Since the beginning of the year, the Commodity Futures Trading Commission (CFTC) has been issuing a “Supplemental Commitments of Traders Report” each week that breaks out the reportable positions of the Commodity Index Traders (CIT) in 12 selected agricultural commodities as a new separate category.
The new CIT category in the supplemental COT report generally identifies positions of the large Commodity Index Funds that track the major commodity indexes: The S&P Goldman Sachs Commodity Index, The Reuters/Jefferies CRB Index and The Dow Jones/AIG Commodity Index. It is currently estimated that more than $100 billion track the above-mentioned indexes and use futures, or other contracts tied to the futures, to meet the index returns.
The positions of the CITs are generally long positions in a given commodity based on the allocation to that commodity in the index tracked by the fund. The position is not held based on the fundamentals or price movement of the individual market and will not be traded based on fundamentals or price movement but rolled over near expiration. The CIT positions draw from both the non-commercial category, managed funds and other institutional investors seeking exposure to commodity prices using a standardized commodity index; and commercial category, positions of entities whose trading reflects hedging of OTC transactions involving commodity indexes.
We can find a “special situation set up” in the supplemental COT report when the large traders, the commercials and non commercials, are net short against the net longs of the CITs. In the event trend followers want to buy back their positions because of a change in trend, and hedgers want to reduce or at least not add to their hedges because of a shortage in the market, where are they going to find supply if the existing longs, the CITs, are not sensitive to individual commodity price movement nor fundamentals?
To understand the impact of the new category just compare the data of the traditional COT to the supplemental COT issued as of May 29, 2007 for Chicago Board of Trade wheat (see “Night and day, below”).
If you review the history you will find that both the commercial and non-commercial, net totals are generally in the middle of the range for the past year in the traditional report and do not represent significant new market information.
If you review the history of the supplemental totals you will find that the commercial net total is near the smallest net hedge of the last year, suggesting they are not aggressive hedgers in the market, and non-commercial net shorts are near the largest net short level of the last year, suggesting they are bearish wheat. Both are net short against the CITs. Even small account traders are net short against the CITs.
This is a good example of a “special situation set up” in the new report. If there is a change in trend and the reported non-commercial traders want to by back their shorts, where are willing sellers going to come from?
In “Special situation,” below, the arrow points to May 29, the day the supplemental report shows how a dramatic move in the wheat market can happen on a “change in trend” when the market participant positions are in a dysfunctional, almost chaotic “special situation set up.”
When a trader identifies a special situation, he should confirm with his technicals to trigger a trade entry. The special situation suggests a group or groups of traders are trapped in a potentially lopsided market. It isn’t until the trapped group tries to get out that the trade opportunity arises.
George Slezak has been a trader and broker working with the COT data for nearly 30 years. He has published COT summaries and commentary for more than 12 years. You can access his COT summaries at www.CommitmentsOfTraders.com. E-mail him at george@georgeslezak.com.
