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The Commitment of Traders (COT) report is issued by the Commodity Futures Trading Commission (CFTC) and shows how small speculators, commercials and large speculators have placed their chips in the futures markets.
In contrast to other indicators like sentiment, it is an invaluable source of market information because it objectively lays out how the three separate players are positioned. The only caveat is that it comes with a 3 day delay (so insiders can still have an edge) so by the time you look at the target, it may have already moved.
Nonetheless, as long as our time horizon is medium to long term it can still be useful.
The latest report COT was released last week on Friday May 25th 2007. It showed a remarkable change in the behaviour of the commercial hedgers (known as the “smart money”). They not only reversed their recent short run bet against a rally, but are now sitting on one of the largest aggregate net long positions in the past 10 years.
The S&P 500 COT report shows the commercial hedgers as net long as they were in the early part of 2003 while the “dumb money” small speculators are still as short as they were at the March 2007 market bottom. In short, they are equally bearish even as the market has shaken off the dip we had in late February and early March 2007.
Over at the Russell 2000 (the small caps) things are quite lopsided as well. The small speculators are net short as much as they were at the bottom of the market in the summer of 2006.
Here are a few examples of previous times the commercial hedgers were close to this net long:
August - October 2002
With the exception of the 2004 instances, this was a fantastic tell that the market was headed up (on an intermediate to long term time horizon).
It is unusual to see such a lopsided bullish position by commercials after the market has risen considerably. Usually they step in and scoop up the market when it goes on sale due to panic selling (September 2001, for example).
I would be more confident buying along with the commercials when the market has been spooked lower but under any circumstances, it is too risky to bet against them. That is what you’d be doing if you short this market right now.
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