Robert
The Main Points of the Williams article are:
Williams' firm has researched the commodity markets for 10 years and discovered that:
1. Commercial mass psychology is always right, in predicting future market activity and speculator mass psychology always wrong, and when a trend is in place in favor of speculators, and when there is a large divergence between commercials and speculators, the market will change in trend in favor of the commercial position.
2. The commercial position can be determined by the COT and the psychology of the speculators by a proprietary methodology developed by the firm.
3. The divergence cannot be used for reliable timing cycle, only that a trend change will take place, usually less than 90 days from the date of the divergence.
4. That the duration of the change in trend cannot be determined and it may be for a few months or years.
5. Presently, based on the research most commodities, bonds, gold, Yen, and DM will incur a trend change.
6. The research has not been validated by actual trading except for some private accounts which have generated substantial returns but no particulars are given with respect to amount invested, commodities traded, the length of time in use, draw-downs, etc.
Conclusion: The research appears to merely document a well-recognized theory, which I subscribe to as earlier posted, that when market sentiment becomes so biased and traders are so convinced that a market will move in one direction, it causes overwhelming trade in the direction of market sentiment which (1) pushes the market to extremes beyond market value and (2) in doing so, exhausts the trade forces pushing it in that direction. Once, these forces are exhausted, the market will reverse to an equilibrium value facilitated by reversals by those same traders who pushed it to the opposite extremes. The research uses the COT together with reports on market psychology as tools to determine approximately when this will occur.
Is the result of this research reliable? Katherine's question answered this best: "If your research is so accurate, why are you continuing to work for a living" . Perhaps, an investor should ask this of all market pundits who are attempting to sell their research, software, theories, predictions, analysis, stock recommendations, etc.
I join AHHAHA in that I do not claim I can predict exactly what a market will do tomorrow nor do I think anyone else can. Few funds beat the S&P, despite all available resources, both technically and fundamentally, including access to top economists. The theory of commodity trading is that one will be wrong more often than right. Jesse remarked "A man may beat a stock, but no man living can beat the market" I could never understand that from one the best traders until I was in the market for a good number of years.
I also believe that when a trend is set in place, its continuance is not the result of manipulations or conspiracies, but depends on basic conditions. And no matter who opposes it, the swing must run as far and as fast as long as the impelling forces determine.
Now having said that, I think one should ask why are the bonds falling if they should be rising, why is copper rising if there is so much new supply, why have not inventories in basic materials increased in the summer as they usually do if there is so much supply, why is the Yen not going lower with uncertainty which earlier purportedly caused it to fall, why are the European currencies rising if the dollar is so strong, why has gold failed to make new lows in the summer weakness if the demand in Asia is so poor, why are ABX and HM, stocks that one would expect to lead, substantially off their Dec.-Jan lows if gold were going significantly lower, and why is the US economy so strong if the coming of deflation is so certain. The answer to these questions may have something to do with the Williams' research.
As the COT reports, I use them as a tool, but have not found them particularly useful as a timing aid, at least with respect to gold . For example, As of September 23, 1997, commercial insiders were long 146,080, short 83,998; speculators long 4,678 (one of lowest totals on record), short 67,575 which was just prior to the decline in gold from 330 to 280. I suggest that one needs to know why the commercials are buying or selling in attempting to analyze the reports. With this in mind, I pass the following, which I picked up elsewhere about a year back and claim no credit for, that you may find helpful.
"UNDERSTANDING the Commitment-of-Traders report: Hedgers are not speculators. For example, in the gold market, to understand the position of the large commercials, you must distinguish between long-hedgers and short-hedgers.
Traders at gold mines who use the futures markets are generally short-hedgers. That is, they sell futures to lock-in a specific price for gold they anticipate mining at some distant date. Gold dealers can be either long-hedgers or short-hedgers. An example of a commercial dealer is Englhard Minerals.
A commercial dealer becomes a short-hedger when the dealer buys physical gold from a mining company and cannot find a satisfactory outlet to sell the gold. In this case, the dealer "hedges" the exact number of ounces of gold-futures as he purchased from the mining company. At some later date, when a physical buyer emerges, the gold-hedger buys back the futures, and sells the physical gold. Hence, the hedge is liquidated.
A commercial dealer becomes a long-hedger in the reverse case from the above. If the dealer finds a physical buyer, but cannot locate physical gold, the dealer sells the physical gold ( for delivery by a specified date ) , and he buys the exact number of gold-futures to offset his risk. The long-hedger has an extra option in this case, if he still can't locate the physical gold to buy, he can "take delivery" of the gold at the Comex warehouse -- and thus obtain the physical gold. "Taking delivery" does not normally
happen, but under unusual circumstances, it guarantees the long-hedger a physical source for gold. When the long-hedger finds the physical gold, he buys the cash gold, and liquidates ( sells ) his gold-futures position.
Hence, from the most recent Commitment-of-Traders Report, it's virtually certain that the huge commercial long position is the result of activity by gold-dealers who have become long-hedgers. Specifically, these hedgers have sold physical-gold for delivery in the not-too-distant future, but they have been unable to buy enough nearby physical-gold to meet the demand. As a result, they have bought gold-futures to "hedge" themselves against a run-up in the gold price. A large commercial hedged-long represents mandatory future demand in the "physical" gold market. "
I hope this has been somewhat responsive to your request.
Vieserre
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