Q&A
Futures For You
Inside The Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today’s futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Visit Garner at www.DeCarleyTrading.com. Her books Currency Trading In The Forex And Futures Markets; Commodity Options; and A Trader’s First Book On Commodities, are available from FT Press.
READING THE COT REPORT
How do I read the Cftc’s Cot report and should I be following the commercial or speculator groups?
You should be following the manner in which equity traders refer to Sec filings to determine the outlook of corporate officers in relation to their company stock. Commodity traders look to the Commitments of Traders (Cot) report for insight into who is buying and selling futures and options. The Cot report, which is released by the Commodity Futures Trading Commission (Cftc) at the end of each week, is a potentially valuable tool in determining market sentiment. Not only will this report reveal the level of bullishness or bearishness, but unlike other sentiment readings, it depicts traders actually putting their money where their mouths are!
The purpose of the Cot report is to provide information on market sentiment in a quantifiable manner. Specifically, the report is a weekly snapshot of the net open interest (long open interest minus short open interest) on most futures contracts listed on US exchanges. If you aren’t familiar with the term “open interest,” it is simply the number of futures contracts held overnight (beyond the close of the day) and therefore doesn’t account for daytrading positions that are offset prior to the close.
Despite its release on Friday afternoons, the measurement takes place at the close of trade on Tuesday. Despite that disparity, the Cot discloses a wealth of information on who is trading what and which direction. More important, it provides a glimpse into the minds and actions of certain types of traders.
The Cftc makes Cot reports available to the public free of charge on its website (https://cftc.gov/MarketReports/CommitmentsofTraders/index.htm), but it is also possible to have the information emailed directly to your inbox. Unfortunately, Cot data directly from the Cftc is in plain text format, and that could make it much more difficult to read. Nonetheless, the information that you could gain from the report can be worth the effort.
The purpose of the COT report is to provide information on market sentiment in a quantifiable manner.There are multiple versions of the Cot but in its simplest form, the Cftc determines the net position in two major categories: reportables and nonreportables, with reportables broken into commercials and speculators. This translates into hedgers, large speculators (often referred to as the “smart money”), and small speculators (nonreportables).
If you aren’t already aware, reportable positions are those held by single entities (individuals or funds) that exceed preset thresholds by the Cftc. For individuals holding positions in excess of the reportable limits, a daily tally is reported to the Cftc by the associated brokerage firm. The reportable limits vary by market and are typically substantial. Most retail traders will not fall into this category; it is often dominated by hedge funds, Commodity Pool Operators (Cpos), and Commodity Trading Advisors (Ctas) who are trading substantially large positions and account sizes.
Nonreportable positions, on the other hand, are those not large enough to meet the Cftc’s reportable limits. Most readers of this column deal with this category.
The commercial category represents end-users or producers of the underlying asset, and their positions are for hedging purposes only. The firms dealing with commercials face commodity price risk, interest rate risk, or exchange rate risk, and hedge accordingly.
The speculative reportable category represents the smart money (high capital accounts with large position size). The nonreportable category is made up of small speculators (casually referred to as “dumb money”), and the commercials are legitimate hedgers.
In essence, the Cftc’s Cot report displays the net position of each of the three categories of market participants by subtracting the number of short positions in each category from the number of long positions to determine a net figure. This figure reveals not only whether speculators and hedgers are long or short the market, but it tells us by how much.
Knowing the degree of bullishness and bearishness in each Cot category can be helpful in determining whether a trend is emerging or exhausting itself. Next month, we will discuss which aspects of the Cot might be helpful in predicting future market behavior, such as following the smart money, fading the small speculators, and using the Cot to avoid the wrath of overheated markets.