***OFF TOPIC***
Mark
I hope the following is of help to you. It's made up of excerpts I've taken from various sources, at various times. Some of the sources were articles that were written 3 or more years ago. If you plow down through the material far enough, you'll find excerpts that pertain to silver and the COT report.
Regards - Emory
COMMITMENTS OF TRADERS REPORT (COT)
This report, from the Commodity Futures Trading Commission (CFTC), details purchases and sales of futures contracts. The largest traders in each market are required to disclose their positions to the agency on a daily basis and are separated into two groups: commercial hedgers (firms that operate a cash business in the underlying commodity), and large traders (a.k.a. large speculators) primarily commodity and hedge funds. The reports also show the positions of small traders, which aren't required to report and whose holdings can be calculated by subtracting the total of contracts held by the reporting groups from all the contracts outstanding. A small trader can be a speculator or a hedger. ...
Savvy traders use the commitments report to predict important trends, not only in futures prices but also in related primary markets. Bond traders look for signs of imminent changes in the interest-rate environment, and mutual-fund managers use the data to anticipate shifts in the fortunes of stock sectors....
The commitments report can be followed much like SEC insider-transactions numbers to spot special situations. The net positions for commercials can be plotted over time, by subtracting the total short contracts from the total longs to arrive at the net position. Whether commercials are net long or net short isn't relevant in itself. Net position patterns vary from market to market. What is important is to compare current net positions to historical levels.
Commercial Hedgers
Not surprisingly, large commercial hedgers have proven to be consistent indicators of important trend changes. (You don't think they invented this game and invited us to play just to lose money, do you?)
Commercials hold a significant informational edge over other traders in terms of fundamental supply-and-demand statistics. (In fact, much of what passes for fundamental news originates from these big trading houses). In addition, the heavy hitters aren't subject to the position limits imposed on speculators. When they begin betting in the same direction, their massive trades alone can move markets.
Commercials are typically value buyers. When their net buying is near its historical top, it's a tip-off that they think bargains are available. When their net position reaches its lower historical boundary, it usually means that they think tulip-mania has gripped a market.
Commercials have shown an uncanny ability to position heavily just before important market turns is only logical. As large cash merchants in the business, commercials maintain their own intelligence gathering networks and analysts. In fact, in some markets -- such as coffee, cocoa and sugar -- commercial trade houses are the primary source of fundamental supply and demand statistics available to the trading public. Assuming the statistics are accurately reported, you can be sure they already have been acted on in the market before the data is disseminated to the public. The COT report detects these actual market manipulations. Besides a decided informational advantage, large commercials by definition, trade in sizes large enough to move markets. Given these advantages, their futures trading prowess is not surprising.
Legendary trader Daniel Drew is credited with the adage "Anybody who plays the market without inside information is like a man buying cows in the moonlight". Large commercial hedging firms enjoy an enormous inside informational advantage over other market participants. The COT report levels the playing field by exposing the players behind the trades. Indeed, trading without reference to it might well be likened to "buying cows in the moonlight".
S&P500
If you followed only one market using these data, the S&P500 would be a good choice. Commercial hedgers in stock indexes are primarily institutions that use futures as a hedge against their stock inventory or commitments. They have shown an uncanny knack for spotting opportunities in the S&P. Historically, a bearish signal has been generated whenever commercials held more short than long contracts; this is one market in which being net short is relevant. This rare phenomenon was in evidence in Aug. 1987, Feb. and Aug. 1989 and Jan. 1992. Any time commercial buying resulted in holdings of 25,000 more long than short contracts, it was time to buy. On the other hand, the bearish report published at the June top in 1990 shouted that it was time to sell.
Moving to financial markets, commercials -- generally referred to as institutional traders including banks, mutual funds and dealers -- have proven as astute as their agricultural counterparts in positioning for important market turns. When commercials have held 25,000 more long than short S&P500 contracts, a buying opportunity was signaled. Sell signals were generated when the net position dropped below +7,500 contracts. (As of approx Jan. '94) the only COT signal failure on record for the S&P500 was in Aug. 1993.
Of course, you can't discuss stock market indicators without highlighting the Oct. 1987 crash. How did commercials fare? They provided a clear-cut sell signal by moving to a rare net short position on the Aug. 30, 1987, COT report, and held that position through the crash.
Short-Term Interest Rates
The report issued on Jan 21 ('94?) showed that large commercial hedgers had sold an unusually large number of 30-day Treasury-bill futures during the preceding two weeks. In fact, they held 16,545 more short than long contracts when the report was tabulated on Tuesday, Jan. 18. This represented their lowest net position (long contracts minus short contracts) in more than two years. Obviously, the "commercials" had suddenly changed their outlook on short-term rates. This was a clear sell signal to perceptive readers of the report, which was released just five days before the market topped and interest rates spiked.
Gold & Silver
Last year ('93), silver was a hot stock-market sector, as well as one of the brightest commodities. Gold and silver mining shares rallied smartly from a mid-Jan low of 93 and never looked back. The commitments report published on Jan. 22, 1993, showed that commercial purchasers had pushed their net position to an 18-month high in gold and a three-month high in silver. A second buy signal was apparent in the March 7 report (delayed one week by the World Trade Center bombing), as commercials were aggressive purchasers of both gold and silver contracts. The silver net position reached a 15-month high. Gold and silver futures on the Commodity Exchange bottomed on March 10. Later in the year, unprecedented commercial hedger selling preceded the Aug. 4 market peak. Subsequent rebuying triggered buy signals at the reaction low in Aug. '93 as commercials paid up to re-establish their position. The recent market top was tipped off when record commercial selling (and a new net short recort in silver) was noted in the April 1 report.
Commercial traders provided key buy signals with unusually large purchases of both gold and silver contracts at the major bottom last March. Commercials held a net long position in gold (+30,584 contracts) but were net short in silver (-27,657 contracts). Yet both were bullish indications. How can this be? Each futures market is made up of an unique mixture of traders. In silver, large hedgers are primarily producers who hedge against price declines by selling forward in the futures market. As a result, commercials have never been net long in silver. In gold, however, the commercial mix is more heavily weighted with fabricators who buy long contracts as a hedge against future inventory needs and rising prices. In aggregate, commercials are as often net long as net short in gold. Therefore a simple net position is meaningless; it is imperative to compare the current net position with recent historical levels in the respective market. |
