Wednesday, 24 October 2007

COTs Signal Lower Fed Funds Rate

Some highlights from the latest Commitments of Traders report issued last Friday by the Commodity Futures Trading Commission:

- What will the Fed do at its next meeting on Oct. 30 and 31? Large speculators are signaling a lower Federal Funds rate at some point in the future, according to my trading setup based on the COTs data. The large specs are the large investment firms and hedge funds. Amusingly enough, these geniuses are normally considered the "dumb money" because they're often wrongly positioned at market turns. However, my research has found that's not true in every market. In fact, in the Treasuries, they and the small traders are actually the "smart money," while the commercial traders are the dummkopfs. In the Fed Funds futures and options, the large specs flipped my setup to a bullish signal with the Sept. 25 COTs report and have now given four consecutive bullish signals. This is based on their fast-growing net long position as a percentage of the total open interest, which has now hit a level not seen since Jan. 2006.

- If you can't quite wrap your mind around the fact that the large specs can be the smart money, rest assured: in my S&P 500 setup, the small traders are back to their usual moronic ways as the "dumb money." And they're still super-bearish as of the latest COTs report, with their net short position falling 1.29 standard deviations below its 17-week moving average. This is bearish enough to give me another bullish signal - the fourth in a row for this setup. Which suggests the COTs see the current market difficulties as a mere hiccup.

- But here's another twist for you: In my setup for the SOX Semiconductors, the large specs are back to being the smart money. Don't shoot the messenger: the funny little COTs numbers work in mysterious ways; no doubt this is why so few have been able to make much headway with them after all these decades. What say the NASDAQ 100 large specs? They're mega-bullish. And that means a fourth renewed bullish signal for my SOX setup, which is based on the NASDAQ 100 COTs data.

- Similarly, in my natural gas setup, the large specs also turn out to be the smart money. And they're still highly bearish, giving a renewed bearish signal in the last report. Sorry, gas bulls.

- For my read on the metals, check out my report this week at Good luck this week, and see you back here Friday.


Anonymous said...

Interesting blog Alex. I was wondering if you've noticed any patterns peculiar to long-short hedge funds that seem to like going long the SOX and the NDX and short the S&P's. Most of the large specs and even the small specs are hedge funds if I'm not mistaken. Not sure if the commercials can also be hedge funds. Anyway, long tech and short financials is the current trade du jour, and was just wondering if your work is picking that up.

About Alex Roslin said...

Hi, and thanks for your comment. You raise a few interesting questions. I'm not watching the large specs for the SP500, so not sure what they're up to there, but I can say the NASDAQ 100 large specs are at a bullish extreme, so that jives with your long tech comment.

As for being short financials, the closest data I have to detect something there are the Treasuries COTs numbers. My bond setup is currently bullish. The 30-year large specs (the smart money in my setup for the bond) are currently at a bullish extreme, giving a renewed bullish signal, but that's not being quite confirmed by the commercials, who are extremely bearish, but just a tad too little to give me a confirmatory bullish signal for my setup for the bond.

In the 10-year, the "smart money" small traders have a slightly bullish tilt right now but not dramatically so. They're also giving this setup a bullish signal at the moment.

The large specs are super-bullish the 30-day Fed Funds contract as I've pointed out in my post today. The small traders are also quite heavily bullish the 13-week T-Bill at the moment. All this positioning would seem to suggest strong bullish positioning from the institutional and retail communities on financials, although then again that may be a leap.