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The Little Book of Fundamental Market Indicators

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Peering into the Minds of the Biggest Traders, Every Friday Afternoon

Peering into the Minds of the Biggest Traders, Every Friday Afternoon

Whether You Trade or Not, the Commitment of Traders Report (COT) Can Offer Fascinating Market Insights

Group One Trading Hard at Work

If it wasn’t for the CFTC requiring it, no trader in their right mind would share this information freely. This is a fascinating treasure map! And we get to be fascinated by it every week, every Friday to be precise.

https://www.cftc.gov

So, what’s this COT report? 

The U.S. Commodity Futures Trading Commission, the independent organization that regulates the derivative markets, requires traders to declare their open positions. They gather the information every Tuesday and release it the following Friday after the market close. These reports cover many interesting areas such as grains, cattle, financial instruments, metals, petroleum, and much more.

This process is invisible to most of us small traders, as the brokers take care of it behind the scenes. But being able to access this information in aggregate is incredible and a big gift that you owe it to yourself to spend some time with this data. It offers a whole new level of transparency into the big players!

Let’s Look at the Data!

The report comes in two different sizes, the long format:

And the short format:

Both seem printed on 1980's dot matrix printers and look like crap. Thankfully, we can get great COT charts for free through Barchart Commitments Of Traders (COT) Charts. And, even better, we can download free historical CSV files from Quandl.com. It is free but you need an account to access them.

The report usually breaks data into 3 groups of traders — commercials, professionals, retail/small traders. People have weaved all sorts of stories as to which to watch and which to avoid. Like stating that commercials are too opaque to be of use due to overly complex hedges or that the retail traders are the dumb money (that’s us, they’re saying we’re dumb, that’s not very nice). But then again, if I had a penny for every time somebody's intuition proved wrong in data science or trading tactics, I’d be rich!

Dig into the Data Yourself

What do we do? We roll up our sleeves and measure things quantitatively and for ourselves. I downloaded the Gold COT report along with Gold Spyders, the fractional ETF shares. I then ran a Pearson correlation between the price of the gold ETFs and each feature available in the COT report (remember that a correlation of 1 is perfectly aligned, -1 is perfectly inversely aligned, and anything around 0 is not correlated, otherwise called random).

Low and behold, the Money Manager Longs and Money Manager Shorts, the so-called “smart money” proved to be the least correlated to gold:

Money Manager Longs : 0.374898752135321
Money Manager Shorts : -0.01454589523252516

Of more interest, the open interest with the second most correlated with the price of gold:

Open Interest : 0.677188150322622

And the “Other Reportable Spreads” was the most correlated : 

Other Reportable Spreads : 0.7152336053206511

And here are two plots to bring the last correlated pairs home:

Gold and “Open Interest”
Gold and “Other Reportable Spreads”

And here is the full list of correlation values:

Open Interest : 0.677188150322622
Producer/Merchant/Processor/User Longs : 0.374854967081495
Producer/Merchant/Processor/User Shorts : 0.3669517983685786
Swap Dealer Longs : 0.27600522706446834
Swap Dealer Shorts : 0.3240620109060007
Swap Dealer Spreads : 0.6896983241767743
Money Manager Longs : 0.374898752135321
Money Manager Shorts : -0.01454589523252516
Money Manager Spreads : -0.37777882292464676
Other Reportable Longs : 0.4193652352237133
Other Reportable Shorts : 0.37294652741784046
Other Reportable Spreads : 0.7152336053206511
Total Reportable Longs : 0.6717391400475287
Total Reportable Shorts : 0.6746743738027434
Non Reportable Longs : 0.27396109726857365
Non Reportable Shorts : 0.34162751983060935

If you want to dive deeper into COT research or if you want to learn more about this style of fundamental analysis, check out the ViralML School and in particular the Applied Fundamental Market Analysis with Python Tract:


Applied Fundamental Market Analysis with Python Tract

Another great resource is Larry Williams, he has written extensively about this report:

Larry Williams — Trade Stocks and Commodities with the Insiders: Secrets of the COT Report https://amzn.to/2rMRJal