CURRENT COT ANALYSIS

I’m seeing some misinformation regarding the COT levels recently. Unfortunately some analysts find what they want to find in the COT reports to support their bias rather than what’s really there.

First off let me clear up the claim that volume is down. Folks volume always drops after a quadruple witching at quarters end. If one only looks at the data during the weeks right after quadruple witching then yes it will appear that open interest is in decline. The correct way to access volume is during the week of Quad witching.

Another error is in only looking at the large contracts. Nowadays most of the volume is in the emini’s and has been for several years.

The volume in the emini’s during Quad Witching is at roughly the same level it’s been at for the last 7 years. So let’s ignore the theory that volume is low. It’s just not true. Volume is roughly the same as its always been.

current cot analysis

Next I want to look at the NDX contracts as they have been the most reliable for short term timing for several years. Generally speaking traders don’t need to get too nervous until the net commercial position reaches minus 7-9 billion. You can see in the next graph that at minus 2 billion we still have a ways to go yet before we want to start anticipating an intermediate top.

ndx

And finally a look at the combined contracts (Dow, SPX, NDX & Russell). The current level is still quite bullish at plus 14 billion. As a matter of fact never in history has an intermediate cycle topped with the commercial traders this bullish. So you probably aren’t going to be doing yourself any favors by following the perma bears call that the market is topping. Short term top… maybe. Intermediate top…very unlikely.

combined contracts

And finally the concept that complacency is at levels equivalent to the top in 2007 is just ludicrous. At the top in 2007 the ROBO ratio (a measure of call and put buying by the most clueless retail traders) was in the cellar at 34%. Retail traders were buying calls hand over fist.

The simple truth is that 2008-09 was a once in a lifetime shock to traders mentality. It has changed the way most people view the markets. For many people it has knocked them out of the market for the rest of their lives. The same massive reversal in investor sentiment occurred during the Great Depression.

Compare the ROBO ratio pre 2007 to what has occurred since and you can see that the retail traders have never recovered their former confidence in the stock market. Now compare the retail confidence at the top in 2007 to the recent top in 2015. Folks there is no comparison. Even after a 7 year bull market retail traders still haven’t been able to shake off the memory of 2009.

robo

Source: sentimentrader.com (as I’ve said many times, any serious trader must have a subscription to sentimentrader).

So it’s understandable that many analysts, with the memory of 2008 still fresh in their heads, continue to anticipate the next crash. They see what they want to see to confirm their bias. The simple fact is that 2009 was a once in a generation event. It’s not going to happen again, and especially not 7 years after the last one. Central banks learned they could print trillions of dollars and reflate markets. And as long as everyone was printing at the same time no one’s currency collapsed. The longer you live in the past, or pay attention to the analysts who do, the less likely you are to make money.

The risk isn’t that we are going to have another crash. The risk is that central banks will create another series of bubbles with global QE and negative interest rates.

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20 thoughts on “CURRENT COT ANALYSIS”

  1. Irwin

    I wonder how the number of “retail traders” is calculated.

    Many, if not most, retail traders from years ago, now trade using ETFs from BlackRock, Vanguard, PowerShares, etcetera.

    Thus, if ETF volumes are counted as “institutional”, then all those retail investors have disappeared and become institutional, but they are still there.

    Don’t know – just wondering.

      1. Ralph Wiederzane

        If I were an institution I wouldn’t round orders to the nearest 100, I’d place orders in multiples of 7 or something like that. Easy enough to do since everything is automated these days, and many funds’ holdings show odd numbers of shares in reports to NASD. It seems like the days of a dad buying 15 shares of Disney for his son are long gone, but maybe the retail trader numbers are still useful.

        Gold, oil, and stocks open higher this evening, perhaps it will hold until morning.

  2. bill

    Great post Gary, the retail trader is so programmed they keep shorting as this market will break new highs.

  3. Joseph

    Hi Bill et all
    Not in stone but this is how I am playing this…….
    Up — sideways into April 15 OPEx….
    Down into April 22 will be LOW of April….. This is where will do short…..
    Hope we break 2030 and we go to 2012-2000….maybe 1990 if lucky….
    To get to NEW HIGHS, need to Break 2085 to go to. 2118…. NOV High
    OR MAY High 2134
    Down hard into APRIL 22 or so…. Then UP into Early May into June/July
    APRIL 17 OIL MTg
    APRIL 27 FED Mtg and again June 15
    Will they raise rates in JUNE….. maybe or they wait to new PREZ but…. many people saying that so they may raise rates to have amo in 2017….
    OIL needs to break $43.75 to go to $52.00

  4. tulip

    at this point the korelin comments excelsior.. has lost all credibility imo.
    he is touting his stocks and doesn’t know the facts. He writes well though…
    who is he…??/
    Beware.

  5. bill

    Gold just had a little straight up burp to almost $1251. Somebody thinks something’s up. And Obama is meeting with Yellen….its getting steamy.

  6. Gary Post author

    Ahh how many times did I make the mistake of buying late in an intermediate cycle during the bull years from 2001-2011? Almost without exception I ended up giving back some of my gains because I got greedy.

    At this point I will let gold go where it wants. (maybe it tests 1308). But I will not get caught at anymore tops 19 or 20 weeks into an intermediate cycle. Sooner or later gold will correct into an ICL, even during a bull phase it will usually retrace at least back to the 50% Fibonacci level. Assuming gold does pop to 1308 that still means a pull back to 1180 or lower. That’s where I want to buy, at the next ICL.

  7. Ralph Wiederzane

    I didn’t notice until now that GDX also closed at new 52 week highs on Friday, GDXJ was the leader early in the day. We have to be getting near a short term turning point or profit taking event, but I’m Old Turkey on this group so will have to endure the roller coaster.

      2. Ralph Wiederzane

        🙂 and stocks like MUX up another 7% after 19% last week! This is getting ridiculous, I’m off to the gym before I decide to sell something.

  9. silverrex

    Gary I completely understand your approach in looking at gold, but considering how gold continues to extend further in it’s current cycle, would you start considering revising or adapting to the situation as this may be a sign that the bullish tone may be even more aggressive than the late 70s. If you are dead set on seeing gold to rise for 2-3 years. I can only imagine the best strategy is to not completely exit the entire position during its cycle highs because it feels like gold is starting to move 3 steps forward 1 step backward.

    while you learn alot since 2011 and do not wish to get caught being greedy, i am not saying to keep riding the wave or getting back in late, but something to think about on our next entry. After all like 08, everyone thinks the market will crash, so too you might think the same failing strategy may repeat in gold in 2016 as it did in 2011, but characteristics can change, just when everyone thinks it is a traders market, it instead becomes a buy and hold.

  13. pk

    Oh man. I am a maniac. I bought DUST at 2.16 for the 1st time in this entire baby bull. I have technical reasons but I can’t believe the sentiment here and on every gold site. my stop is 5%. God Speed.

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