Daily Commentary - Posted on Sunday, October 10, 2010, 10:28 PM GMT +1

6 Comments


Oct Sunday 10

Commitments of Traders (COT) in Nasdaq 100 Futures

Most recently the current Commitments of Traders (COT) report got a lot of press around the blogosphere, regularly picking out the rapid increases in the net short position of commercial traders in Nasdaq 100 futures, and respectively the rapid increases in the net long position of non-commercial traders, regularly pointing to the bearish implications of the current elevated readings (due to the fact that the commercial traders – the smart money – would regularly be on the right side of the market, while the non-commercials – the dumb money – would regularly be on the wrong side of the market).

According to the U.S. COMMODITY FUTURES TRADING COMMISSION: ‘ The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Just the numbers:

On Tuesday, September 29, 2010, commercial traders already held a net short position of -19,556 contracts in Nasdaq 100 futures (large contract, not the E-minis), and on Tuesday, October 5, 2010 this group held a net short position of -30,762 contracts, the lowest reading on record (since 4/16/1996). At the same time, net positions in E-mini Nasdaq 100 futures were reported as -97,884 and -119,881 contracts respectively (the latter not the lowest reading on record, which were -249,799 contracts).

At the same time non-commercial traders held a net long position of 15,100 (Tuesday, September 29, 2010) and 25,463 (Tuesday, October 5, 2010) contracts in Nasdaq 100 futures (large contract, not the E-minis), the latter representing the highest reading on record. At the same time, net positions in E-mini Nasdaq 100 futures were reported as 75,500 and 91,087 contracts respectively.

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I thought it would be interesting to check how such elevated readings (net short / long positions) played out in the past and if – and to what extent – regularly implied negative implications would be justified.

Table I below shows all occurrences and the SPY‘s historical performance (since 01/01/2000) over the course of the then following 5 , 10 , 21 (regularly 1 month) and 42 sessions (approximately 2 month), assumed one went long on close of the last session of a week where commercial traders were reported to held a net short position of at least -12,500 contracts (in order to get a large enough sample size) in Nasdaq 100 futures (large contract).


(* no close below trigger day’s close during next 42 sessions)

Out of 62 occurrences (weeks), the SPY closed at a higher level 1 month later on 2 out of every 3 occurrences (or 67.21% of the time) – thereof on 14 out of the last 15 occurrences -, and 2 month later on 3 out of every 4 occurrences (or 75.41% of the time), (significantly) better than the at-any-time / random chance of 56.58% and 55.38% respectively for a higher close 1 and 2 month later, while chances (and odds) for a higher close 5 and 10 sessions later are on par with respective at-any-time / random chances for a higher close 5 and 10 sessions later (no bearish bias).

In addition: The SPY posted at least one higher close on all of those 62 occurrences, while there were 8 occurrences were the SPY did not post a single close below the trigger day’s close over the course of the then following 2 month.

Now checking for even more extreme readings: Table II below shows all occurrences and the SPY‘s historical performance (since 01/01/2000) over the course of the then following 5 , 10 , 21 (regularly 1 month) and 42 sessions (approximately 2 month), assumed one went long on close of the last session of a week where commercial traders were reported to held a net short position of at least -17,500 contracts in Nasdaq 100 futures (large contract).


(* no close below trigger day’s close during next 42 sessions)

Out of 17 occurrences (weeks), the SPY closed at a higher level 1 month later on 14 occurrences (or 82.35% of the time), and 2 month later on 15 occurrences (or 88.24% of the time), (significantly) better than the at-any-time / random chance of 56.58% and 55.38% respectively for a higher close 1 and 2 month later.

Now the other way around, checking for those occurrences where the non-commercial traders held an extremely high net long position. Table III below shows all occurrences and the SPY‘s historical performance (since 01/01/2000) over the course of the then following 5 , 10 , 21 (regularly 1 month) and 42 sessions (approximately 2 month), assumed one went long on close of the last session of a week where the non-commercial traders were reported to held a net long position of at least 50,000 contracts in Nasdaq 100 futures (this time E-mini contracts).


(* no close below trigger day’s close during next 42 sessions)

Chances (and odds) for a higher close 5 (69.05%), 10 (65.85%), 21 (68.29%) and 42 (60.98%) sessions later are absolutely on par (actually slightly better) with respective at-any-time / random chances for a higher close 5, 10, 21 and 42 sessions later (no bearish bias), but again the SPY posted at least one higher close on all of those 42 occurrences, while there were 6 occurrences were the SPY did not post a single close below the trigger day’s close over the course of the then following 2 month.

In addition: On 36 out of 41 ocurrences (or 90% of the time), the SPY posted a higher close above the trigger day’s close (in this event Friday, October 8) already during the then following 5 sessions (1 week).

Conclusions:

With respect to historical occurrences, from my perspective there is no evidence that elevated levels in commercial traders’s net short and/or non-commercial trader’s net long positions in Nasdaq 100 futures (large contract and E-mini) had negative implications for the market’s (the S&P 500) performance over the course of the then following 2 month (rather sometimes quite the contrary).

Immediately positioning oneselve on the same side of the market as commercials hedgers, when the commercials become extremely committed in their net position, is not the best way to utilize the COT report, at least not with respect to a short- and intermediate time frame. Extreme divergences in long and short positions of commercial hedgers and non-commercial traders could’ve very well been reliable indicators of important trend changes in the past (and might be in the future), but rather in the long run only.

Successful trading,

Frank

Disclosure: No positions in the securities mentioned in this post at time of writing.

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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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Comments (6)

 

  1. [...] This post was mentioned on Twitter by Frank Hogelucht, Turkish Actuary , Finance Reader, Actuary, Aktuerya and others. Aktuerya said: New blog post: Commitments of Traders (COT) in Nasdaq 100 Futures URL: http://bit.ly/dA5riY ($$ $SPX $ES_F $NDX… http://bit.ly/9RzUyw [...]

  2. Joe says:

    Frank,

    I really really appreciate how you disect the rumors from the facts and how you present it here on your blog. Thanks so much! I have always been a loser in math, so I am quite jealous.
    Joe

  3. bob says:

    Fantastic work Frank.

    I was wondering if you could look into the divergence of the financial sector and the broader mkt. Any implications to future mkt performance? thx.

    • TradingTheOdds says:

      bob,

      thanks a lot.

      I don’t follow the financial sector (any more). When checking for some pairs trading strategies (and correlations/divergences/mean reversions) in the past, it never worked for the financials (although divergences might have provided a reliable indication in the past – e.g. the broader market won’t rally without the financials -, this does no longer apply, at least not sicne the start of the recent financial crisis).

      Sorry.

      Best,
      Frank

  4. ted says:

    I wonder what the odds are in a situation where the market has averaged 1.3 pts a day for 14 days in the market (the market has moved 20 pts in about 14 sessions).

  5. Michael says:

    For the COT testing, the absolute number of contracts net short or long is not that interesting in and of itself. That number has to be taken in context. It could have been that during your tests the commercials went from being -50k to -12k and that would be bullish. But if they go from a net positive to a net negative then that can be bearish. It also depends on if they’re doing more hedging or trend following but that’s a lot more complicated.

    If you can do the tests taking into account the context that would be extremely interesting. Some ideas to try are the number flipping from positive to negative and at a x-month low.

    My interpretation of the current report is bearish but only time will tell, and due to the report lag they could be covering those shorts before we’d know it. :)

    Thanks for sharing

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