COT – Commitment of Traders report
A tool widely used by investors and financial market experts to analyze the American stock market behavior and, by direct consequence, even the world market is the COT – Commitment of Traders report.
The COT is a weekly report by the US government, which captures the positions still open on the major futures markets (equities, bonds, currencies and commodities) of the three major categories of financial operators:
Non-Commercial Traders (also known as Large Speculators) are real speculators such as hedge funds and fund managers in general. This category usually uses the concept of leverage to amplify changes in the underlying, thus having a more aggressive attitude on the markets, on the other hand, hard stop losses, so when the market falls for example at certain levels, they go back up or at any rate they cover themselves immediately.
Commercials, however, who have an active portfolio management, take the position on options and futures to amplify, reduce, or isolate the risk of their portfolio, depending on whether they predict a rise or fall in the market. It is this category, which includes investment funds and business banks such as Merryll Lynch, Goldman Sachs, Salomon Brothers, etc., which is normally a winner.
They often go against the trend when selling when the market goes up and down when the market goes down. Their derivatives positions usually anticipate trend reversals and therefore be closely monitored.
The Non-Reportable Positions are, finally, the positions held by small traders who are usually in the wrong part of the market. This category of investors is often the most confusing and less disciplined, it does not follow strict rules. It is dragged almost always into the trend, but it is slow to change position when the latter reverses its direction.
For each single market, spreads are reported for both long and short (open), still open, by investors.
Therefore, if you analyze the data in the COT you can determine what the expectations of each type of investor are for the future of the markets and to check how the investment funds and the business banks change their positions on the basis of ‘ price trends.
Knowing the position of Commercial (Institutional Investors) is crucial to determining the Sentiment (Perception) of the American Stock Exchange. Their weight, in percentage terms, ranges from 50% to 75% on the S & P500’s future and ranges between 40% and 60% for the Nasdaq 100 derivative.
It is useful to note that Commercials, like Non Commercials, may undertake arbitrage or hedging (hedging transactions), or have active management of their portfolios (buying and selling futures on markets other than American ones ), or have open positions on the underlying (future underlying) and cover the risk of changing the price of the asset by taking opposite positions on the future market.
So the COT is definitely an important “thermometer” to measure the American Stock Exchange, but it is not, of course, the tool that alone can make us predict how the financial markets will move in the future.