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Commitment Of Traders Report Still Bullish at Trader’s Narrative

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I received a lot of questions regarding my post on the extremely bullish commitment of traders report. So let me explain it and answer the questions that were raised. Then I’ll cover the most recent COT report and its significance.

What is the COT?
The Commitment of Traders report is a static snapshot of how the 3 different market participants (commercials, large speculators and small speculators) in any futures market are positioned. Each week the Commodity Futures Trading Commission (CFTC) reports how many contracts each of the three are long and how many they are short. The classical viewpoint is that commercials are the savvy group with inside information (who knows more about gold than a mining company?) and the small speculators are the ‘dumb money’ easily panicked by fear and lured by greed.

But interpreting the COT is as much art as it is science. It not only provides an amazing snapshot of the make up of the market, with each participant’s net position explicitely laid out but it also is a treasure trove of historical information. However, you have to navigate the data with a very nuanced approach.

There are a few details that can throw you off course. For example, the threshold for what is considered a small speculator as opposed to a large speculator can and has changed over time. And how reliable is it if a contract lot of, say, 990 is considered ’small’ but just 10 more is considered ‘big’?

There is a lot of information on the web if you google the term and some variety of words like trading, signal, bullish, bearish, etc. If you’re totally new, read up on the vocabulary so you know what the terms mean. And then from there move to the more advanced stuff.

One great new source of COT data as well as actionable trading information is the blog COTs Timer, written by fellow Canadian Alex Roslin. As opposed to my mish-mash, back of the napkin methods, Alex does thorough backtesting.

How bullish?
Now, on to the current COT data. The latest report shows another record setting bullish position by the commercial traders. They are now holding their largest aggregate net long position for the past 7 years. I think this is where a lot of the confusion came from in my last mention. Many thought that I was talking about one specific contract rather than the group of equities futures contract (in aggregate).

This is significant when you consider that the usual net position for commercials is to be short equities. Since they already have exposure to the market by the very nature of their business, they naturally want to hedge that exposure by going short the futures. So for them to even eliminate a net short position, that is be neutral, is quite a bullish sign.

But for them to actually go net long… well, that is a rarer sight indeed.

ss queen mary.pngThe SS Queen Mary
So while right now the commercials are net long for the S&P 500 minis they are not so for the larger contract. While this sort of ‘conflicting’ data can seem confusing, if we look at an aggregate number, rather than an individual futures markets we get a more holistic view. This market ‘gestalt’ can be useful in setting up an over arching view of the market.

While the put/call ratio or the LowRisk sentiment survey can be like zippy little speed boats, this aggregate view of the COT report is more like the SS Queen Mary. Can’t turn on a dime. But when it turns, boy, does it have an astounding amount of power behind it.

That reminds me. I have to do a better job of pointing out and categorizing the various market indicators mentioned. Otherwise it can be really confusing:

I’m bullish on the markets from an intermediate to long term perspective, but I do think that we are seeing a bit of an over extension here which warrants caution.

Now that I’ve said that… watch the market zip higher! ;-)

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