From the September 01, 2010 issue of Futures Magazine • Subscribe!

Using COT data to find major opportunities


Making oatmeal

To further illustrate this analysis, we will take a closer look at oats and milk. Oats is a market that has recently exploded higher and milk has yet to do so. In going over both markets, you can see how profits could have been achieved in the oats market and how an opportunity to profit in milk still exists using this commercial trigger mechanism.

However, there’s another powerful metric that, when synchronized with the above discussed near record net long/high commercial position framework, helps identify a deep value bottom. It also helps in the timing of when such undervaluation will be recalibrated to the upside. The metric is the relative value of a particular agricultural commodity with the continuous commodity index (CCI).

When a particular agricultural commodity is historically cheap in relation to the broad price level of the 17 most-traded commodities in the world, which is captured by the CCI through an equal-weighted format and concurrently is exhibiting near historical commercial net long/high positions, a rare investment opportunity has likely presented itself.

Here’s the buy alert criteria:

  • Near record long/high commercial net positions have been established.
  • Near historically cheap relative value against the CCI.

Since 1991, the oats market has seen four conditions where commercial net long positions were near historical highs and where the relative value of oats prices against the CCI were near historical lows. Those years were 1995, 2001, 2004 and just recently in 2010. The average percentage move in oats prices subsequent to this rare duel condition was 154%. In mid-July prices had already exploded higher by close to 40% since the recent bullish signal of the commercials near record long position and of the near record low relative value conditions kicked in.

Once again this duel indicator model for identifying major bottoms and rather timely price surges has demonstrated its predictive value in the oats market. If history is any guide, the oats market has far more upside before the current bull market subsides. The minimum move expected based upon historical price performance would be a 100% move from the recent lows near $2 per bu. This would project a minimum top close to $4 over the next 12 months.

chart

Even though the oats market still has plenty of upside left, the object of using this duel commercial/relative value trigger is to be able to buy near the bottom and participate in the early part of the move, which tends to be the most explosive and where some of the greatest returns reside. The milk market looks like a textbook opportunity to take advantage of this effective commercial/relative value trigger before the explosive early part of the move takes place.

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