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The latest Commitment of Traders report had a surprise inside. The “smart” money, commercial hedgers now have an all time record net long position.
If you recall I’ve mentioned the Commitment of Traders Report a few times and pointed out the aggregate net position of the commercials.
The usual behaviour for commercials in a rising market is to either reduce a net long position or to increase a net short position. After all, they are commercial players who already have exposure to the stock market which they want to hedge.
But something quite singular has unfolded recently. Since around April 2007, eventhough the market has gone up, the aggregate nominal value of the commercials has been net long. And it has remained net long over a prolonged period of time.
Now, it has actually increased remarkably and broken all previous records. The aggregate nominal value of the commercials net positions is a historic $14 billion (appx.).
And it is even more remarkable when you consider that not only have the markets been rising lately, they are either in or almost at, all time highs.
As I look across at the internal metrics and various indicators, most are ambivalent or neutral. The COT is by far the most bullish one out there right now. However, I do want to point out that with this sort of indicator, which is dealing with dollar values (of contracts), we have to be careful.
Over time, the market tends to increase in size, capitalization, and with it commensurately, volume and trading activity. If we compare today’s market, on a dollar basis to itself, say 5 or 10 years ago, we are comparing apples and oranges. This is why stock market activity is usually equalized using GDP or other economic gauge.
In the same way, the COT data I mention above is in dollar terms and therefore, we have to take it with a grain of salt. The fact that it is now at a historic extreme may not be due to simply an extreme in sentiment but in the increasing size of the market and contracts traded.
But while we consider that caveat, there is no doubt that the picture it paints over an intermediate time frame is still quite bullish.
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