COTs Sour on Natural Gas

Will crude oil go to $100? Or is the bull over? Is natural gas finally recovering from its 30-percent smash-up? Or is more bad news coming for "gassy" stocks? If it’s true that the energy markets reflect global economic strength, the latest Commitments of Traders report doesn’t look too sunny.

Friday’s report—based on futures and options holdings as of Sept. 4—has some sad news for energy bulls. My existing bearish signals for crude oil, energy stocks, natural gas and the Canadian dollar all still hold true. Same for my bearish signal for the U.S. Dollar Index.

This is because traders in these markets didn’t registered any new historically extreme positions that would have reversed my existing signals, according to my reading of past COTs data. (See the "Latest Signals" link in the Navigation bar for more details from the latest COTs report.)

As well, in natural gas, the COTs report issued Sept. 7 gave me a renewed bearish signal for this market. This signal is based on trading the same side as the large speculators using the combined futures and options COTs data.

Woah. Hold on a sec, Alex. Aren’t the large specs the “dumb money” folks who are normally wrong in the markets? Yes, they usually are. My studies of the COTs data show the large specs are indeed the wrong-way traders in most markets—and thus should be faded when they hit historic extremes in their net positions—but in some markets like natural gas they in fact have proved to be the “smart money.”

I think my trading setup for natural gas shows this fairly conclusively. The large specs have been on a bearish signal since the March 27 COTs report (which, with my three-week trade delay for this setup, meant the signal took effect on the open of trading on Monday, April 16).

Surprise, surprise—natural gas has given up nearly 30 percent since then. Were the large specs smart or dumb? I think the natural gas market shows the importance of actually studying the COTs data, rather than reporting fairly meaningless popular notions about it that we often see in the financial media.