COT Report/Speculators

 

 

Trader Scott’s Market Blog

December 22, 2016

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The recent post about the Commitment of Traders Report (COT) was focused on what the commercials do. I need to do a better job of explaining it by focusing on what the speculators (weak hands) are doing. We now know a more professional, unemotional approach to markets is a better way to do it. But the speculators get greedy at market tops and fearful at market bottoms. They are the ones who drive the prices, the trends. And as a group they get themselves way off balance at the tops and at the bottoms. Most speculators are just basic trend followers, following the market up or down with their “systems”. And they drive the prices accordingly, as the money flows from the weak hands into the strong hands. In the commodity futures markets, we can see this in a data format with the COT report. The report is split between commercials and speculators. The commercials are producers and users and they’re hedging their production or demand. They’re basically net neutral. The speculators are, well speculating. So we can see how the speculators drive the prices by looking at the big rally in gold from last December. You can view the weekly reports here, but basically what was going on is the speculators were covering short positions and going long. And then in February they really picked up their buying as you can see in this detailed chart. This led to the large upthrust with the surge in volume on February 11th. Gold surged that day and people around the world were foolishly lining up to buy gold and paying huge premiums. And they wouldn’t get near it two months before when it was $200 cheaper. So the reason we know it’s the speculators driving the price is because their buying drove prices higher, while from the COT report the commercials were taking the other side. Therefore, it’s the speculators buying which drove the prices higher. The commercials taking the other side did not stop the locomotive. And looking again at the COT reportwhich Adrian worked up for us, we can see how the speculators and the commercials basically mirror each other. We can see how extreme the positioning was last year in December. And currently, we’re getting there, but there is no exact level of extremeness. Just like in the stock market with volume, it’s just relative. But we do know the speculators will be way off balance with emotions and selling at the bottom. And lastly, of course there are weak hands and strong hands in the stock market. And there are COTs for stock index futures, but there’s a lot else going on in the stock market. Obviously there are no COTs for individual stocks and sector ETFs, but there are plenty of other tools to use to judge readiness to enter or exit markets.

 

 

 

About

img_0074bwcrsmTrader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.



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'Trader Scott’s Market Blog – COT Report/Speculators – December 22, 2016' have 6 comments

  1. December 24, 2016 @ 6:34 pm traderscott

    The latest gold COT report shows the speculator’s positions continue to fall – six weeks in a row.

    Reply

    • December 25, 2016 @ 12:07 pm David Parker

      Hi Scott,
      But we are still nowhere close to where we were Dec, 2015 where the commercial net short position was close to zero. Sentiment for PMs may be awful right now but COTs suggest we are headed down. Gold has been going down 6 weeks in a row. Last time it happened was in Oct-Nov 2015. The week after we got the bottom in Gold with some back and forth in Dec before heading higher.

      Reply

      • December 25, 2016 @ 1:56 pm traderscott

        Right, but focusing on the speculators, they are ramping it up. Yes sentiment is not a timing tool at all. It is good anecdotal background. We still need patience, the first big sign of strength (selling climax, etc.) will start the process. That’s when we need to get less patient, so to speak. But just like last year, it is a process – we need the bigger rallies and reactions. I chronicled the process in the posts late last year before turning bullish in December.

        Reply

    • December 25, 2016 @ 4:26 pm traderscott

      Net long positions continuing to fall that is.

      Reply

  2. December 25, 2016 @ 6:28 pm Gerald Clifton

    No, “commercials” are not just “producers and users” The swap dealers more directly offset speculators’ activities than do the commercial hedgers who mine, process, and sell to various merchants (like Kitco, Monex, et.al.). Swap dealers buy, sell, and lease gold that has never/will never see the light of day, gold that has been sitting in various government/dictator/royal vaults for centuries. Mining and its offshoot activities probably accounts for less than a third of the buying and selling depicted by the weekly COT reports. If you want to understand the gold market, you have to understand the swap dealers, which include many of the bullion banks around the world. I find your commentary naive and incomplete.

    Reply

    • December 27, 2016 @ 1:22 am traderscott

      There you go Gerald – you have gotten your point across.

      Reply


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