How to use Commitments of Traders data

Mercury · December 21, 2018

Recently we have touched on an interesting and oft little know resource that technical and fundamentals traders alike leverage. The US Commodity and Futures Trading Commission issues the positions "commitments" of traders on the exchanges covering a wide range of markets (see link below).

https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

Now traders will use this in different ways, as with everything in trading there are likely to be several different approached. Here is how I use COT data within my trading methodology. Note that I am a long term swing traders so I am looking for major trend changes to enter high probability/low exposure positions. Note also that a big part of this strategy for anyone doing it is to be contrarian when it makes sense (i.e. bet against the herd at the end of the trend as they pill over the cliff!).

I am using Gold to illustrate this as I have been actively using it to inform my Gold trading, especially when I went Long in Sept & Nov 2018 (see my Gold and Silver Rally thread for the history on that one if you are interested)

The bottom line on this is quite simple. When the the Non Commercials are heavily net one way or the other, based on historical swings and peaks and this occurs where my technical analysis is showing a turn I get ready to go the opposite way. most of these Non Commercials are trend followers and have to be in the market, where as retail traders can sit it out and wait, this is our one big advantage. The chart below shows annotations of where the Non commercials have been peak Long when the market turns down and vice versa.

Food for thought. PS I use the combined Futures and Options data set.

Mercury · December 22, 2018

Here is the COT assessment of the S&P500. It isn't as clear cut as Gold, which is not surprising really. The Miners clearly know more about the Gold industry, especially supply and demand, than anyone else so they drive the market and the Financials are left to respond to events that the Miners obviously know about first. Also when it comes to commodities the players are generally few and powerful (Miners, Oil companies and cartels etc). When it comes to Stocks futures the commercials and many and varied so the playing field is more even, maybe even tipped towards the Financials. Certainly this seemed to be the case during the 2007-09 credit crunch crash when the Net COT positions were heavily Bearish at the 2007 top and switched heavily Bullish at the early 2009 bottom (not shown on the chart below). However since then things have been more mixed with Financials Net longs peaking early in the Bull trend as traders got nervous about the whole trend and everything seemed to hang on Central Bank policy perhaps? Non Commercials were net evenly split between Bullish and Bearish at the Wave 1 (Purple) turn and were Max Bearish when the market went Bullish at Wave 2 (Purple) . They did better at Wave 3 (Purple) being very Bearish but actually didn't max out net Bearish until the Wave B (Pink) point. This is not that surprising as many people including myself, thought this was the end of the Bull. The Commercials were almost still as Bearish when Wave 4 (Purple) turned Bullish, perhaps showing that the majority of the Non Commercial Professionals though this was the end. Nice to know I was in such good company back then...

After that though it seems that euphoria overtook all market players and we began to hear why this time it would be different. Economists came up with the concept of ZIRP and NIRP as the new normal. MSM were awash with articles extolling the virtues of high dividend stocks and companies were borrowing heavily at low rates to fund M&A and share buy backs at crazy prices. Non Comms were net max Bullish for the rally at wave 3 (pink) and again net max bullish at wave 5 (Purple) the recent Oct top, and I believe the All time high and end of the Bull. It is this COT story, together will my well documented assessment (see other threads) leads me to believe the end has already come for the raging Central Bank Bull, a Bubble that will doubtless be the subject of many an academic thesis I am sure.