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Commercials sitting on largest net long SP500 Future position in years
- Thread starter makloda
- Start date
Do not mean to rain on the parade makloda but this really doesnt mean shit, for all we know this is commercial hedging.
Quote from makloda:
May 29th, 2007
http://www.tradersnarrative.com/commitment-of-traders-report-gives-bullish-signal-972.html
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 two week 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 âsmart moneyâ). 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 âdumb moneyâ 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:
October 2005
January 2004
March 2004
May 2004
September 2003
August - October 2002
September 2001
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 youâd be doing if you short this market right now.
Quote from basis:
Yes. If I buy futures and short stocks, my positions show up as longs for COT, and my shorts as short interest on the exchange.
How long are index arbitrage positions typically left open for? I would have thought only a short period of time in which case they wouldn't be open positions so wouldn't count as open interest. Commercial hedging is another matter.
It's probably useful for advisory services that claim to have COT "mastered" and can then sell their subscriptions to the dumb public. Floyd Upperman & Larry Williams come to mind. I'm sure there are others.
Quote from basis:
Are you saying people don't do index arbitrage?
The point is that all this crap is useless. There's no predictive value to it. Short interest was probably useful in 1970. Now it's not. COT in a replicable product has *always* been useless.
True, COT needs to be viewed with a very open mind, in some markets like silver, ETF's (classified as Commercials) are carrying about 15%, skewing data as they are long only at all times. But having seen the nonsense on here on elitetrader.com , l am quite sure using Small Spec as an indicator would probably be the closest we can come to a holy grail. But also remember use of COT Large Spec is equally misleading as it tracks activity of market participants ( mainly CTA & Hedgehogs) who are by far and large trend followers of sorts. However its one of the few non-price based quantifiable measures of market activity publicly available for decision making that we have. I would suggest absolute care when using COT as it has an element of bottom and top picking. Its certainly a tool, but less useful in areas were there is a large,liquid & international cash market ( fixed income, FX & other financials ).....COT is best left for breakfast ( Orange juice,corn,coffee,pork bellies etc)
Quote from notouch:
How long are index arbitrage positions typically left open for? I would have thought only a short period of time in which case they wouldn't be open positions so wouldn't count as open interest. Commercial hedging is another matter.
You can't look at it like that. Index arb is one of many correlated strategies, so positions initiated as index arb can/do end up in many different buckets. But it's completely possible that a stock vs futs position lasts for a couple months. And short interest / COT stuff is snapshot, so it would only matter what positions existed at the time they're measured.
where big money is dont mean shit, where was LTCM when they went under.
Fantastic post. You're absolutely correct that arbitragable financial futures give few hints of position bias in the COT. It's freakin' IMPOSSIBLE to figure out what's a hedge against the underlying or vs. an options position or part of an intermarket spread (i.e. a dealer will be long ZB but short ZN).
Traditional commodities are a better tell. Even there, one must be careful to be flexible when interpreting data. As you mention much of the large spec OI is trend following funds and those guy's with more and more frequency have the ability to run over commercials.
The "smart money" isn't always smart......
Traditional commodities are a better tell. Even there, one must be careful to be flexible when interpreting data. As you mention much of the large spec OI is trend following funds and those guy's with more and more frequency have the ability to run over commercials.
The "smart money" isn't always smart......
Quote from Cygnus Atratus:
True, COT needs to be viewed with a very open mind, in some markets like silver, ETF's (classified as Commercials) are carrying about 15%, skewing data as they are long only at all times. But having seen the nonsense on here on elitetrader.com , l am quite sure using Small Spec as an indicator would probably be the closest we can come to a holy grail. But also remember use of COT Large Spec is equally misleading as it tracks activity of market participants ( mainly CTA & Hedgehogs) who are by far and large trend followers of sorts. However its one of the few non-price based quantifiable measures of market activity publicly available for decision making that we have. I would suggest absolute care when using COT as it has an element of bottom and top picking. Its certainly a tool, but less useful in areas were there is a large,liquid & international cash market ( fixed income, FX & other financials ).....COT is best left for breakfast ( Orange juice,corn,coffee,pork bellies etc)