7 replies to this topic

[CAzzaro]

My understanding of the CFTC's Commitment of Traders Reports that come out every Friday is that prevailing wisdom says that commercial traders are the "smart money". Going back to July, 2006, the commercial traders of the large SP futures contract were net short. In July, 2006 the SPX was tracing out a bottom around the 1240 area. They were consistently net short until May, 2007, when they became net buyers. SPX at the time was around 1515. During this period, the large speculators were net long. I'm wondering why the commercial traders would be considered the "smart money". In recent weeks, the large SP speculators have gone increasing net short, while the commercials traders are increasingly net long. One other example. Crude oil. Since Feb-March of this year, the large speculators have been large net buyers. The commercial traders are net short. Crude oil prices have risen approximately 40% from mid $50s to mid $70s. Evidently I'm overlooking something, and admittedly I have not made an extensive study of the subject. But I'm not understanding how the commercial traders would be considered "smart money". Can someone shed some light? CA

[ogm]

I agree. Large specs look much better on the charts.

[Cirrus]

The large traders have done outstanding in many categories for a couple of years now. I was going to post about the very unusual COT positioning in several areas--from equity indexes to bonds to currencies to commodities. The COT data/positioning is very, very unusual when looking at historical precedents.

[arbman]

It is exactly that the large investment banks or commercials have very close ties to the commercial banking and the Fed. They are called smart money because they can get themselves rescued by all these bond measures. Why do you think 2 of the Bear Sterns hedge funds collapsed? Because the system has become so abused by the Fed's rescue that the commercials became the trend followers eventually... Guess what? The bond market became inaccessible for their large losses all of a sudden. Their funds collapsed. They are not the smart money, they are simply the manipulative money. You just have to find out whether they can get another bail out. They are the old money in this game. The large specs did not become large (or larger) because they are dumb, they just learned not to make mistakes to get them into trouble, then the profits comes all by itself. Make no mistake, I think the large specs are a lot of rich people and political power to get their game together too... Small specs are the poor guys crushed by these two groups of traders. There aren't many left anyway... - kisa

[Cirrus]

kisacik, Your analysis seems sound for the commercials. I would add that activity in the COT in so many categories is well beyond historical statistical variances. Again, I think the entire monetary/commodity system will be quite interesting over the final 5 months of this year---substantially more volatility is in order IMO.

[ChickenLittle]

Definition from SentimenTrader "Commercial Hedgers - Commonly believed to be the "smart money", these traders are involved in the day-to-day operations of each commodity. They have an excellent handle on the underlying market, and it typically pays to follow their positions when they reach an extreme. Large Speculators - This group mostly consists of large hedge funds, and almost always take the opposite side of commercial traders. The are primarily trend-followers, and will accumulate positions as a trend progresses. When their positions reach an extreme, watch for a price reversal in the opposite direction of the existing trend. Small Speculators - These are smaller traders, composed mostly of hedge funds and individual traders. Again, they are mostly trend-following in nature and we often see price reversals (in the opposite direction) when they hit an extreme."

[PorkLoin]

For stuff like Crude Oil, the Commercials are often huge hedging producers, so being net short, even bigtime, is often just going to be their deal. I do agree that seeing them at extremes bears watching, but Cirrus is right about being beyond historical statistical variances too - the game is at least a little different now. For commodities where the Commercials are big producers, it's seeing them heavily LONG that really makes me take notice. Doug

[Pabst]

Using the COT report to monitor institutions is horsesh*t for financial futures such as interest rate, index and currencies. Most institutional participation in those areas is arbitrage related. It means nothing to me that Lehman Brothers is short a zillion 10 year futures against a corporate issuance. In the S&P those longs are no doubt paired against short stock or hedging an options book.