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Analysis of the Net Commercial Stock Index Position

 

Commitments of Traders Report Data on Stock Indexes

The Net Commercial Position in the S&P Futures has been heralded as one of the top "Smart Money" indicators in calling Stock Market tops and bottoms. How good is the record of the indicator going back in time? Does the %COT indicator of broad commodity price moves correlate to moves in the S&P?

With the popularity of the E-Mini's and the NASDAQ and the DOW futures, what does a combined analysis of the net commercials tell us?

The following graph shows a weekly updated chart of the net S&P futures with data from the COT Report plotted over the weekly S&P futures.

The RED line graph is the Net Commercial position. The green line is the net large speculator position, brownish-yellow the small speculator, and the black line is total open interest. They are plotted relative to each categories individual five year or all time range

The net commercial position (red line) tells us the net hedging activity by the large investment funds. Stock index futures are used to hedge portfolio risk many types of large investment managers at banks, endowment funds, insurance companies, mutual funds, pension plans, etc. The net position of these large portfolio hedgers can imply to us their collective net opinion of stock market risk. Following the net opinion of the large portfolio hedger is often referred to as following the "smart money."

 

The following current chart is set to update each week when I update my COT charts at www.commitmentsoftraders.com so you can re visit this page each week to view the update. 

But the world is not getting simpler. We now have futures on the NASDAQ, E-Mini futures and DOW Futures. To consider the dispersion of the net commercial positions to these other futures the listings of COT data in this web site show "combined stock index" COT data. The following chart is the S&P cash index with the "combined stock index" COT data. 

This chart combines the COT data for the S&P 500, E-Mini S&P (data totals divided by 5 because the contract is one fifth the size of the full), NASDAQ 100, E-Mini ND 100 (one fifth of the data), and the DJ Future.

The longer term chart below shows a "big picture" record of the net commercial position as an indicator for the S&P stock index.

The following chart is the long term S&P cash index with the combined stock index COT data. The influence of the combined data is a relatively new issue because of the new futures (DJ and NASDAQ) that started in the LATE 1990's

 

 

 

SPECIAL %COT Indicator

The following chart is the weekly S&P with the %COT indicator plotted over the chart. 

The %COT indicator is a composite index of the net commercial position in the major futures markets. The index shows a net buying or selling by commercials in all the commodity markets listed in this web site and is calculated by simply adding up the column of the net commercial positions, but reverse the sign on the interest rates, the stock indexes, and the Dollar index. That way they are all a reflection of the net commercials anticipating higher or lower commodity prices. 

The premise on using the %COT as an indicator for the stock market index is that the history of the indicator suggest net commercials in the primary commodity futures markets anticipate rising commodity prices all the way into the peak in prices, and the stock market falls all the way into the peak net commercial anticipation of rising prices. Once the net commercial %COT turns down from a high point, the history of the indicator suggests we can then look for a low in the stock market.

The %COT seems to rise and peak into a stock market bottom. It's rise is a coincident indicator of the bottom. 

The indicator seems to fall into and turn up at a stock market top. It's bottom is a coincident indicator with the top.

The longer term chart below shows the %COT indicator (red line) "peaking" at market bottoms (ie 1/95, 1/98, 7/98) and turning up from a low at market tops (ie 1/94, 9,97, 3/98 1/00).

 

 

Any reference to Profit or Loss is hypothetical and does not reflect the results of any actual trading. 

All aspects of any trade recommendations contained in this report are subject to modification at any time. 

ANY STATEMENT OF FACTS HEREIN CONTAINED ARE DERIVED FROM SOURCES BELIEVED TO BE RELIABLE, BUT ARE NOT GUARANTEED AS TO ACCURACY, NOR DO THEY PURPORT TO BE COMPLETE. A STOP LOSS MAY NOT LIMIT YOUR LOSS TO THE AMOUNT INTENDED. FUTURES TRADING INVOLVES FINANCIAL RISK AND SHOULD BE CONSIDERED CAREFULLY BEFORE MAKING ANY TRADES. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

REGULATORY DISCLOSURES REGARDING HYPOTHETICAL RESULTS

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS EXISTS IN FUTURES TRADING.