Wednesday, January 5, 2011

Weekly Commitment of Traders Report - Week Ending 12/28

For about six months now I have been downloading the weekly CFTC report and crunching the numbers into an Excel spreadsheet.  It's been more educational in terms of how certain markets work but as I understand these reports more I am realizing there is a lot of good data to be had.  For those new to the COT report, traders are categorized into three categories Commercial, Non Commercial, Non Reporting.  Commercial traders for example would be Starbucks buying coffee for delivery through the futures market.  These are the traders that know what's going on and the ones where the most can be gained by studying their positions.

So the charts below focus solely on the commercial traders and their net position (long minus short).

Chart 1:  S&P 500 Versus Copper Commercial Positions.

For sake of comparison, I often invert an axis as I did on the left side which represents the net position).  The prior week registered the highest short position of commercial week and this week we see them finally to have reduced that position.  It's not definitive enough at this point to declare an overall change in copper price action but considering the strength in copper, why would commercial traders drop their net short position.  Commercial traders short into strength and go long into weakness.

Chart 2:  S&P 500 Versus Copper.  

I show this chart for the simple fact of showing how tightly correlated the two have been.  The past 6-8 weeks they have traded with almost perfect correlation.  Copper has begun to rollover the past few days.  It's worth noting price action over the next few days to see if the slide continues or not.  

Chart 3:  S&P 500 Versus S&P 500 Consolidated Commercial Positions

Notice the relatively strong correlation the past year.  It's not as tightly correlated as Chart 2. Notice the April high (peak on the SPX - orange line) and how it was trading higher than the green line until it reverted.  Notice what's been happening the past few weeks as the two have once again diverged.  Would imply the SPX is due to correct as it did in April 2010.

Chart 4:  S&P 500 Versus 30 Year Treasury Commercial Positions

Similar to Chart 3, notice how the net position has begun rolling over while the SPX has continued to diverge?  

Chart 5:  30 Year Treasury Yield Versus 30 Year Treasury Commercial Positions

Notice how the commercial traders have been increasing their short position (axis on the right inverted for comparison) while the 30 year yield has diverged.  This would imply the 30 year is close to a bottom in price (high in yield) and due to begin catching a bid which based on correlations would put pressure on the SPX (see chart 6).

Chart 6:  S&P 500 Versus 30 Year Treasury Yield


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