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COT Data
US Government - Commitment of Traders Data
When looking to analyse the markets, one of the most important
pieces of information is the positions of the large institutions in
the market (or as more commonly referred to as the “smart money”)
and whether they are bullish or bearish on equities. This is
critical information when it comes to forming views on market
direction in both shorter and longer time frames. This data is known
to some as “Commitment of Traders” data and is sourced directly from
the US Government. Although not a direct representation of business
confidence, it does provide insights into how the large banks and
investment institutions see the current and future outlook for
equities in some of the world’s leading economies.
How many investors know about this data, and more importantly how
many people know how to interpret it ? Well the answer to both
questions is very few. Can this information be useful in forming
views as to future market direction ? Well, in the opinion of many
seasoned investment professionals the answer is a resounding yes !
As an example, you can see in the chart below the level of appetite
of the smart money, expressed as an indicator (in red) in the inner
window of the S&P 500 Cash Index. A high indicator reading means
that the large funds are bullish on the S&P 500 and a low indicator
reading indicates that they are bearish on the S&P 500.
A chart of the S&P Cash Index with the Commercials appetite
expressed as an indicator in an inner window.
By monitoring the appetite of the large institutions we are able to
get a sense of what side of the market the big players are on. This
is particularly useful when used in combination with other technical
studies, which help us get a sense of probable market direction.
If you had been privy to this information in recent years you would
have been acutely aware that the large institutions had indeed
turned bearish on equities around the middle of 2000 forewarning us
of the likelihood of a change in trend. As history now confirms,
range bound activity gave way to a bearish trend which prevailed
until March, 2001. Notice however that the large funds turned
positive on equities in March, 2001 which coincided with a short
term rally in equity prices.
Now lets revisit the same chart but this time we will look at the
positions of another group of investors in the market – that is the
positions of the small traders. This group has a history of taking
opposite positions to that of the large institutions and
unfortunately being on the wrong side of the market direction, most
of the time. In the chart below, the appetite of the large
institutions is again represented in red and the appetite of the
small traders in blue.
Small investors have a history of being on the wrong side of the
market, most of the time.
As we can see from May, 2000 right through until March, 2001 the
small investors had “punted” on the S&P 500 rallying whereas the
large institutions anticipated a fall. As is the market, there is
always a winner and always a loser and in this instance it was clear
that the small investors were again on the wrong side of the trend.
There is an old saying that goes something like “big money didn’t
get big by being stupid” and there is probably no more glaring
example of this than the activity of the large institutions in the
equity markets. And why are they often on the right side of market
direction? Well we can only guess at this but it is probable that
their size and financial clout buys them the best technology, the
best analytical systems that money can buy, and the best people.
Does the average investor have a hope of getting access to the same
research that the large institutions have? Well not really, but the
small investor can perhaps get access to the next best thing and
that is data on whether the large institutions are bullish, bearish
or neutral on equities. Today, this information is available to us
over the internet and clients can get access to this information on
a weekly basis.
More Information
Call a Paritech consultant on 1300 652 511 for further assistance
on COT Data.
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