Commitment of Traders
by David Nichols, Editor
On the surface, this looks alarmingly like the other points in this long bear market where the averages plummeted in a waterfall decline.
But there is one important difference between now and those points -- the "smart money" was positioned for a decline back then, and this time they're not.
So who exactly is this "smart money"?
I'm talking about the Commercial Traders of S&P 500 futures. Not many realize that these traders are required by the that Commodity Futures Trading Commission (CFTC) to divulge their market positions on a weekly basis.
For every futures tranasaction, there is a party that is long the contract, and a party that is short. It's a zero sum game. The CFTC has rules that the main players have to divulge their positions; in addition to these "commercial" traders, there are also categories for "non-commercial" traders and "non-reportables" (small traders that aren't classified).
It's always interesting to see on the weekly Commitment of Traders report -- it's released every Friday at 3:30 pm at www.cftc.gov -- how the big commercial traders are positioned. Theoretically, they got to be biggest players because they are one step ahead of the market they trade.
Tom McClellan, of the McClellan Market Report, tracks these weekly Commitment of Traders reports on the S&P 500 futures, and his chart is showing some very interesting developments. (Thank you to McClellan Financial Publications for the use of the following chart).
It seems that the commercial traders are pulling in their short positions like mad, and switching over to the long side. As a group, these traders have not been this long since prior to the bear market!
It's interesting to note on the chart that prior to earlier market swoons, these commercial traders were set up with huge net short positions. This was particularly apparent back in February 2001 and July/Aug 2001, right ahead of those big market declines. You can see on the chart when previous support levels were broken decisively, these traders were positioned net short in a huge way.
Yet you can also see that right at the bottoms, these commercial traders were covering their short positions in a rush -- ahead of the bottom! -- and were then also capitalizing on the big rebounds. Many of these traders are making out both ways. Very impressive.
So now, instead of this group staking out a huge net short position, they are busy going long in a big way. The big players are betting on a double bottom here, and a big rally. Although the commercial traders are still net short, they are actually in a larger net long position than at any other time in the bear market.
Looking at their track record, this is significant. You take the opposite side of the trade from this crowd at your own risk. They don't like to lose, and they have lots of firepower available to win the market skirmishes that aren't going their way.
This also fits in well with something I've observed empiricially, which is that the trading in the futures pits actually drives the broader market. In a real sense, the S&P 500 futures market has become "the market", and these commercial traders are the ones that are on the floor, in touch with the day-to-day flow.
It's a big clue that being bullish right now is the side to be on. So I'll say it again: you couldn't really write a better script for a better buying opportunity than right now -- and this Commitment of Traders report confirms the opportunity even more.
Of course, in the short term, the hysteria can continue. There is still a virus of fear running loose in the markets, yet to be fully vanquished. This is actually the most persistent fear virus in history, from my eyeball survey. The VIX has been consistently high for months. We just have to wait for this epidemic to burn itself out. But when it does, look out.
We'll load into leveraged Rydex Funds on the long side, and ride the negative sentiment to huge gains -- right alongside the smart-money in the futures pit.
Sentiment Analysis from Phil Erlanger
The Squeezeometers popped into a short-term uptrend on yesterday's strength, with high buy confidence.
The longer time frames remain in mature downtrends. Keep in mind that a strong short-term advance phase will likely trigger these longer time frames into uptrends, moving them into the "turning up" row. The turn is close -- all we need to see now is a confirmed change of momentum in the VIX and VXN. |
