So as I peruse the latest Commitment of Traders Report (COT) from the CFTC, I ask myself whether the behaviour of the commercial traders, the large traders and the small traders today, long or short, means anything in terms of market returns tomorrow. Before proceeding, I am in the camp that markets are dynamic and nothing is ever the same as it was before - thus one has to roll with the flow of the market and adapt based on changing environments...in short patterns to me are not that big of a deal.
With that said, in looking at the latest COT reports from the equity index futures that I follow (Russell, S&P, Nasdaq and Dow), I found some interesting tid bits of information. Here is a rundown.
- S&P 500: The latest numbers from this report show that commercial traders have not been this net long since the summer of 2008. Further, they movement upward over the past few weeks in their position argues that they are planning for a bear market, in similar fashion to the move in 2007 when it started to rise in the summer of 2007 near the market peaks and spiked upward in the fall when the market double topped out around 1550. In regards to the small traders on the mini side of the ledger, they were net short for much of the period from the collapse in 2008 to upward movement earlier this spring (after being long from 2004 through 2008). This movement to the long side argues that the bull market is still in force in my opinion. The last piece is the large traders in the mini side - they are about to go net short for the first time since late 2008. So on balance, what we have is the long side positioning for longer term troubles while in the shorter term, the retail side of the ledger (small traders) are getting more bullish while the large traders are hedging out their portfolios.
- Nasdaq 100: This future is very hard to read overall. I would say what is notable here is the movement in small traders on the large contract side. It jumped to net long for the first time since the flash crash. They were net long off the move in 2008 when the NDX 100 made its lows and remained so through the flash crash. Argues that the bulls control.
- Dow Jones: The one read I am getting from this is that commercial hedgers, having been net short since the fall of 2009 moved back to net long this past few weeks. Whenever they go net long in a bull markets, the markets move up appreciably while in bear markets the opposite occurs. The movement in the markets from here thus along with their movement could confirm what market we are sitting in.
So on balance, predictably the movements in the markets over the past 10 weeks has lead to positioning within the trader community that the probablity of a longer bear market is developing. However the movmeent upward in the ND futures argues that the dip buyers are in force which means we have the long term conflicting with the short term. The in between signal is the ultimate move in the stock marekts from here. Continued weakness could argue that the movmeent on the Dow side means a longer term movement upward/downward is coming (how is that for fence sitting?). I will be watching.
My cards by the way are on the bulls retaking the trend to the upside.
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