The CoT report and how to use it
Traders looking for an extra tool in their armoury would do well to look at the weekly CoT reports, which show where the big institutional money is going.
What is the CoT report?
The Commitment of Traders (CoT) report is a weekly update released by the Commodity Futures Trading Commission (CFTC). It provides an illustration of how different types of traders are positioned in the market.
The report has two types of traders – commercials and money managers (often referred to as ‘speculative money’). Commercials are using the futures market to hedge the prices of the commodities they produce. This is the origin of futures markets, and financial markets generally, and is a long-established practice.
Speculative money is made up of hedge funds, commodity trading advisors (CTAs) and other major investment funds. These are purely interested in profiting from price movements.
A study of this data will tell a trader how the ‘big money’ is positioned, and this can be a useful addition to a trader’s toolbox.
How to use it
The CoT report shows the flow of money into and out of a commodity, currency or stock index. Going with the crowd can be a profitable trading principle, at times, but it has periods when it works and times when it doesn’t, like every trading period.
When speculative money is very 'net short' on a particular market, some good news that causes a small upward move can spark a rapid appreciation in price, as those who were short look to cover their position by buying back the market, forcing the price higher. Others then also cover their position, sending the price yet higher, and so on.
By contrast, when speculators are heavily long, a piece of good news may not cause a spike, since ‘everyone’ is already long, and there is relatively little extra money to flow into a market.
When bad news emerges, if speculators are already heavily short then the price may not move down by much. And bad news might not hit a market hard even when money managers are heavily net long, since longs are usually less keen to abandon their positions than shorts.
The below chart, from Investing.com, shows the price of gold in the lower panel, with the main chart showing speculative positions. As can be seen, speculative long positions began climbing in early 2016, and the price followed suit. In 2018, big institutions cut back on their gold exposure, driving the price lower.
They became net short in late 2018 for the first time in over five years, but as gold recovered this was rapidly unwound.