COMMITMENTS OF TRADERS - COMMERCIAL TRADERS

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE

UPDATE SCHEDULE:

Friday afternoons by 4:00pm EST

REPORTING DELAYS:

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

EXPLANATION:

The Commodity Futures Trading Commission (CFTC) - the regulatory body responsible for the futures industry - designates levels that determine whether futures brokers must report the positions of their clients.  As of January 2003, that level for the large S&P 500 contract was 1,000 contracts. 

If a trader is holding more than 1,000 S&P contracts at a brokerage, then that position is "reportable" to the CFTC.  If that trader is using the futures markets solely for hedging their ongoing, ordinary business activities, then they may file a form with the CFTC designating themselves as hedgers, or "commercial" traders (this may allow them lower margin requirements). 

If they are holding more than 1,000 contracts and are not designated as a commercial trader, then they are called large speculators.  The CFTC collects this data from clearing brokers every Tuesday and reports it the immediately following Friday on their website (link below).

When you go to their website and pull up the current report, you will see the data in raw form.  This is what you will be looking at:

In this report, for the reporting week ended 01/21/03, we can see that commercial traders held 415,028 long positions and 456,885 short positions.  This makes their overall position a net short 41,857 contracts.

It is always good to know what institutional traders are doing, and there is no better way to find out than this.  Although there are ways for a large trader to get around the reporting requirements, this report has historically given an accurate representation as to what large traders are doing vs. small traders. 

One thing to keep in mind is that the commercials are like ocean liners - they do not turn a dime.  You will usually see them begin to get more and more short as the market goes up, then, as the market declines, they will cover their short positions and begin to get longer.  Sometimes they will make a drastic change in their net positions, typically getting longer after a market plunge, and that is usually an excellent signal that a rally will take place and it will be significant.

GUIDELINES:

More than any other indicator we follow, there is no level of significance to watch for here.  About the only real meaningful number is ZERO.  When the commercials go net long, that usually tells you something.  Since their main activity is hedging, and since they are almost all holding long positions, recently the commercials are almost always net short.  That is because they are hedging their long positions.

Also take note when the stochastic on the chart reaches the top of its range (meaning commercials are shorter than at any other time over the past year), or the bottom of its range (meaning commercials are longer than at any time over the past year).

Another thing you want to look for is the TREND, and then the change in that trend.  If the commercials are short and getting shorter (as the market declines), then change direction and begin to get longer, you can expect a market bounce.

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between (34,800) and 32,600

95% of readings (2 standard deviations) should be between (68,500) and 66,300

99% of readings (3 standard deviations) should be between (102,200) and 100,000

In other words, we should expect a net position of under -102,200 contracts or over 100,000 contracts around 2-3 times per year.  Since such a reading would be extremely unusual, it suggests that we are likely to see a trend change.  These figures assume a normal distribution curve.

ADDITIONAL RESOURCES:

Commodity Futures Trading Commission (www.cftc.gov)

© 2005  Sundial Capital Research, Inc.  All Rights Reserved.