this in the SMR.

Larry

Larry,

I'm a new observer of your forum. I like what I see and read and am trying to understand the system... I have been impressed by your conviction over the last few weeks until your comments this morning. Since you have a tough decision to make shortly, I thought I would test your emotions a little...

Isn't it true that if you add emotion, hunch, gut feel, etc. to the strategy don't you risk crossing yourself? Afterall, no matter how much we want to think otherwise, we don't know what will happen next. If you second guess the COT or try to fine tune a strategy based on a hunch while too close to the action, then you are assuming that you know something the COT doesn't and that seems like it could potentially put you on the dumb-money side of a few trades. And if you think that you can win the timing game and beat the COT then haven't you broken at least one of your master rules? Afterall, the COT has already switched - that's a lot different than saying "they are about to switch or they are thinking about switching". It's already happened. As of today, the smart money is long - period. What else do you need to know. Maybe they feel the bubble growing just like you but think it will be months, quarters, or years from busting. Isn't that what happened in the late 90s? The smart money might all agree we are going down hard at some point. But right now the majority thinks we are going higher first. Maybe it will help to reminder yourself that we could look back on this and say "what was I thinking, I saw the bubble get much worse on the last bull, why was I so sure we were going down so soon? I should have trusted the COT, they know better that I."

I hope you know I am having fun with you. Don't get me wrong, I am having the same mind swings you are. I am just trying to be strong and bring out the conviction in you that I know is there. It seems to me that you have a good system in not trying to out smart the COT - you must trust it!

Mark

Mark,

There are three basic COT strategies in terms of entry and exit. Only two of them have flipped. So I don't see how it can be said that the COT strategy has switched to long. Which strategy? The reason that I have more than one posted is precisely so I, and others, can choose the one we like best. It doesn't mean you have to use the same one every time. Last week, because of market conditions, I thought that one of the "buy on weakness" strategies had a better edge than Strategy No. 1. After the first week, that turned out to be correct. Now, the situation is a little less clear to me.

Mark, I have never claimed to be a pure, 100%, mechanical trader. In fact, I have repeatedly said that I'm not. I have a theory that there is a thing or two that I've learned in the last 31 years that I should add to the decision making process. So sometimes I do apply a little intuition. Not much, just a little. Intuition comes from observing thousands of market conditions over a very long peiod of time. It's just a way of measuring probabilities from previous experience. There's a huge difference between intuition and "emotions." Or "gut feel." Emotions have nothing to do with it. I got rid of the emotions problem a long time ago.

Larry

I am trying to see your point - please allow me to challenge you a little more... Maybe some good will come of it.

The problem I am having is that I want to stand firm on the basic concept of following the main COT indicator (net commercials for s&p). All strategies expect #1 suggest that there are times when you are betting against this basic indicator. For example, right now if you are still short then you are betting against the main indicator. I would think that if #1 creates too many trades for you then the variations of the #1 strategy would be to exit the market during these intermediate times and have rules similar to those of #2,3,4 for re-entering. But to stay short when the COT is long seems to break the basic spirit of the overal strategy.

Now lets look again at how you expressed your mindset this morning...

You indicated that you might cover your shorts and wait and see. This seems completely logical. The only problem I have with it is that we would then not be following any stategy and therefore we begin to be vulnerable to making up the strategy along the way. This seems to take us further away from the fundamental strategy of having a strategy in the first place. (did that make sense?) If you do cover your shorts and not go long right away, I can think of several market scenarios that would leave you wondering when to re-enter. In other words, you would be left without a predetermined strategy and therefore vulnerable to relying on intuition for your next move.

Maybe what I am suggesting is that we formalize this "intuition" that you referred to by testing/creating a new strategy that is similar to the others and uses the concepts of #2,3,4 but has a little middle ground before switching from long to short. The big difference in my eyes is that this new strategy(s) would never be on the opposite side of the main COT indicator. (this ignores the fact that we don't get the COT results for a few days)

What do you think?

Mark

mark, i think you're probably right - intuition can NOT be backtested - therefore if you want a 100% pure mechincal system you should NOT rely on intution.

i think what larry is saying is, he doesn't (nor has he ever claimed to) follow the COT as a 100% mechinical system. he looks at the cot, looks at his 4 strategies, looks at his own intution (which is based on 31 years of market experience) and THEN makes the call.

i tend to follow system #4 100% - but i use my own intuition to decide HOW MUCH.

we're all different - that's why we all get different results. hey, whatever makes sense to you AND makes you money - that's your system.

-ja

OK - I agree that in the end we all have our own decisions to make. And rather than leaving it totally up in the air, Larry has detailed 4 strategies to act as a guide. (Let's not underestimate how significant it is that Larry has taken the time to do this and share it with all of us. Thank you!)

But for the sake of a good discussion, don't you think that the most overwhelming leason that Larry's 31 years has taught him is to go with the smart money? Isn't that what drove him to creating the first basic #1 strategy? Is it then ok to tweak the basic strategy in such a way that you end up with moments in time where you are betting against the smart money? I assume most of us get continually reminded that we can't consistentally out smart the market. And that when we spend hours trying to we are just doing it because we like to and not because it creates better results (or fees in the case of fund managers).

It seems to me that the real question is...

Is all this "intuition" a real "special spice" that makes us good investors or is it the flaw that keeps us from being better investors and keeps chewing up our time that would be better spent on other life activities?

In other words, is the strategy to follow the smart money or to get greedy and try and beat the smart money?

I don't know about you but I like this COT strategy because 1) it makes sense to follow the smart money; 2) it is based on broad index funds; and 3) it is a time-efficient investing system.

I guess you could say it is mechanical but there is a big difference between technical mechanical systems based on charts and this strategy that is really based on what the smart money is doing. I'm just not convinced that any of you (even you larry - with all your experience) should go about your investing with the mindset that you can beat the smart money. Isn't that what you are saying you can do if you start tweaking the basic strategy?

Mark

Let me add one more thing...

Doesn't adding intuition to the strategy violate these two Principles of Consistency?

#1: I objectively identify my edges.

#4: I act on my edges without reservation or hesitation.

If I am missing something then please point it out. I am only trying to learn.

Mark

I'll add one thought to this thread. I will consede that the smart money has been on the right side of the market most of the time in the bull market of the nineties and even the begining of the bear market. However no one that I know of regardless of how much money and info they pocess can see into the future. I imagine that these entities have their basic beliefs that influence their trading strategies. The short position came down hard in June and stayed that way till Sept. Seems pretty obvious these traders believed like we do that the bear market has just started. However the future didn't work out like they thought. They reduced their position drastically in Sept. Six months went by on the wrong side, far and away the largest mistake they have ever made. Now they're long at a time that has historically been a very unprofitable time to be long the market. Some serious risk management seems in order at this time. If we were to get another Oct 87 without the commercials switching back in time it wouldn't be pretty.

Gary

Mark,

You’re getting into a subject that is far too involved to do justice to within the constraints of a message board. Let me just say that there are three stages of a trader’s development – 1. the mechanical stage. 2. the subjective stage and 3. the intuitive stage.

The thing is that you can’t get to the subjective and intuitive stages of development until you’ve mastered the discipline of the mechanical stage. You’ll just have to take my word for it that I’ve done so. But it’s not easy to do. All you have to do is read a lot of these posts for the past few months and you’ll see how difficult it is for many people to follow a simple mechanical system.

As far as the COT is concerned, the only time I bring in subjective decision making and intuition is in choosing which of the strategies I think is most appropriate for current market conditions. Also, I use multiple entries when I enter positions. But I’ve done that all along. And I’ve written about it several times.

This is a great subject that you’ve brought up, Mark, but you need a little more background before we can discuss it much depth. I suggest you read Mark Douglas’ book, “Trading In The Zone.” You’ll see that I’m not violating any rules or letting emotion into the decision making process. And I’m certainly not operating without a plan. I’m just at a little different stage of development than many are (don’t you think it’s about time?) Read the book, and we’ll discuss this subject some more.

Larry

Gary,

Your last two sentences really got my attention...

"Some serious risk management seems in order at this time."

No kidding! What is it that I preach about until I'm blue in the face if it's not risk management? It's not just in order at this time but at any time.

"If we were to get another Oct 87 without the commercials switching back in time it wouldn't be pretty."

Now I'm really confused. I thought that we didn't have to worry about a crash because President Bush was always going to come in and buy stocks at the 50 day moving average and cause a flag pole rally. What happened to that?

By the way, I like the adjustments that you've made to your system. I commented on it in your "New System" thread.

Larry

Larry,

Here is the problem I have now...

Normally, I read/study/learn everything I can about a subject. This comes natural to me. Once I get interested in a subject I get very motivated to understand it in great detail. I think it is safe to say that my career has been shaped by this character trait and it has allowed me to have a significant edge over my competition. My main focus is commercial real estate investment and development but I have several other businesses as well. I guess you could say that I am a mini-Trump. I firmly believe that knowledge is the key and anyone can learn if they make it a priority. Now I spend lots of my spare time helping friends and family understand how to get out of the "rat-race". (By the way, I think the CashFlow Games are great and that’s why I buy so many from you for the people I care most about). So my first thought after reading your last post was great, I will read the book you suggested and get just a little bit smarter.

But here is my problem...

Since my main investment vehicle is commercial real estate investment and development, I don't have tons of time to spend studying the securities market. I have resolved to have it be a part of my portfolio but until now I just accumulate ETFs and stay long. I did manage to exit the market in the spring and summer of 2000. It seemed obvious to me that we were going down hard. I used this period to collect more real estate assets so it’s not like I was on the sideline. I began re-entering the stock market on the long side last summer and just continue to average back in each month. I guess you could say that I am assuming I will recognize the next major bear and will start to get out at some point. (Maybe it’s people like me that keep driving up these prices). I don’t expect to time it perfectly and since I always average in and out I don’t really get hung up on timing. It’s really the major trends I try to get a sense of. The problem I have with this approach is it violates my fundamental rule of not investing in something I don’t fully understand. I have not been comfortable with this loosey/goosey strategy and that’s why your COT strategy is so intriguing to me. It seems to have the potential to formalize the way that I was investing in the stock market and that makes me more comfortable investing without doing tons of homework everyday to keep up with stock trends. Basically, it lets the COT do the work. I like that. Don’t get me wrong, I like reading about investing and following the stock market. I just don’t want to confuse my serious investing with my entertainment.

Now if I start reading the book you suggested then I am afraid I will get sucked into this whole game of trying to outsmart the smart money. I just don’t feel I can ever do it justice and will only learn after many hours and lots of trial and error that I should have just stuck with a simple disciplined strategy. After all, time does seem to slip away and I like the idea of spending more of my time with my family and friends – ok I play golf 3-4 times a week also.

So my question to you is this…

Do you think it is reasonable for someone to have a sound strategy that is strictly a “mechanical” strategy that doesn’t contain any subjective or intuitive elements? Could the COT strategies (1,2,3,4) be just that?

I understand that this is not the way you invest. But that’s not the question. I hope you agree that if my strategy depends on my adding a subjective or intuitive element, then based on my main rule of investing, this forces me to be deeply entrenched in the market on a regular basis. I don’t want that. Do you think others have this same problem? Do you think I should still read the book?

Mark

Larry,
Do I think we'll see another flagpole rally? You betcha! But I am keeping an open mind to the fact that at some point I think the bear market will overwelm any efforts to stop it. Very strange market action Thursday. Russell thinks that deflation might be starting to take hold, he's advised selling the diamonds and he thinks that the top is probably in for this market. Is he right? I don't know, but until now he hasn't advised selling the diamonds on any pullback. Personally I'm a bit nervous to enter more longs at this time. I will sell my QQQs Monday take my profits and be happy. I'll will just sit and watch until Feb. 10. Then if the market is trending I will take a position using my lower risk system. (I hope it's trending down, not because everyone else is long but because there's a lot more money to be made on the downside)

Hey Joe you wanna bet on the Superbowl? I'm one for one and on a hot streak. Patriots in a close one.

Gary

Larry,

I just read many of your past SMRs and I think I know how you will answer my questions. You kind of already did in the last several issues. "There are no short cuts!" - OK, I got it! Just like everything else I have mastered, those that do the homework will be rewarded. I am sure I will begin reading most of your suggested reading list titles. I am sure they will help with all my future investing.

But just one more time... If I am willing to forgo superior stock market results and just invest for the long run and accept the mast market returns as a portion of a much larger portfolio of assets, do you think its reasonable to "upgrade" to the COT strategies without subjective or intuitive elements - and therefore achieve somewhat of a "shortcut" to slightly better returns that I would get by just being long the S&P?

I promise I will let you off this thread after this post.

Mark

Mark,

Okay, now that I know more about your situation I can look at what you’re asking in a whole different light. No, you don’t need to read the book if real estate is your main focus and the liquid markets are just some kind of casual endeavor (although I think the same principles apply to any form of investing, but I don’t want to open that can of worms right now).

So like I said, there are three phases of development – mechanical, subjective, and intuitive. You need to stay strictly mechanical. In fact, the great majority of part timers should stay strictly mechanical. So pick one of the strategies that you like (evidentially you like Strategy No.1) and stick with it. You will still see me writing about all kinds of other ways of approaching the market. But don’t pay any attention to it if you know it doesn’t apply to you. I often will write about things that I’m doing, with a warning that whatever I’m doing shouldn’t have anything to do with what anyone else is doing.

Mark, I had the distinct impression that you were directing your observations to me and what I’m doing. If you’re talking about yourself, then I agree with you 100% - absolutely keep it mechanical. If I could relate it to the real estate market, I’m sure you would give different advice to a casual real estate investor who only does it on a part time basis and only as entertainment than you would someone who is a real pro. In fact, if I ever get interested in real estate again (it would only be when they’re almost giving the stuff away) I would just pay a pro to do it for me. There is no way that I would want to do whatever it takes to become an expert in that area. And the only way I would do it on my own is if I were an expert.

Occasionally we get posts on this forum from people who are obvious amateurs who know just enough to be dangerous. You obviously don’t have that problem and that’s probably part of the reason you’ve been successful in you other endeavors – you’re smart enough to stick with what you know and to put everything else you do on autopilot. I agree that a mechanical approach to the market is an excellent way to do that.

Larry

Mark, one more thing since my last post evidentally crossed with your last post - you don't have to cut off this thread. Even though I get frustrated at times when I have a hard time communicating with people, I really do enjoy this forum. Otherwise, I wouldn't do it.

Larry

Thanks Larry! I think we are on the same page now. I have learned a lot from you already and I respect your opinion. I was wanting to think that an autopilot strategy would work for me but I was getting confused when you started adding the special spices - like the difference between my cooking and a master chef.

I will try and continue to add my prospective to the message board. It's probably fair to say that you have two audiences – full timers and passive investors like myself. Maybe I can help you help others not get ahead of themselves and stay within their expertise. That may be a tall order!

Mark

Larry,

Just to be clear about the nature of my liquid investments... I didn't mean to give you the impression that I only have "funny money" invested in the markets. I want to feel good about having 20-30% of my total assets in the market with the majority of the rest in my main real estate investments where I spend all my time. That's still a lot of money in market and it concerns me to be investing in an area that I don't study everyday. It is very serious to me and that's why I like the COT strategies. When I made the comment about entertainment I meant that while my 20-30% serious money is working based on an autopilot strategy in the stock market then I like to read and listen to all the commentary as entertainment. I don't make any investments based on this "entertainment" information because there is too much chance I will be on the dumb-side of the money.

I believe it is easy to make money - it's not loosing large chuncks along the way that most people have trouble with.

Mark

I would say that today was a text book case of a flagpole rally. I missed it by one day. I really thought we would have seen it yesterday. I guess I'm slipping Just kidding. Now will it hold up next week. If it doesn't there might be bad times ahead.

(conspiracy theory)
Gary

I didn't have anything to do this morning and thought I might write down some of my thoughts on the market and the COT. Why have the commercial traders been on the wrong side of this trade for so long? Why are they starting to whipsaw? In the middle of Sept. the large short postion evaporated very rapidly. This was followed by a very steep decline in the markets. This dosen't seem to match up. But wait immediately in Oct. we have one of the many flagpole rallies that starts the market to new highs. The short positon stays in the 49% to 50% range until recently when it flips to long, which is followed almost immediately by another steep decline in the market. Now the position has switched to short again on the same day that we get another flagpole rally (it really flipped on Tuesday) What the heck is going on here? I think the commercials are on the fense they are not sure if Bush and the Fed can keep supporting this market or if the Bear will resume. Accutually I think they know the bear will be back sometime hense their bias towards staying short by a small amount most of the time. I'm very interested in seeing were the market is at next Friday. These are just some of my thoughts on a lazy Saturday morning. I wonder if we'll ever find out if my theory is right or wrong. Come to think of it I wonder if we'll ever know if there were really weapons of mass destruction in Iraq

Gary

It doesn't appear that there has ever been a week were the Nasdaq closed lower than the top of one of the flagpole rallys in the last 7 months. There might be an edge as to which way the Nasdaq is heading by watching the close on Friday. I wonder if it is lower on Wed. or Thurs if we'll see another one.

Gary