cot $ stoch description

Three days - the reports are released on Fridays and reflect positions as of the immediately preceding Tuesday.

Please see the description for commercial traders for more background on the Commitments of Traders data.

The All-Index, All-Prodcut Dollar-Weighted Stochastic, while a handful to say, is actually quite a simple indicator. It takes into account all of the major index futures products (S&P 500, Nasdaq 100 and Dow Jones Industrial Average) and both the full contracts and the e-minis. It then multiplies each product by the dollar value of the futures position.

For example, one full S&P 500 contract was worth $250 times the index value as of September 2004. So if the S&P was at, say, 1100 at the time, the contract would theoretically control the equivalent of $275,000 worth of stocks. By combining all three major indexes and both the full and e-mini products, we can get a better overall picture of how commercial and small speculator traders are positioning themselves.

The Stochastic looks at the most recent years' worth of activity for both groups of traders. It measures where in this two-year range commercial traders are currently positioned and compares that to the same figure for small speculators to come up with one final number.

For example, if commercial traders are currently the most net long they have been in two years, then that side of the equation will be 100. If, at the same time, small speculators are the most net short they have been, then that side will be 0. The final Stochastic reading, then, will be the difference between the two, or 100.

This is the most bullish configuration the data can have for the market going forward. Conversely, a final Stochastic reading of -100 will mean commercial traders are bearish while small specs are bullish, and that is normally a bad sign for future prospects of the market.

In a commentary dated 09/14/04, we outlined the future performance in the S&P 500 the given number of months after extreme Stochastic readings. The table below shows those results:

S&P 500 Performance After Stochastic Extremes

1992 – 2004

3 Months Later

6 Months Later

12 Months Later

+80 or Above

4.3%

(79%)

6.1%

(69%)

13.6%

(89%)

-80 or Below

-1.5%

(47%)

-2.9%

(44%)

-4.3%

(36%)

It is clear that the market performs better when the stochastic is very high than it does when it is very low. By watching these levels, we can gain more insight into the market's prospects going forward.

The guidelines here are pretty clear - if the Stochastic is high, it is positive for the market; if it is low, it is negative for the market. We use +80 and -80 as the initial positive and negative extremes, respectively, but when it reaches +100 or -100, then that is the time to really sit up and take notice.