Help Save the COT Report

Help save the Commitments of Traders reports in their current form. If you haven't already written to the Commodity Futures Trading Commission, which publishes this invaluable weekly government data on trillions of dollars in derivatives positions in major markets, please do so.

The CFTC is proposing to alter the COT report in a way that would greatly reduce the ability of traders and researchers to study it and use it in trading. Its plan is motivated by good intentions - improving market transparency - but the execution isn't well thought-out. Read more in my post here (and be sure to check out the comments for a good exchange about the data). Also, see below for a letter sent by Dutch researchers asking the CFTC to continue publishing the data in its existing format.

The CFTC's deadline for comments is Thursday, October 1. Write the CFTC at cotchanges@cftc.gov asking it to keep publishing the COT data in its current format alongside the new format. Thanks to all those who've written saying they've sent in their comments.

To: The CFTC

We are a Netherlands-based group producing scientific research in conjuncture with the VU (the leading university in Amsterdam), doing ongoing statistical, mathematical research into correlations between traders' behaviour and market prices and other financial data. The weekly COT report is at the centre of that. When we started our research into the COT data we assumed that it would be published forever into the future.

Changing the values of the report would make our research obsolete. That means that many man-hours and computer hours would be lost. It would take a great effort to newly analyze the value of the new format and its correlation to other financial-related data. Because the greater amount of data in the new format and the fear of again changing values in the new-style report would probably keep us from committing us again to such intensive research. The new format, due to the nature of statistics, would take years to produce meaningful data.

There are many other reasons to think of why we would like the COT report to continue, such as the fact that in Europe, Asia, etc., such data are not available. The strength of the COT report lies in the continuation and accessibility of information about the biggest markets in the world. Of course, we do not oppose new data being published. We would just like to keep the old style, and we hope that it could be published simultaneously.

We feel that maybe we should have told you before about our research, so that you would have known the importance of the report to us and the institution it is around the world.

I hope to have provided some input for the discussion of the future of the report. Please feel free to contact me.

Greetings, Carl Borgen

Caution Ahead: Data

Oh-oh. Potentially bearish tidings in this week's Commitments of Traders report. The wrong-way small traders in S&P 500 futures and options are suddenly becoming a good deal less skeptical about the market rally. Meanwhile, as you can see on my newly updated latest signals table, the commercial hedgers - the so-called "smart money" - are a lot less bullish than they were last week.

This by itself doesn't mean a whole heck of a lot. The changes aren't anywhere near enough to flip my trading setup for the S&P 500 - which has been bullish since Aug. 24 - to cash or bearish. As well, the correlations between this data and next-week S&P 500 prices are so small it's hard to base decisions on them. (In fact, the small trader net position as a percentage of the total open interest has a slightly positive, albeit tiny 0.18 correlation with next week's S&P 500. Meanwhile, the commercials have a negative -0.27 correlation. So much for the popular wisdom that we should trade alongside the commercials or fade the small traders based on their weekly COT position changes. Doh!)

What is more interesting, however, is what's going on in the three-month Eurodollar contract. (That's the interest rate, not the currency.) This widely watched measure of global liquidity is putting up a caution flag. The large speculator total open interest has suddenly taken a nosedive. That's important because this indicator has a strong 0.61 correlation with next week's U.S BKX Bank Index. My setup based on the Eurodollar data remains in cash for the eighth consecutive week. It takes a position only when three different groups of traders agree in their positioning, which hasn't occurred. But this change in the data could spell more turbulence for the coming week.

Also, my setup for natural gas will go bearish with a one-week delay - i.e. on the open of trading the week of Oct. 5. That signal will not last long, however. One of the components of that setup - a signal that trades alongside the small trader total open interest - has gone bullish this week. That component, however, trades with a two-week delay, so it doesn't impact the coming signal for Oct. 5. It's just to say that the setup won't remain bearish for long and will go to cash or bullish after a single week of being bearish. Interestingly, both components of this setup have strong correlations of nearly 0.60 with the price of natural gas the following week. Yet, the two groups of traders are giving very conflicting reads of the market in the latest COT report. That, again, shows the importance of relying on more than one group of traders when attempting to interpret this data.

Hope you did okay this week and that you have a great weekend. Tune back in early next week for my portfolio update. And please keep your comments coming about the CFTC's proposed changes to the COT report. Read my post for more details ("Save the COT Report!") and a comment sent in by researchers in the Netherlands (scroll down to the end of this post).

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Wrong-Way Traders More Depressed, Signal More Possible Upside

No new signals for my trading setups based on Friday's Commitments of Traders report. All is quiet. See my newly updated latest signals table for details on how the setups see the data now. Also, no signals pending for Monday's open.

The S&P 500 setup is still bullish, and the latest weekly data looks more bullish than last week, with the wrong-way small traders getting much more bearish again, while the "smart money" commercial hedgers are a mite more bullish.

Natural gas, however, is looking decidedly more bearish; while the setup remains in cash, both signals that make up that setup have now clicked back into the bearish column. That could line up for a bearish trade taking effect in early October. Crazy times for that market, as usual!

Meanwhile, please take a look at my post below asking readers to write the CFTC to preserve this invaluable, free government data in its current form. (Read the comments exchange for some extra details on what's at stake.) Sorry I didn't have time for a more detailed update this week. But be sure to check out my portfolio page Monday for my updated results. And good luck this week!

Addendum on Monday morning: I just got this letter in my inbox that a reader sent to the CFTC about its proposed changes to the COT report. I had to share (with permission). Thanks to Carl and the many other readers who have written in!

To: The CFTC

We are a Netherlands-based group producing scientific research in conjuncture with the VU (the leading university in Amsterdam), doing ongoing statistical, mathematical research into correlations between traders' behaviour and market prices and other financial data. The weekly COT report is at the centre of that. When we started our research into the COT data we assumed that it would be published forever into the future.

Changing the values of the report would make our research obsolete. That means that many man-hours and computer hours would be lost. It would take a great effort to newly analyze the value of the new format and its correlation to other financial-related data. Because the greater amount of data in the new format and the fear of again changing values in the new-style report would probably keep us from committing us again to such intensive research. The new format, due to the nature of statistics, would take years to produce meaningful data.

There are many other reasons to think of why we would like the COT report to continue, such as the fact that in Europe, Asia, etc., such data are not available. The strength of the COT report lies in the continuation and accessibility of information about the biggest markets in the world. Of course, we do not oppose new data being published. We would just like to keep the old style, and we hope that it could be published simultaneously.

We feel that maybe we should have told you before about our research, so that you would have known the importance of the report to us and the institution it is around the world.

I hope to have provided some input for the discussion of the future of the report. Please feel free to contact me.

Greetings, Carl Borgen

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Save the COT Report!

U.S. regulators claim they are improving market transparency with some big changes to the Commitments of Traders report. But the changes threaten to sharply curtain the very transparency they hope to achieve.

Please help save this valuable free data by writing a comment to the U.S. Commodity Futures Trading Commission at cotchanges@cftc.gov. The deadline is Oct. 1. More info on how to do so is at the end of this post.

The COT data comes in a free weekly report issued by the U.S. Commodity Futures Trading Commission. It details trillions of dollars in derivatives positioning in over 100 major markets - everything from crude oil to the Japanese yen, gold, frozen pork bellies, wheat and the S&P 500.

Just Raw Numbers

The data is just a bunch of raw numbers that are difficult to decipher until you look back over it for many years and start seeing patterns. Analysts like Steve Briese and Larry Williams pioneered methods to help decipher the data and increase popular understanding of its usefulness.

Taking off from their work, I crunched years of data and studied the long-term charts in search of a way to trade off it alone. This led to my COTs Timer system, a trading strategy based exclusively on this fascinating data that I offer here for free as a public service.

The strategy has a 72-percent win record since December, when I started to trade the first of a new generation of trading setups. The average has been a 5.4% gain with a 3.2-wk holding period, with a 18.3% real-time cumulative return (adjusted to remove gains due to leverage and adjusted to the maximum portfolio allocation of each setup).

Now, in the wake of the financial mess we've faced for over a year, the CFTC is rightly trying to increase market transparency. That includes making some changes to the COT report to give more details about the data, announced Sept. 2. (See the CFTC's additional explanatory notes here.)

But in so doing, the commission will actually curtail the very transparency it seeks to improve. Unless we speak up.

Historic Data Vital

The CFTC will replace two of the categories of traders in the report with four new categories. The commercial traders will now be broken down into a category for producers, merchants, processors and users, plus a separate category for swap dealers. The non-commercial category (popularly known as large speculators) will be broken down into "managed money" and "other reportables." Presumably, the third category - non-reportables (a.k.a. the small traders) - will remain untouched.

The CFTC is inviting comments on whether it should continue to publish the data for the existing categories alongside the new data. This is a vital issue for anyone who cares about this data. If we no longer get the data in the existing categories, the new numbers could be difficult or impossible to evaluate for years.

The CFTC has said it would publish historic data for the new categories going back three years. That's far from being enough for most purposes of statistical research. At a bare minimum, my calculations suggest we need at least about 10 years of data - and likely much more; as much as possible, in fact. Also, the data must cover as many diverse market conditions as possible for the data to have any statistical meaning.

In fact, the existing COT data, which goes back to 1995 for most major markets, just became useful for statistical purposes in the last few years when there were finally enough data points to research.

Comparing Apples With Oranges

The CFTC may argue that a researcher could just recreate the data for the old categories by adding together the positions of the new categories. But this is cumbersome and creates significant programming difficulties because the new data is reported in a different format.

It also raises the question of whether the new categories will exactly replicate the existing ones. For example, if we add up the positions for the new "managed money" and "other reportables" categories, will we get the same figures as for the old non-commercial category? Will the small trader category remain exactly the same? Or will we be comparing apples with oranges?

Do the changes involve any other kind of redefinition of categories or reassignment of traders? Could the new categories make such changes more likely because the old data will no longer be seen as relevant? All these things would reduce or eliminate the ability to compare the old and new data.

Email the CFTC

If you think the CFTC should continue to publish the existing categories, email the CFTC at cotchanges@cftc.gov. Please write before the deadline for comments on October 1. (Mention that you are commenting on the CFTC's proposal of Sept. 2 to amend the COT report.) If you're pressed for time or not sure what to say, you can even just email them a link to this post: Save the COT Report!

Can we make a difference? Yes! The last time the CFTC reviewed the COT report, it received an unprecedented 4,659 comments from 23 countries. It was by far the most in the agency's history in response to such a notice. The response was unanimous in support of the reports. Remarks included: "Please, please do not discontinue this very valuable report," "Don't you dare," "Save the COT" and "Leave it alone you knuckleheads." The CFTC backed down from a proposal to discontinue them. If we remind the agency of the importance of this valuable data, the cause of transparency has an excellent chance of prevailing again.

Gold Rally Over? Trouble Also Seen for Nikkei, Bond

Some new signals in my trading setups based on today's Commitments of Traders report. See my newly updated latest signals table for the gruesome details. Don't have much time for a lengthy update, but suffice to say gold bugs will not be pleased! Oops. Nikkei also goes to cash on Monday's open. Plus, an older time-delayed signal puts my 30-Year Treasury Bond setup into the bearish column, too (meaning interest rates expected to rise). Have a good weekend, and be sure to check in early next week for my portfolio update.

Correction: A version of this post I put up late Friday said incorrectly that Nikkei goes bearish on Monday. The latest signals table had it correctly. The setup goes to cash. Sorry about the error.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders,derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission,COTs Timer, out-of-sample testing, walk-around testing

Rally Gets Boost From Bullish Data

More bullish news from this afternoon's Commitments of Traders report suggesting the rally is still probably on solid ground.

My trading setup for the S&P 500 is bullish for a second straight week. The latest data shows the wrong-way small traders getting somewhat less bearish than they were last week - but on balance they're still very negatory in their sentiment. See my newly updated latest signals table for the exact numbers. (Note that I've corrected a couple of errors on that table from last week's numbers. Apologies.) This is their sixth straight week of increasing bearishness.

Meanwhile, the commercial hedgers - who tend to be correctly positioned when markets turn - are still highly bullish, as you can see from the latest data on that table. Some other highlights from today's report:

- U.S. banks: My trading setup for the BKX U.S. Bank Index is in cash again this week - its fifth in a row. This week's data saw the setup come just a hair from going to bullish. Two of the three signals that make it up are already bullish. The hold-out signal is based on the large speculator total open interest. It has shot up 29 percent in the past three weeks, bringing the large spec positioning to 1.15 standard deviations above the moving average. It needed to get to 1.25 standard deviations above to go bullish. If the open interest had increased 3.6 percent more this week, that would have done it.

- Natural gas: Wow, what a run that was for my short signal. Today's massive reversal to the long side took away some of the gains, but I don't mind at all given what happened earlier this week and last. I figured it would be volatile, but this was craaaazy. The setup goes to cash on next week's open, and there's no clear sense if natural gas has bottomed or not, at least not from the COT data, which is pretty mixed in its outlook for the next week out at least.

- 30-Year U.S. Treasury: This setup also goes to cash on next week's open after a nice rally. It will remain in cash a week, then go bearish on the bond price (meaning bond yields would rise) for at least two weeks starting the open of trading Sept. 14.

- Crude oil: More bearish numbers from the small traders and commercial hedgers in crude oil. But there's still no clear signal at this point because of the various trade delays for their signals in my setup in this market. On next week's open, the current bullish signal - a money-loser, unfortunately - ends, and the setup goes to cash.

Hope you have a great long weekend, and be sure to check in here early next week for my portfolio page update, plus a look at the CFTC's proposed changes to the COT report. Also, be sure to check out my new FAQs page for details on my backtesting process and how COTs Timer works.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

New FAQs Page, Portfolio Page Updated

I've just updated my portfolio page with results as of Friday's close of trading. I've also just added link to a new Frequently Asked Questions page to my Navigation bar on the right. Most of those are questions I've gotten asked numerous times, and I guess I'm just getting lazy about not wanting to repeat myself over and over! That page also includes a step-by-step breakdown of my backtesting process.