If as Larry suspects the market stays in a trading range for the next 5-10 years like it did from 66-82 (I'm leaning that direction myself because I think central banks will print enough money to keep the world economy from deflating) maybe we should try to come up with some trading strategies to take advantage of it.

Gary

go to: http://www.traderclub.com/systems_sidewinder.htm

chuck le beau has a bond (futures) trading system called the "sidewinder" that he claims makes money in sideways markets. read about it &, if you're curious, buy it. he charges $250.

i don't know what the strat is but i do know he's a credible systems designer.

-ja

p.s. if you don't like this one he has many others.

Gary,

Let me clarify what I wrote in SMR 113 (http://ldholmes.com/password/smr113.htm) because I don’t want there to be any confusion as to what happened during the years 1966-1982.

I didn’t use the term “trading range.” A trading range implies the market is not trending. I did say that the market ended up in 1982 pretty much where it began in 1966. But in the meantime there were some huge moves both ways -- 1966, down 25%. 1966-1968, up 30%. 1968-1970, down 30%. 1970-1973, up 55%. 1973-1974, down 45%. 1975-1977, up 80%. 1977-1978, down 25%. 1978-1981, up 35%. 1981-1982, down 20%.

To put that in perspective, in order for today’s market to match the 1973-1974 decline, the Dow would have to drop to about 5,800. I don’t think that would seem like a sideways market to anyone. And then for it to rebound 80%, like it did in 1975-1977, it would have go back up to 10,400 -- about where it is now. Again, an 80% move in two years is not going to seem like a trading range.

So I don’t know what special trading strategies are needed. The only strategy that you would want to stay away from is the buy and hold approach. And, hopefully, nobody is still of that mindset.

Larry

Or to use another example that more people can relate to, the S&P right now is about where it was in 1998. But, in the meantime, it's been as high as 1550 and as low as 760. Have we been in a trading range since 1998?

Larry

I guess I'm wondering how we could go about catching these moves with COT money. We had pretty good moves last year but the COT doesn't seem to be a great strategy for profiting from these intermediate moves. The character of the COT seems to have changed also. During the first 17 years the COT was on the right side of the market most of the time and if it wasn't, it didn't take them long to figure it out and get on the right side. But the COT has been on the wrong side now for almost 2 years. This is unprecedented compared to their record previously. The COT has been mostly short now for a little over 5 years with the exception of Mar. - June of 03. It is acting more like a sell and hold system lately. Larry you posted a while back that until you thought the commercial traders weren't using the futures market to express their opinion of market direction you would have no reason to doubt the COT system. Do you think it's possible that most of the commercial traders are now using the futures market as a hedge against a big decline instead of expressing their opinion of market direction.

Gary

Gary,

Of course the COT has been mostly short for 5 years. Five years ago the S&P was at 1500. So I would hope they’ve been mostly short. And, you’re right, the only significant long position was during March through June of 2003. But that was a pretty significant one.

The period where the COT really gave back a chunk of money on the short side was the six month period between July of 2003 and January of 2004 . The market really hasn’t done much since then. Therefore, the COT hasn’t done much since then either (just looking at the basic Strategy No.1 results).

So the real question for me is why was the COT -- and I’m focusing on Strategy No. 1 because it’s the one that simply follows the COT flips -- short during the period of July, 2003 to January, 2004 when the market was really ramping up?

To answer that I have to go back to why I think the commercials are using S&P futures in the first place. I think they tend to go long S&P futures when they think the market is relatively undervalued and I think they tend to go short S&P futures when they think the market is relatively overvalued. It’s as simple as that. They’re not trying to time the market. They have deep pockets and they don’t have to worry about timing. They’re just looking at relative value.

So it’s easy for me to understand why they would get out of long positions and go back to being net short in July of 2003. Price/earnings ratios were even higher than they are now. Fundamentals didn’t look good. The economy still looked pretty weak. The market had just had what seemed to be a big short covering rally from a low. If I were in their position, I would have sold into that rally as well.

If you want to know the truth, what really surprises me is that they stayed long all during 1999. I’m glad they did, but I’m surprised. Most of the real pros that I know of -- including Richard Russell -- were getting out of stocks by 1998. And, as you recall, the commercials did the same thing. They took a big hit being short in the early part of 1998. It’s just that, for some reason, they went long later in the year and stayed that way until the spring of 2000.

And, yes, I think a lot of commercials simply use S&P futures as a hedge. They’ve always done that. But here’s what you need to understand about their hedging activities. Unlike the commercials in gold, they don’t have to hedge. You see, a lot of gold companies stay hedged all the time. They do it as a matter of philosophy and strategy. Commercial traders of stocks don’t do that. So even when they’re hedging, they’re expressing an opinion.

So it always gets back to a fundamental premise. Winning in the market is all about finding an edge. And edge is simply the likelihood of one thing happening over another. The COT is just another way of finding an edge. Commercial traders, over time, are going to be right more often than they’re wrong. So I for one will continue to follow what they do.

Larry

Larry,
Just a couple of more questions for debate. You said you think the commercial traders go long or short if they think the market is over or undervalued. You already brought up 1999 when the COT was long but the market was extremely overvalued, I'm going to point out that when they went long in March of 03 the market was still extremely overvalued. Out of curiosity what was the P/E of the S&P from 95-99? It appears that they are trying to time the market sometimes and maybe hedge the market at other times. In regards to gold traders, I thought most of the miners had unwound their hedges (NEM, ABX). I was under the impression that the commercial traders in gold were the large banks. Is this not correct?

Gary

Gary,

If you’re looking to debate the COT with me, you’re going to be disappointed. Over the last three years I’ve posted all I have to say about the COT either in previous SMR’s or on this forum. I’m here to answer sincere questions about the COT (or any other financial topic) for those who are trying to learn. But I’m not here to debate its merits. Everybody is going to have to make their own decision about that. I’ve made mine.

Gauging the relative overvalue or undervalue of the stock market is more complicated than just looking at p/e ratios. I used p/e ratios as an example because many people know what they are and I didn’t want to get into all the other ways of valuing stocks. And remember I’m talking about relative values, not absolute values. For example, in March of 2003, the market had been washed out, the S&P had declined 45% from its high, all the bad news appeared to have been discounted, and the market looked primed for a big rally. And I wrote that in a SMR in late February of 2003, before the commercials flipped. So, no, I’m not a bit surprised that they flipped to long at that time.

Off hand, I don’t know what the p/e ratio for the S&P was from 1995-1999. You should be able to find that out with a Google search. Obviously, it was much higher in 1999 than it was in 1995. I do know that the smart money was net long most of the time beginning in late 1987, after the Crash had caused a lot of stocks to be dirt cheap.

I don’t know what you mean by “It appears that they are trying to time the market sometimes and maybe hedge the market at other times.” So I can’t help you there. You would have to give me more details about what you’re looking at.

I will say this. There have been many times in the past when the timing of commercial flips has been right on the money. But, as I’ve said from the beginning, I wouldn’t expect that. I can’t imagine why -- except for pure coincidence -- a commercial flip would exactly coincide with a market turn. So when it happens, consider it a lucky break. And I do think that the timing has been much better on the long side than on the short side. The topping process just takes a very long time.

When you talk about large banks being big commercial traders of gold, you must be talking about central banks who have positions in gold. Remember that to be considered a “commercial” trader you must have a position in the spot (cash) market. A bank that does not would just be a “large speculator.” I used to have banks as clients. I can’t remember one trading gold futures. And part of that time was when gold was going through the roof and on everybody’s mind.

There are still plenty of gold mining companies that are constantly hedged. And there are a lot that are unhedged. And there are some who are partially hedged. But there are enough that are hedged to keep a constant net short commercial position in gold. Commercial traders in gold have very rarely been net long, and only for very brief periods of time. And they’ve never been net long silver. So it’s a very different game than the S&P. You have to look at extremes rather than outright net long or net short positions.

And I have no idea what they’re doing in oil. I can’t do a backtest of the history of oil futures and find a relationship between commercial positions and the price of oil. I wish you would show me what you’re seeing there. If you’re just guessing, I understand. But if you’ve actually done the research, I’m very interested.

Larry

Larry,
I'm just asking questions that I think you probably have the answers to. I hadn't considered other levels of value in March 03. So I learned something new. Thanks
By the way after checking Google I found that P/Es went from about 16 at the end of 95 to about 30 in 98 before the big correction and then spiked to over 40 by 2000.
My question about commercial gold traders had nothing to do with S&P traders I just thought I remebered hearing on financial sense that the commercial traders were the large banks trying to supress the price of gold. I only follow the commercial position in oil as one tool to help me try to find an edge. Yes maybe their record over the past year or so isn't great but they are still the best capitalized and the smartest traders in the market and probably some are the same firms who trade the S&P so it seems reasonable to at least pay attention to what they are doing. You mentioned before that in 95 the market never looked back and an investor never got a chance to get back in. This doesn't appear to be nessesarily true. The Nasdaq pulled back to the 40 week moving average at the begining and middle of 96, middle of 97, beginning of 98, a large pull back almost to the 200 week average in the middle of 98 and pretty close to the 40 twice in 99. If you want to consider the 50 DMA then you got even more opportunities to reenter. So if the commodities bull is only in the 3rd inning (I happen to agree wholeheartedly) then I think its way to early for the oil stocks to start trading parabolic, which a lot of them are. I suspect we'll get lots and lots of chances to reenter. A person could have traded the Nasdaq. Took profits when the markets made new highs then waited for the pull backs. You could have caught most of the bull market and during the times you were out you could have possibly found a more profitable use of your capital instead of watching a lot of your gains fade away as the market corrected. You would have to have patience. So will I catch all of the commodities bull market... probably not. Will I catch most of it...probably. And hey I've got a couple of promising strategies for the times when I'm waiting for the inevitable corrections

Gary

"You mentioned before that in 95 the market never looked back and an investor never got a chance to get back in. This doesn't appear to be necessarily true."

When the hell did I write that? I'm not saying I didn't. But I would love to see the entire context in which I wrote such a thing. If I did write it, I certainly did not mean that an investor didn't have a chance to get in from 1995 until 2000.

Of course the indices pulled back to the 40-week moving average several times during that period. In fact, the S&P crossed it 12 times. The Nasdaq more than that. That’s what Strategy No. 5 is based on. And there’s no telling how many times it came back to or crossed the 50-day moving average. I tested that as well. What’s the point?

So you’re going to buy on pullbacks. Great. When are you going to sell? You didn’t mention that. And, of course, that’s the hard part.

I have a challenge for you, Gary. You tell me when you’re going to buy and when you’re going to sell (or vice versa). And I’ll show you how you’re going to underperform. Is that a deal? Or here’s a better suggestion -- I won’t argue with you about rock climbing if you want argue with me about the markets.

Finally, I’m having a hard time getting through to you what I’m saying about commercial activity in oil. I’m not saying commercial traders in oil haven’t done well in the last year or so. I’m making a much stronger statement than that. I’m saying that you can’t show me a correlation between commercial activity in oil futures and the price of oil at all. Nada. Zilch. Not just in the last year or so, but since the beginning of trading in oil futures. So how can it possibly be a useful tool? I think it’s because they’re much more active in the forward markets than the futures markets (like currency traders are). But I don’t know for sure if that’s the reason.

I do know that the little guy is net short oil futures. So I have question. If everybody is bullish on oil -- I think you said before that when everybody’s thinking the same way nobody’s thinking -- why is the small trader short oil futures? The little guy is overwhelmingly long S&P futures. So why isn’t he long oil if “everybody” is thinking the same way?

Larry

Larry,
I don't understand why you think I'm trying to argue with you. I'm just asking questions and occasionally expressing my opinion. If it seems to you that I'm trying to argue about investing, of which you are obviously more knowledgable than myself, I apologize. I'll try harder to reword my posts so there is no misunderstanding

You wrote:
"But since Joe is comparing it to tech -- a good comparison by the way -- tech got really overbought by the end of 1995 -- a lot of names 50% to 100% above their 200-day moving averages, etc. A lot of people were saying they’d just wait for a pullback to buy. It never happened."
I took that to mean that the market never pulled back.

You challenged me as to when I would sell. I wrote: "Took profits when the markets made new highs then waited for the pull backs" This is exactly what I did recently. When oil traded down to its 200 DMA in Dec. I entered leveraged positions, with fairly close stops I sold most of my leveraged positions at the end of Feb. and the first part of Mar. Did I sell to soon? Yep I sure did. Do I care? Nope not one little bit. Did I make money? A lot. When oil pulls back to the 50 DMA I'll put on small positions again. When I think things are getting a little to frothy (there's that word again) I'll take some profits and wait for another pullback. Eventually there will be a large correction again, when it happens I'll have lots of cash waiting to buy. This probably isn't the best strategy for catching the whole move but it fits my personality and I can stick with it and by using some leverage when we get a severe correction I think I can probably end up making about as much as just buying and holding all the way through the bull market.
In regards to COT for oil, I'm not trying to build a trading strategy around their positions by any means. I'm just using it along with oil stocks not confirming the new highs in oil, the fact that almost everyone in the media at this time is bullish on oil, the dollar looks to have found support and is now making what appears to be higher lows and several writers who's judgement I respect also think that commodity prices are set to pull back, most notably Marc Faber. Taking all these factors together I just think now is a good time to take some profits on oil positions. That's just my opinion.

Sorry again for giving the wrong impression.

Gary

Gary,

I don’t know if you’re trying to argue with me or not. I do know that I have a lot of difficulty communicating with you. I don’t know if that’s my problem or yours. But it is true, nonetheless.

For example, I still don’t know what the point of this thread is. It started out as a request from you for a discussion about how one should trade or invest in a sideways, or trading range, market. And you cited 1966-1982. I simply -- and I think very patiently -- explained how 1966-1982 was not a sideways market, but a market of many pronounced trends going both ways. Fine, I thought that was settled.

And then you said what you really had in mind is the COT and how we were going to catch these moves using COT signals. Okay, fine. I just didn’t understand if that’s what you wanted to know why you didn’t ask that in the first place. So we had our usual back and forth about the COT that we’ve had many times before. That’s fine too, but I don’t understand why you care, because you clearly have never used the COT in any way that I would recognize.

And then you had “a couple of more questions for debate.” And you challenged my assertion about what the commercials are doing when they buy and sell S&P futures. That sure seemed a little argumentative to me. If I hadn’t explained all that umpteen times before, I would understand. But what’s the point of beating a dead horse? I’ve come to the conclusion that it’s just one of those things that some people understand and some people don’t. If I ever figure out a clearer way of explaining it, I will. But until then we’ll just have to go with all my previous explanations.

And then there was the "You mentioned before that in 95 the market never looked back and an investor never got a chance to get back in. This doesn't appear to be necessarily true." Where I come from (which I realize is a different planet than the one you live on) when you tell someone that what they are saying is not true, you’re either saying they’re wrong or you’re calling them a liar.

Here’s my quote you cited from Joe’s excellent point about how the way to make big money is to catch a major trend -- like tech in the 90’s -- and use prudent leveraging. He’s exactly right. He’s been there and he knows what he’s talking about:

I wrote, “But since Joe is comparing it to tech -- a good comparison by the way -- tech got really overbought by the end of 1995 -- a lot of names 50% to 100% above their 200-day moving averages, etc. A lot of people were saying they’d just wait for a pullback to buy. It never happened.”

Gary, when I used the word “names” I’m referring to individual stocks, not an index. Just look at a chart for Intel (INTC) from 1995. The stock went from 4 to almost 10 (a 200% to 300% move) before it came back to its 50-day moving average, much less its 200-day moving average. Perhaps I shouldn’t have written the word “never.” But, I assure you, if you were looking to buy INTC on pullbacks in 1995, you would have been very, very frustrated. And not many people would have bought it on a pullback to 7.5 after seeing it at 4 just a few months before.

Then you finally came to the bottom line. You want to buy stocks at their 50-day moving average (or was it 200-day moving average?) with a close stop and then you want to take profits on a new high, and buy back on a pullback to the moving average. You say that works for you. Fine.

Okay. here’s what would have happened with INTC during the period cited above. You would have bought INTC in late 1994 at about 3.5 (after being stopped out several times because it moved above and below its 50-day moving average and you would be using close stops). I don’t know how you define a new high, but if you define it the way most people do, you would have taken profits at about 4.5 in March of 1995. Then you wouldn’t have had a chance to re-enter until August of 1995 at 7.5. And then you would have been stopped out several times again as INTC went above and below its moving average again.

That’s a really tough way to go. But if you’re comfortable with that then more power to you.

By the way, no apologies necessary. It was a lazy Saturday afternoon on Easter weekend. And I didn’t have anything better to do anyway.

Larry

Larry,
Sorry my posts do ramble and jump from one subject to another a lot. I don't suppose I will be taking up writing for a living any time soon
What I had in mind with my original post was to see if we could come up with ideas on how to play a back and forth market like we had last year. We had some decent moves but I dare say probably few of us were lucky enough to know when to take profits. If we get a similar market like we had from 66-82 we will get a lot of chances to make money but how will we know when to take the profits. This is what I've noticed over the last 2 years, the COT has not made money in fact it's lost money, more than at any other time. Before it was quick to correct mistakes, now it seems locked into the short side no matter how far or how long the market goes against it. I know that being disiplined is critical but I also know that a lot of systems that work great in one kind of market don't work in a different kind of market. Maybe it wouldn't hurt to consider the possibility that the system that produced great results before might not be the best system for this market. You've mentioned before that wall street is still locked into the "must own tech mania" from the 90's. When people find something that has worked in the past they want it to continue working. Unfortunatly change is inevitable. Could we be making the same mistake? "must trust the COT, look what it did in the past". Another thing I've noticed, and this is in no way disparaging towards you, this bear market has repeatedly fooled you. Now let me clarify. You have over 30 years experience in investing. Why should the commercial traders be any more adept at calling this market than you are, I suspect that most of them have far less experience than you have. Sure they have money and anyalsts and can get info faster and better than us but I would have to believe that it would pertain more towards individual stocks than the market as a whole. I went back and looked at the SMR in Feb. of 03 where you thought something good was about to happen. You obviously were thinking along the same lines as the commercial traders except you got there before they did.
But you also thought that the rally wouldn't get very far. Again thinking just like the commercials as evidenced by their reversal in June. Very few investors today have any experience trading this very difficult bear market. I'm leaning towards the view that if you can't have much success reading this market I seriously doubt that the 30-40 year olds trading at Goldman & Merrill will do any better. So in conclusion I thought it couldn't hurt if we tried to come up with strategies for trading this back and forth market.
In regards to the oil thing I didn't realize you were talking about individual stocks. My decisions to buy and sell oil stocks will be dependant on where oil is at the time not on whether the individual stocks are making new highs.

Well after that long winded response...
I hope we can be friends again

Gary

Gary,

1. I don’t base my belief in the COT solely on what it’s done in the past and you know it.

2. Since 1986 the COT has been through all kinds of markets. I don’t know what’s different about this one. The fact that you can only look at the last two years out of 18 years does, indeed, show a lack of discipline.

3. You’re right that the people doing the actual trading at Merrill & Goldman aren’t any better than I am. But they do have better information and, more importantly, their firms are so big that they can dominate the market by virtue of their sheer size. If they had to trade as individuals, most of them would fall flat on their face. But they don’t have to do that.

4. I don’t try to “call” markets and neither does the smart money. I’ve done my best to explain that. I look at edges, that’s all. Do you know somebody who can call markets? Please give me their name.

5. I’ve given you sentiment strategies, reversal strategies, and trend-following strategies. I don’t know what else you want. In fact, I don’t know what else there is.

6. You’re going to learn over the years that this is much, much more complicated than you think it is. There’s always a tendency for newbies to oversimplify things. You’re not always going to be able to make money. Nobody can. You try to identify your edges. You manage your money. That’s all there is. But it’s not easy.

7. I don’t know what you mean by “we.” If you want to trade based on what the market did in 2004, that’s fine with me. But I don’t know what that has to do with me or anyone else.

I’ve got to go do some family things now. We’ll have to have this deeply intellectual conversation some other time. And, of course, we can still be friends. I have a lot of friends that are.. shall we say… eccentric.

Larry

gary,

i think it was larry who recently told us that any one who simply went long the S&P 500 (via SPY i guess) anyday it closed ABOVE it's 50 day moving average and then closed that position any time it closed BELOW the 50 day moving average then you would have a superior trading system to a simple "buy & hold" approach.
(larry, if that wasn't you then... sorry. i read it SOMEwhere!)

i've also read recently (somewhere) that buying the S&P 500 when the PE ratio was below 15 (the lower the better) & KEPT buying while it was low (dollar cost averaging) - then sold the position when the S&P PE went to 20 or higher that THAT was a superior approach to "buy & hold" too.

the dogs of the dow has a very good track record too - see:
www.dogsofthedow.com for more info.

i'd also be willing to bet that trading SPY using larry's weekly SAR system would be better than "buy & hold" too!

the point: if trading the COT (sentiment) strategy is giving you pause then there are other "logical" ways to trade the broad market averages. look into one of these other approaches, one that is "logical" to you. once you're happy with a strategy that you deem logical then you'll be more likely to stay with it. they all will have losing streaks - that doesn't mean they're broken.

-ja

Joe,

It was me that posted in an SMR a few weeks ago about buying and selling above and below the 50-day moving average. I didn't do the research myself. I was quoting John Murphy. He used the Nasdaq. It did something like triple the returns of buy and hold.

Of course, it's another one that will be difficult for most people to follow because there will be periods where you get whipsawed a lot. So it always comes back to discipline (there's that word again). Most people would give up on it during the losing periods and conclude that it doesn't work anymore.

Larry