Sentiment and the Commitment of Traders

An old stock traders adage is that "anybody who plays the market without inside information is like a man buying cows in the moonlight." The problem is that "inside information" is first very difficult to get; second it is illegal; and finally it is not always accurate, as some unscrupulous insiders have been known to leak information which is contrary to their position (telling of good news when they need to sell shares, or letting the public know of bad news when they are buying to keep the price down).

Though not true insider information, the Commodity Futures Trading Commission (CFTC), does release bi-weekly a break-down of who is holding what for all the futures and options markets called the Commitment of Traders Report (COT). The COT Report is a break-down of Open Interest (out standing contracts) into three main classifications: Commercial Hedgers, Large Speculators, and Small Speculators.

Commercial Hedgers are firms and individuals who operate on the cash side of the business in the underlying commodity, like farmers, grain elevators, merchandisers, and processors. This is by far the most influential group in the commodities markets, as these firms have scores of analysts and field agents who keep them informed of wide variety of important events. Their intelligence gathering networks are second to none. These are the big boys of the grain trade, like Archer Daniels, Conagra, Monsanto, and the like. By using the COT Data, you can not tell what information they have, but you can tell how they are reacting to this information.

The Large Speculators are those speculative traders who have positions which are large enough to be deemed "reportable". By and large, this classification is typically the Commodity Funds. In the past, this was the most accurate group to follow, as Large Speculators used to get large by trading well. However, in recent years the industry has grown and many Large Speculators are large not because of their trading abilities, but due to their money raising abilities. As such the Large Speculators are not terribly accurate, though they are definetly worth paying attention too, especially at extremes, as their buying and selling can move the markets. It is definetly worth watching the grain markets at popular moving averages when the Large Speculators are extremely long or short, as their activity tends to pick up around these levels, as most of the funds are Trend Followers.

The last category is the Small Speculator. This is you and me! This includes all speculators below reportable position limits and small hedgers. It used to be that the CFTC segregated Large and Small Commercial Hedgers, which made the small speculators a more accurate "fade" (do the opposite), but with the inclusion of the small commercial hedgers, this group has become more accurate, making watching them less usefull.

In general, the Commitment of Traders information is best viewed when a group is at an extreme. Normally, when the Speculative groups reach an extreme, they market is ripe for a correction, especially the small spec's. I view extremes as the Net Position (Long Positions - Short Positions) in the upper or lower 20 percentile of the last years range, as calculated by:

(Current Net Position - Yearly Low of Net Position)/ (Yearly High Net Position - Yearly Low of Net Position)

  • with the net position being the net position of a specific group: Commercial Hedgers, Large Speculators, Small Speculators.

Grainguide, strictly advises that the Commercial Net Position is the only one worth watching. When the Commercial Net Position is at an extreme, the Commercials are usually correct on the trend for the next several weeks. As such, Grainguide tends to follow the commercial net positions, and watching for large buying or selling, especially when the market in question is in an Under- or Over- Valued zone.
 
THE DATA CONTAINED HERE IN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE.  CFEA WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN.

DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES POSITION.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. 

NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. 

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.