Weekly Contrarian COT Index and Retail Positioning Analysis

The Commitment of Traders Report is created by the CFTC – The Commodity Futures Trading Commission and is published weekly every Friday. This body gathers and publishes the open futures positions on all publicly traded US futures contracts as well as the corresponding options. The data consists of 3 main categories.

Commercial Traders – These are the bigger players in the markets, the smart money and consist of large firms that actually use the commodity being traded, includes companies like…BP in the Oil and Gas Market, Nestle in the Cocoa and Sugar market. The main function of these traders is to hedge the price of the commodity that they trade in.

Large Speculators – These consist primarily of commodity fund traders and are mainly trend following. The position sizes of these traders tends to be in tandem with the movement of price.

Small Speculators – The little guys, individual traders and small firms, these are the traders that tend to be wrong in the market at the tops and bottoms of markets.

How do we use this data? We believe that the COT Index offers a good indication of market sentiment and future direction. The key is to follow the smart money (Commercial) and trade against the other 2 groups when they are at an extreme.

Extremes in the data are figures below 30.00 and above 70.00. The ideal situation for a short position is a low reading in the Commercial COT and high readings in the Large and Small trader numbers. For example the Commercial COT Index reads 5.97, this means that the net commercial position is strongly biased to the short side. The Large and Retail (our main contrarian focus) are reading 97.70 and 100.00 respectively, meaning they are the most long side biased they have been in the last 6 months. For traders this means that their focus should be on short side trades, the goal is to follow the commercial traders when they are strong in one direction and the other 2 groups are strong in the opposite.  This is the ideal alignment of the groups for optimum success.

This weeks COT Index Review

e-mini S&P 500: This week we see a weakening of the Small trader short position and a strengthening of the Large trader short position. Overall this has little effect on our current bias which remains to the long side.

Signal: Bullish

EURUSD: The COT position for the Euro has become very bearish this week and has been increasingly bearish for the last 2 weeks, however in this time the market has continued higher.

Signal: Bearish

GBPUSD: The GBPUSD COT positioning has been similar to the Euro in the last few weeks, with increasing strength developing to the short side, however the market has continued higher very strongly in this time.

Signal: Bearish

USDJPY: The USDJPY Intervention has led to some weakening in the COT short position, however the overall bias still remains to the short side.

Signal: Bearish

Retail Trader Position Analysis

Also known as the Long-Short ratio this is a tool primarily offered by Forex firms, we haven’t been able to come across the same data in the futures as yet. The data is based upon the collective trades and trading direction of many thousands of retail traders (the average Joe). This group of traders is notoriously wrong at predicting market direction, market tops and bottoms with some simple analysis we can look at this data and take a contrarian view, for example if over 70% of retail traders are long USDJPY this offers us a short bias. Savvy traders should then be focusing there energies on short side trades.

USDJPY: After pulling back on their long positions last week when we had the spike up due to the intervention, retail traders are back long the USDJPY hard! (even though we closed the week down significantly from the intervention highs.

EURUSD: Retail traders seem to be strengthening their positioning to the short side on the Euro, although the disparity from the break even point is not great, it is something worth considering especially seeing as it contradicts the COT analysis direction.

GBPUSD: Retail positioning in the pound remains fairly neutral again this week.

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