Eye-popping COT data reveals some huge swings

As mere human beings, traders are capable of dramatic about-turns in sentiment. John C Burford refers to two recent examples, and explains what they mean for the markets.

With the Fed seemingly in complete control of the financial markets (as most believe), and with all eyes upon Wednesday's release of their latest deliberations and forecasts, the latest commitments of traders (COT) data is showing some remarkablere-alignments as traders/investors position themselves for what they believe the report will say.

Last Friday, the latest COT data was released for the date of Tuesday 11 June, and some of the switching is truly amazing.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Remember, the futures positions in the US markets (the world's most influential) is an expression of a monetary commitment by all participants. To me, this is a more genuine gauge of public sentiment than even the best of the sentiment measures that poll individuals how they feel about a particular market.

As we all know, we can feel positive in the morning and then, after a particularly lousy day, feel more negative in the afternoon! Your response to a poll is perhaps not a very accurate reflection of the true state of your attitude to that market after all, you have no money on the line, as you do when you have a futures position.

Advertisement
Advertisement - Article continues below

A position is a much more serious expression of your sentiment and commitment I like to say the COT is where you put your money where your mouth is.

So, let me show a couple of eyebrow-raising examples from last week.

The euro: here come the bulls

Here is the hourly chart:

13-6-17-MWT-1

And here is the COT data:

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
Contracts of EUR 125,000Open interest: 260,418
Commitments
68,95676,48914,860128,701106,793212,517198,14247,90162,276
Changes from 06/04/13 (Change in open interest: 19,685)
25,152-18,9367,094-20,26628,38011,98016,5387,7053,147
Percent of open in terest for each category of traders
26.529.45.749.441.081.676.118.423.9
Number of traders in each category (Total traders: 167)
4352355047109118

When I saw that, my jaw dropped almost to the floor! Let's admire what the specs have achieved:

The non-commercials (hedge funds) have increased their long positions by a whopping 36%, while at the same time have decreased their short positions by a huge 25%.

Advertisement
Advertisement - Article continues below

On 4 June, the ratio of longs to shorts was 0.46, just a week later the ratio was 0.90 an incredible doubling in only one week.

It's clear: the hedgies have had a mass conversion from being bears to bulls.

I don't know about you, but that is as close to a 180-degree turn in sentiment as is likely possible in one week.

The small specs also performed a more bullish switch, but were put in the shade by the hedgies.

With the market having continued its rally into Friday, I'm sure this switch to a more radically bullish position has continued.

In a way, this switch is not surprising although the magnitude certainly is since hedge funds are trend-followers, and the market has been trending higher since the July 2012 low and the recent 1 April low at the 1.28 level.

Advertisement
Advertisement - Article continues below

But my question is: Have the hedge funds seen the bullish light too late? After all, trends have a nasty habit of turning just when enough specs have been sucked in.

We have seen plenty of examples of this in my Trader posts gold topping out at $1,920 in 2011 being the highlight.

But the market has made a Fibonacci 62% retrace of the wave down off the 1 February high and the early April low. This would be an excellent place to look for a turn.

A volatile week for the S&P 500

Here is the hourly chart for the week of June 4-11:

13-6-17-MWT-2

A pretty wild week with a range of around 50 big points, but the market ended up nearly unchanged on this volatile week.

Here is the COT data:

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
($50 x S&P 500 INDEX)Open interest: 3,397,407
Commitments
456,571341,749146,4482,460,4162,579,8763,063,4353,068,073333,972329,334
Changes from 06/04/13 (Change in open interest: 89,555)
-71,38113,50933,72349,26320,04611,60567,27877,95022,277
Percent of open in terest for each category of traders
13.410.14.372.475.990.290.39.89.7
Number of traders in each category (Total traders: 534)
1099863220234366362

Another eye-popper!

Advertisement
Advertisement - Article continues below

Here, the hedge funds have massively increased their net short position with a large 16% decrease in their long positions and a 4% increase in short positions.

But the small specs (many of whom favour day trading the e-mini), have even out-gunned the hedgies with a massive 23% increase in longs and a smaller 7% increase in shorts for a net increase in long positions.

Traditionally, the small specs are considered the weak hands who have the closest stops, whereas hedge funds are much more deeply financed and can hold adverse positions more tightly. The strongest hands are, of course, the commercials who are much less price-sensitive.

So we have an interesting situation where the hedge funds have become much more bearish, while the small specs are much more bullish with the commercials in the middle. All the while, the market went nowhere.

It is very unusual, when we get such a stark difference of opinion between the hedgies and the small specs that the small specs come out on top.

To me, the COT data is telling me that the odds are high for a continuation of the decline off the 22 May high, but as last week showed, sharp rallies are entirely possible.

Advertisement
Advertisement - Article continues below

We know from AAII surveys that the small investor/trader has been much more wary of getting back into equities since January than the large money managers, but now suddenly, they have woken up to the virtues of equity ownership just after a massive four-year bull market!

This is classic small investor behaviour piling into equities at tops and selling out at market bottoms. This COT data is confirming this again.

So, this is one more piece of evidence to say that the 22 May high is a major one, but of course, only time will tell if this is correct.

Also, I have found that the COT and sentiment data is not a good trade timing method all it does is indicate likely turns ahead, and in which direction. I use my other methods to time entries.

Anything is possible in markets, but not everything is probable.

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019