S&P COT results...

commercial long: 422,135
commercial short: 407,626
Net long: 14,509
% long: 51%

Strategy No. 1 has flipped to the long side. Strategies 2-4 will flip if the S&P closes below 1139.83.

I'll be back after the close.

Larry

I understand you must stick by your strategy. However I would have a hard time going long in such a speculative market.

Mike,

What I understand is we do not flip yet since we did not close lower than last week. We could get a flip back to short next week.

The commercials flipped to 51% long. The S&P closed at 1141.55. Last Friday it closed at 1139.83. So only Strategy No. 1 signals to cover shorts and go long. It has been my plan all along for the Model Portfolio to go by Strategy No. 4. We need a week where the commercials are 51% long and the S&P is lower for the week to enter long positions. I am particularly partial to one of the “buy weakness” strategies right now because the market is so overbought and bullish consensus is so high.

Everyone has to make their own decision as to which strategy they want to follow. All four strategies have an excellent track record. The risk that I’m taking by waiting a week is that the market could just keep going higher and not give me a chance to get in. The risk you would be taking with Strategy No. 1 is that the market finally corrects after you’ve gone long and/or the commercials flip right back to the short side. So there is a risk either way. You just need to choose the one that you’re more comfortable with.

Larry

Mike,

I understand your concern. But this is the way it is with any mechanical strategy. You sometimes get signals that you really don't want to follow. Not everyone can follow systems. However, the absolute worse thing you can do with any system is to pick and choose which signals you want to take. It takes a lot of discipline to do it right.

Larry

Larry -

Just to be clear, I seem to remember the 49%/51% rule being at or beyond those numbers, so the currect 50.87 long would not be rounded up to 51%, isn't this correct?

Thanks.

marc

Marc,

No. I always rounded the numbers in my back testing. So 50.87 rounds to 51.

Larry

Larry,
I would like to get your opinion on why you think the commercials were on the wrong side of the market for so long. Is there anyway to find out how many individuals are buying futures contracts. Is it possible that a few individuals that have a bearish view (and a lot of money) have stubbornly been short and have been able to keep the bias slightly on the short side for so long?

Gary

this doesn't answer your question but - I can't sleep, was surfing the site and tho't I’d say this...

who, what, where, when, why, and how? in trading there seems to be a hierarchy of answers to these questions.

WHAT is happening is, in my opinion, the most important. it doesn't matter what is SUPPOSED to happen - only what IS happening.

next is WHERE? (i.e. this stock or that commodity, etc.) "what" and "where" are linked. knowing one without the other is useless.

WHEN is just a entry/timing question.

HOW am I going to exploit WHAT is happening? - is next. what good does it do to know what, where and when if you're not going to do anything?

WHO is doing WHAT is less important to me. WHO CARES as long as you make money answering the other questions?

the cot tells us WHO is doing WHAT, WHEN and WHERE... larry has given us 4 options as to HOW to exploit it. it doesn't tell us what WILL happen in the future... just what "smart money" is doing now.

the only question UNanswered is WHY? in my opinion it doesn't matter. i’ve heard market "experts" and gurus talk to this issue ad nauseam for years. but nothing they say matters because nothing trumps WHAT is happening WHERE and WHEN - and knowing HOW to exploit it.

we have a great system... it's not 100% accurate. why? it's JUST NOT

-ja

Gary,

I don’t know why the commercials have been on the wrong side of the market. If I had to take a wild guess I would say that in July there was enough concern about market valuation for enough commercials positions to tilt the bias to the short side. If so, I can certainly understand why they had that concern. And then something happened in January – maybe they are impressed with corporate profitability, maybe they decided that we’re getting a little too close to elections, maybe they decided that the Fed is going to keep pumping this thing indefinitely, maybe it will turn out to be a false signal, etc. – that caused the bias to switch to the other side. I have no idea, of course, but if you want me to take a guess, there it is.

When you talk about “individuals,” I assume you mean individual commercial accounts as opposed to individual retail customers. Yes, it is certainly possible for a few very big players to be able to tilt the scales one way or the other. You have to be very big to have a reportable position. The value of the S&P futures contract is approximately $285,000 (250 time the index). A reportable position is 1,000 contracts valued at $285 million. I don’t know about you, but that leaves me out as having to worry about reporting anytime soon. You can get the number of traders by looking at the “long form.” As of the last report there were 98 commercial traders who were long and 63 who were short. So there aren’t many of them. But that’s the whole idea, it seems to me. We want to know which direction the biggest of the big boys are leaning – not in terms of numbers of traders, but in terms of size of positions.

Larry

Thanks for the straight answer Larry. It seemed very strange to me that the commercial traders would be on the wrong side of the market for so long. It has never happened before. However if there are only about 160 commercial traders it is reasonable to suppose that a few traders could influence the total position. Have you ever looked at the data to see if the number of traders on one side or the other would produce better results than the amount of money that they are willing to commit to their postion?

Gary

Gary, it seems like I looked at it a couple of years ago. I don't remember the specifics, but my recollection is that in terms of numbers of traders, the longs outnumbered the bears even during 2000-2003. So the data wasn't meaningful. But it's all there on the CFTC web site for anyone who wants to dig into it.

Larry

Larry,
This is just a thought. If we have about 160 commercial traders, and in order to be considered a commercial trader you must have a position of at least 285 million dollars. It seems obvious that every one of those traders (accounts) can afford to buy what ever information is available and have massive research teams available to them. Why in the world would there be more traders long from 2000-2003 than short? This doesn't make sense to me. How could more of the supposedly smartest traders in the country be long than short during this time? I understand that most of the people on this site just unquestionably follow the signals, but I am compelled for some reason to dig a little deeper and try to find a logical reason for why these traders are doing what they do. The current signal as an example. You've even said it yourself that this is the most extended market you've ever seen. Why would these traders pick this time to switch to long. These are very interesting times

there you go asking the "why" question again. it's pointless. we'll never know exactly who did what when and least of all why.

there are many DIFFERENT commerical traders. who's to say any one of them were long or short for any one of the signals that we follow.

the quest for the "holy grail" is a quest inward - not out there.

-zen master ja!

Class is in session and we’re having a pop quiz. Stop your groaning, you should be prepared for this…

1. Give one example of a commercial hedger of S&P futures who would, in various amounts, always be long the futures market. Also, give one example of a commercial hedger of S&P futures who would, in various amounts, always be short the futures market. (We haven’t covered this in class so I’m asking you to think on this one)

2. Consider this scenario - the number of long and short commercial traders of S&P futures is relatively constant, yet the total number of long and short contracts varies significantly depending on market conditions. The result is that sometimes, even though there are more long traders than short traders, the total number of contracts sold short is significantly larger than the total number of contracts bought long. How can this be?

3. Which is has a greater influence on price – the number of long and short traders or the total number of contracts outstanding that are long or short? Why?

4. Futures trading is a zero sum game. The total numbers of longs from the three major participant categories – Non commercial traders, Commercial traders, Non reportable traders – will always equal the total number of shorts. However, the total long and short positions within the three categories can vary significantly. Which of the three categories of traders is most likely to be on the right side of the market? Why?

5. Consider this scenario – you are a commercial trader who, because of the nature of your business, only trades S&P futures from the long side. The minimum amount that you trade is 1,000 contracts. The maximum amount that you trade is 5,000 contracts. You decide to go long l,000 contracts. If you are making a statement about your evaluation of current market conditions, what statement would you be making?

6. Is it possible to develop a trading system that has a 100% success rate over a long period of time? Is so, how? If not, why not?

Bonus question

You are being considered for the position of Director of Derivatives Trading with XYZ Investments. The base salary is $500,000 a year. And with incentives the total pay package can be several million dollars a year. You are in the final interview and the last question that you are asked is the following – if we should hire you for this job would it be your policy to announce to the world why you are taking positions in the S&P futures market? If so, why? If not, why not?

Take your time. You may take the quiz home with you if you wish. It counts for 50% of your final grade in this course.

Professor Holmes

Professor,

this is my first post here, and first of all shortly i would like to thank you Larry, and all the contributors of the forum for helping me start up!

I have a question regarding the quiz. Nor English is my first language, nor I have the proper trading lingo yet, so please make this clear for me:

"1. Give one example of a commercial hedger of S&P futures who would, in various amounts, always be long the futures market. Also, give one example of a commercial hedger of S&P futures who would, in various amounts, always be short the futures market."

What do we mean by being long the S&P futures? Buying puts and buying calls are both being long the futures?
Or when we say that we are long the S&P futures, we are long the "S&P itself" (and are buying calls or selling puts)?

Thank you!
Akos

Akos,

Your lingo is fine. When I say "long the futures market" I'm referring to buying S&P futures rather than selling or shorting S&P futures. I'm not considering options, but futures only in this particular example.

I’ve tried many ways to explain the behavior of commercial traders as reported by the Commitment of Traders report. The quiz is just my latest attempt.

I look forward to your questions and input in the future.

Larry

Larry,

I will give this a stab as it relates to my investing goals.

Question #1.
Sorry, I really don't know the answer to this one.

Question #2.
It is not the number of traders, but the amount of contracts that net us a long or short bias.

Question #3.
The number of contracts. I like to see more contracts
to confirm the bias.

Question #4.
The shear size of commercial traders put them in the best position for us to follow.

Question #5.
That current conditions, in my opinion, warrant a minimum postion at this time.

Question #6.
Impossible. But 55% right makes me extremely wealthy.

Question #7.
Whether it would be my policy or not, I am required by law to disclose my position.

1. i don't know.

2. the majority of commercial traders, regardless of long term bias, think in the short term the market is heading south and increase their short positions accordingly.

3. number of contracts, obviously, due to dollar amount invested

4. commercial, obviously again, due to dollar amounts invested.

5. that you are tenatively bullish, but enough so to begin scaling in with your first position.

6. it would be extremely unlikely, due to the fits and starts the market goes through, especially in the event of a market moving news event that throws your signals for a loop.

bonus i don't think i would anounce it, if i had a system that worked well enough to trade at that level. i would want to keep it private for a long as i could.

While I have a minute, I thought I would answer the questions on the “quiz”…

1. An example of a commercial hedger who would only trade S&P futures from the long side would be a commercial entity who is expecting money to be coming in at some time in the future and they want to use the futures market to lock in prices. Another example would be a mutual fund who uses futures to leverage their existing long positions. And example of a short hedger would be a commercial entity who has a portfolio of stocks and is using futures to hedge against market declines.

2. Obviously, the fewer number of short traders have larger positions than the larger number of long traders. Or it could be that the commercial entities that trade from the short side are larger institutions so they would naturally have larger positions.

3. Supply and demand determine price. So, obviously, the number of contracts outstanding long or short is of importance. The number of long and short traders is irrelevant.

4. Commercial traders are far more likely to be on the right side of the market than other participants. They have the best information and they get it faster than other participants. And just by the nature of their sheer size, they have more influence on market direction. It doesn’t mean they’re going to be on the right side every time, partly because they compete with each other. But there is an edge in knowing what the commercial bias is.

5. If you only trade from the long side and a minimum position for you is 1,000 contracts and a maximum position is 5,000 contracts then , all things being equal, you would be making a bearish statement by only being long 1,000 contracts.

6. It is not possible, nor desirable, to have a highly profitable trading system that has 100% accuracy because it would eventually become so popular that the edge would be completely gone as soon as it is “discovered.”

Bonus: If you want the job, you better say that you’re going keep your reasons for making trades private. As soon as you let it known what you’re doing, others would trade against you, making it much more difficult for your strategy to be successful. So wondering why commercial traders make the trades they make is an exercise in futility. They’re not going to let us in on why they’re doing.

Larry