Trader’s Narrative

The most recent COT (Commitments of Traders) report which covers the recent market downturn is out and it paints a troubling picture for the market going ahead. As you know, the COT shows a snapshot of the three major market participants: small speculators, large speculators, and commercials.

We would expect that after such a steep and hurried decline, the small speculators in the futures market would retrench and lick their wounds. That is, sharply curtail any long exposure, and maybe even go short. But that is not what has happened. In fact, the small speculator has increased their already sizeable long exposure. Meanwhile, the commercials (the smart money) have done the opposite and have on the largest short position since early 2002.

I still think we will get a bounce, but the fact that so many people are expecting a bounce here may mean that it will be a feeble one. What I come back to again and again is that the decline, while sharp, has been over a very short period of time. We need a more prolonged market decline to really put in any sort of significant bottom.