COMMITMENTS OF TRADERS - SMALL SPECULATORS

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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 they are holding less than 1,000 contracts, then the broker does not have to report the position.  By taking the difference between total and reportable positions, we get "non-reportable" positions - commonly referred to as the "small 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 small speculators (the non-reportable category) held 148,227 long positions and 95,356 short positions.  This makes their overall position a net long 52,871 contracts.

Small speculators are typically correct during the midst of a trend.  They will be getting longer and longer as the market rises (buying contracts from the commercial hedgers), then sell off those positions when the market falls.  When the net short positions reach an extreme, then very often a change in trend follows. 

The change in trend is typically the one that is going to make most of these traders lose money.  So, if the small speculators reach a net LONG extreme, the change in trend is typically going to be down - the market will decline and most of these traders will lose money.  Conversely, when the small specs have been selling heavily and have pared down their net long position, then we very often see a rising market soon afterward. 

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 small specs go net short, that usually tells you something.  Since the ending spasms of the late-90's bull market, small speculators have only very rarely been net short.

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).

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between (15,700) and 44,300

95% of readings (2 standard deviations) should be between (45,700) and 74,300

99% of readings (3 standard deviations) should be between (75,700) and 104,300

In other words, we should expect a net position of under -75,700 contracts or over 104,300 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.