COMMITMENTS OF TRADERS (CoT) - COMMODITIES (CRB Index)
APPLICABLE TIME FRAME(S):
INTERMEDIATE / LONG
UPDATE SCHEDULE:
Every Friday at approximately 3:50pm EST
EXPLANATION:
This indicator is like all the other "Commitments of Traders" indicators we post for commodities, but with one difference. First, we'll explain what the indicator is, then we'll explain exactly how this one is different from the others.
Each week, the Commodity Futures Trading Commission (CFTC) releases information on the long and short positions of three groups of traders in a couple of dozen different futures markets in a report known as the Commitments of Traders.
The three groups are determined by the number of contracts they are currently holding, and are described as follows:
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.
We want to get a feel for how traders are positioned in the market, so we use the Large Speculator positions for this particular indicator. On the chart, we plot red and green dotted bands that are 2 standard deviations (a measure of extreme) away from the one-year average of the positions. When the position exceeds the green band, it tends to be bullish for the commodity; when it exceeds the red band, it tends to be bearish.
Now, what makes Commitments of Traders - CRB different?
There are very few gauges of how people feel towards commodities in general - usually the focus is on individual contracts. So what we've done is take each of our Commitments of Traders indicators and combine them into one, general outlook on commodities.
To do that, we used the weightings used by the Commodity Research Bureau to calculate their CRB Index. Like the Dow Jones Industrial Average for stocks, the CRB Index is the de-facto standard when traders talk about commodities.
Until recently, most of the individual contracts were evenly weighted in their index. In 2005, however, the CRB changed the weightings to more heavily favor energy. So, we change the weightings in our indicator to more closely reflect the opinions for the CRB Index.
With many new commodity-related ETFs being rolled out each year, it's now easy for traders to trade "commodities" in general, or more specific sub-groups within the asset class. Visit ETFConnect.com or enter "commodity ETF" in a search engine to get a list of tradeable commodity-related ETFs.
GUIDELINES:
Large and Small Speculators, by default, are considered "dumb money". Prices tend to reverse when these traders reach an extreme, so when they become so net long that their positions exceed the red dotted band, we should look for general commodity prices to decline, and vice-versa.
You also want to look at the absolute level of positions, too - if they're at their greatest extreme in several years (even if they may not exceed the trading bands), then there's no question we're seeing a notable event.
ADDITIONAL RESOURCES:
Commodity Futures Trading Commission (www.cftc.gov)
© 2007 Sundial Capital Research, Inc. All Rights Reserved.