THE BIG MONEY IS BULLISH WHILE SMALL MONEY IS BEARISH
As a futures trader I routinely check the commitment of traders report released by the CFTC. For those who aren’t familiar with the report it is a breakdown provided by the CTFC of each Tuesday’s open interest for market positions in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. It’s widely followed in trading circles and gives a glimpse into what the big money, commercial money and even the small money is doing with their positions.
What piqued my interest in this data were comments in Tuesday’s “Breakfast with Dave” by Gluskin Sheff’s David Rosenberg implying that the equity markets were overly bullish because the commitment of traders showed a net bullish position of 151,000 contracts. Let’s put this in context, however. (See here for the current allocation of large institutions – a much more useful indicator).
I have found over the years that the commitment of traders report tends to be a fairly weak short-term indicator. In fact, the COT tends to be more useful in following the long-term trends of large institutions and where they are currently investing money. Mr. Rosenberg’s implication that the current net bullish position should be seen as a contrarian sign is not necessarily true. After all, big money moves prices and knowing where the big money is going is more often than not a good indicator of where to put your money as opposed to what to avoid. But let’s go even further.
One of my favorite indicators is actually the reporting of small speculators in the CFTC’s report. This shows us what the amateur and small-time futures traders are doing with their money. I have found over the years that this is a fairly reliable contrarian indicator. As you can see in the chart below these traders were net bullish in just 4 weeks over the last year. The last time small traders were substantially net bullish was just before the market crumbled at the beginning of 2009. But what is it telling us now? As of last week’s report it is showing the largest net short position since the week following the March 8th bottom. In other words, small speculators were this bearish just before the market took off on a 60% rally.
What can we glean from all of this? The big money is bullish and the small money is almost as bearish as they’ve been all year (a possible explanation for the skepticism of the rally). You can come to your own conclusions….
* All data in the chart is in thousands
the small guys must be listening to Meredith:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aeJ4CUnMwVJo&pos=5
With hedgies and insurance companies, or anyone playing long-short, and across asset classes … Is this information useful at all … we’re potentially seeing one side/aspect of a trade.
TPC Reply:
December 17th, 2009 at 8:35 AM
This is the primary reason why the large speculators and commercial data is difficult to gauge. Rather, it’s the small specs that tend to serve as a decent market indicator.
How does this chart compare with the Rydex Bull-Bear?
The Rydex says there are many bulls and few bears. So is the Rydex truer to the big money versus small money?
TPC Reply:
December 17th, 2009 at 11:28 AM
As a short-term (weeks) indicator I would put a bit more faith in the Rydex data. The futures data is likely a sign of a bit longer outlook (medium term – a few months)
Sentiment Trader reports each week total $Doolar commitments of Commercials (pros)
as of last week
C.O.T. SP500 – $COMBO (Dec. 11th)
PROS are s Net Short -$15 Billion contracts
June ‘09 = Pros were 2 Standard Deviation Max Long = Correct
Nov ‘08 = Pros 2 std.dev. Max Short = Correct
April ‘08 = Pros near 2 std.dev.Max Short = Correct
Aug.’07 = Pros 2 std.dev.Max Long = Wrong
Feb.’07 = Pros near 2 std. dev. Max Short = Correct
April ‘06 = Pros 2 std. dev.record Max Short = Wrong
PROS Batting average = +62.5% correct since ‘06
Sorry when it comes to SP500 I trust the Pros (smart money)
jt26 Reply:
December 17th, 2009 at 4:24 PM
BTW the standard deviation on 4 years and best-case, quarterly expiry data (sorry, just guessing) would expect, by chance, 50% +/- 25%. Sorry, 60% is not significant.
Just found your article on Commitments of Small Speculators fascinating.
I tried to set up the data so that I could follow it in the future but I am at a loss.
Which of the many COT reports have the weekly data to construct the value of the small speculators commitments??
Deeply appreciate and enjoyed the article.
SHB
Well, by this indicator all the wrong market participants were consistenly long gold 2006 through 2009… And small money is opposite of long money, because, of course, total net position in market at any time adds up to exactly zero.
Roomi Reply:
December 19th, 2009 at 2:06 AM
…opposite of big money… (typo)
What is the nonreportable field in the CFTC reports? Is it composed mainly of retail traders?
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