I look at the commitments of traders data to get a quick reading of how extremely commercials and speculators are at polar opposites. The COT-Futures site ranks the relationship from 0 to 100 in relative terms — 0 is most net short in the past 18 months or so; 100 is the most net long. There is a $5 a month fee for this service. When commercials are 0-10, it's time to think about selling, because they sure are. When it's 90-100, be a buyer. Commitments data won't give you specific entry signals for short-term trades, but they put you in the right ball-park for the next significant move. It works well for the physical commodities. I haven't found them to be very meaningful for financials and currencies, because who the heck are commercials anyway in the stock market (and are they particularly bright?), and the real players in the currency markets use futures only for pocket-change.For weeks, gold, oil, sugar, and grains had all been on "tilt" at 0 (commercial selling and massive speculative buying), and the last couple of days is the result. Natural gas was sitting at a 100 reading (practically the only commodity that was) just before it made its recent big move up.

At the moment, I'm fully invested in 26 fixed names in four groups: 6, 6, 6, and 8. All I am doing right now is that whenever any two within a group diverge relative to each other by 30% from a prior fixed point in time (the previous trade date), I sell 30% of the stronger one and recycle that cash into the weaker one. When there is such a trade I reset the reference point for all the stocks in the group to that day's closing/trade price, and then just wait for the next 30% divergence from that date. There is a significant long-term compounding effect in doing this, by the way. One of the stocks is a 2x leveraged short gold stocks ETF from about when gold was $800. Despite the run-up in the metal, the ETF position has delivered three buy signals near its lows, two sell signals on up moves after buys, and is now net-profitable despite being heavily under water for a while.

Why was I confident averaging down, as it were, against gold? The commitments numbers. I knew that sooner or later gold was going to take a big hit, even if it remains in a long-term bull market. If it drops enough to get the commercials buying again (and/or specs panicking out) then I'll simply switch to the matching long ETF and play that side until the commercials go heavily short again with respect to speculators. Doesn't have to be perfectly timed. In fact you may be wrong for a while, which can help you accumulate a bigger position with a lower cost basis. Since the gold ETF, I've added three other 2x ETFs in natural gas (long), crude oil (short), and grains (long). I'm cheating in the grains — according to commitments data I should be short, but they've come off a lot and that particular position at the moment is quite small. I'm happy to add to it if grains keep coming down. The volatility of these things is great for generating the trading spreads I look for. That's why I've integrated them into my stock portfolio. Watch the commitments as a trend-change guidepost.





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8 Comments so far

  1. Commitments of Traders, and billing at Daily Speculations « 0 to IPO in 7 Years on March 21, 2008 11:37 am

    […] I talk about how I use futures markets commitments of traders data in conjunction with the commodity ETFs I talked about in the last post.¬† I’m not going to repeat everything here, so here’s the link to the Commitments of Traders article¬†if’n you’re interested. […]

  2. Anatoly Veltman on March 21, 2008 3:19 pm

    Way to Utilize! Like every tool: it is not its mere existance, that will help you outplay others. It is timely (as opposed to not timely) and two-dimensional (as opposed to nominal) signals that will rig the game in your favor. Best C.O.T. signal is “divergence on significant weekly delta”, and has probability 5% of occuring. As someone who diligently deciphered weekly C.O.T. for 20 years, I would dis-advise triggering your trades contingent upon $5/mo website’s output…

    The overbought/oversold nominal readings you described belong to large family of fifty-fifty oscillators. You characterized it well: “Doesn’t have to be perfectly timed. You may be wrong for a while, which can help you accumulate a bigger position with a lower cost basis”

  3. Stephen on March 21, 2008 4:03 pm
  4. George Parkanyi on March 21, 2008 9:58 pm

    I agree with Anatoly's advising against using COT data as an entry signal for trades than cannot withstand some drawdown or time. I use the information in the context of a diversified portfolio, where I'm letting the position ride come what may. I have no need to be right in the short run.

    My trading signals are based solely on the price divergence between securities in the portfolio relative to each other. I don't concern myself with the specific profitability of a given trade. I am using this method to simply — in a very general way — steadily accumulate/compound shares in the aggregate, which over time grows the portfolio. This mechanism works in any market because stock prices always diverge from each other, as long as you are prepared to accept being in drawdown positions (and temporarily looking foolish, which I am now) in bear markets. Since I'm not yet trading both the long and short ETFs of the same commodity at the same time in the portfolio — I'm going to use the COT data to toggle from the long ETF to the short ETF and vice-versa to be generally aligned with the commercials — because they tend to eventually have their day. For my purposes, I am more interested in the ETFs' volatility than their absolute performance. The increase in amplitude from the 2x leverage just gives me trading signals (and hence compounding) more frequently.


  5. Anatoly Veltman on March 21, 2008 11:34 pm

    I'm thoroughly confused.

    1. Mainly Long portfolio. Want to side with Commercials. Data works in commodities. BUT COMMERCIALS ARE NEVER VERY LONG IN COMMODITIES.
    2. Commodity C.O.T. signals used to dilute portfolio risk? "I use the information in the context of a diversified portfolio". BUT PORTFOLIO IS NOT FUTURES, ONLY ETF - SO COVERAGE IS RESTRICTED TO ONLY 20% OF ALL COMMODITIES.
    3. "I'm cheating in the grains — according to commitments data I should be short, but they've come off a lot" I AGREE GEORGE: FADING $5 NEWSLETTER IS NO WORSE THAN FOLLOWING IT.

  6. George Parkanyi on March 22, 2008 6:48 pm

    Hi Anatoly,

    Sorry then to confuse. Response to your points: 1. The COT ranking is a relative one. You could interchange the terms "least net short" with "net long" to mean aligning with a commercials for a long position. Since I'm only using one ETF per group of stocks, I for that commodity I either have to use the long-biased ETF or the short-biased ETF. All I was trying to say was that I'm using COT data to determine which bias (long or short) to select.

    2. For the time being, one commodity ETF is sufficient to represent physical commodities in each of my groups of stocks/ETFs. (You can see the exact portfolio in the second-last post in my blog as of today.) This will never be an all commodities-proxy portfolio. Even if I wanted more commodities, there is still only a limited selection of 2x leveraged ETFs to represent them.

    3. Don't be hung up on the $5 web-site thing. All the guy does is organize in a very concise and usable way the weekly COT data for the tracked commodities. This work alone is worth $5 - to me anyway. The fact that he also fits a rolling 0 - 100 percentile scale between the highest and lowest "net short" position for commercials and specs is very useful for quickly seeing where the extremes have occurred in the past, and relative to that where the commodity is today.

    If say oil has a 0 reading for last week's COT commercials, all that means is that commercials are at their largest short position in the past 18 months or so. Nothing more; nothing less. I INTERPRET that reading to mean there is either extreme speculative interest, and/or commercials are happy to sell/hedge at that price all day long - telling me that you are likely to keep getting unabated selling pressure going forward because commercials are making good money at these prices. If there is a supply-demand imbalance (shortage) in the commodity, speculators could drive it "unreasonably" much higher - and I understand that risk.

    At a 100 reading, commercials may not be hedging as much because they may be anticipating higher prices and holding back for it. Speculators may also not be all that interested. Recently in natural gas for example, it was widely perceived there was a glut of supply. The commercials net-short reading was 100 - lowest in 18 months. The commercials weren't hedging all that much and when speculative interest came in (perhaps because of the falling US dollar or the increasing oil/gas price ratio), the commodity started to run. Recently the reading was at 64, meaning commercials were starting to hedge/sell more, but not to any great extreme.

    I don't know if that helps.


  7. Anatoly Veltman on March 23, 2008 2:55 am

    George, your explanation is thorough, as was your original post. Between the two of us, readers got relevant benefit.

    My rating of your investment account strategy is by virtue of evidenced suspicion: that both you and referenced COT-futures website utilize C.O.T. data in the fashion begging more sophistication (a second dimension, or even 3-D at times). KISS Argument (Keep It Simple Stupid) doesn’t fly with me on C.O.T., because I have intimately experienced market biases vis-a-vis composition of its players over 20 years and across all futures - in real-time personal trading adventures. Your consistent disclaimer (that you are not striving for perfect market timing) may satisfy your passive investors, who couldn’t possibly know better - on the subject so advanced. I, for one, wouldn’t grade your system a significant out-performer - just because I practice more potent application of C.O.T. data. This said, my application has elements of discretion and cross-referencing with other techniques; all of which lends itself to neither mechanical execution, nor attractive disclosure-document presentation format. What counts: you are the one with investment fund. So, my admiration and hats off to you - on that basis!

  8. George Parkanyi on March 23, 2008 2:50 pm

    Hi Anatoly,I was originally drawn to COT data by Larry Williams through his books on commodities trading. At the time anyway he espoused using COT data to align with commercials (but not solely of course).Thankfully for them, I don't have any passive investors as yet - just my own account. And I admit to being behind the S&P500 as of when I began publishing my portfolio in March of last year. (All is detailed on my blog.) I made two major missteps last year in deviating from my system and trying to time the market. My punishment for that lack of discipline was re-establishing my system at the very peak of the market in October 2007. From THAT point I'm about 1-2% behind the S&P500 at the moment, but I remain confident that all this will right itself and I will soon start to outperform (barring a total systemic meltdown), because I've thoroughly tested the mathematical effect of my allocation method with both randomly simulated/generated, and historically back-tested data, and both approaches confirm the inherent compounding effect.Now none of this has to do with the application of COT, except for one short gold ETF I've held in the portfolio for the past few months. It also went under water until last week because of the run-up in gold. The 3 other ETFs were added to the portfolio just last week - mostly because one just came on-stream - the grains; and the others I wanted to trade weren't as favourably priced as I wanted for a starting entry-point. Again, from these ETFs I am looking more for trading-range volatility (and non-correlation with respect to some of the other stocks) than long-term swings. It remains to be seen how effective (or ineffective) my simplistic application of COT data will be. And I defer to your experience with it. Were I trading again with high leverage, I would also be using other information sources, and set-up, entry, and exit criteria. COT data is just one tool - one which I'm sure you understand much better than I do.Thanks for your comments.Cheers,George


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