Commodity trader Carley Garner explains how she uses the COT reports from the CFTC to find markets that are overheated or too crowded.
If you’ve been trading for any length of time, you’ve heard of the Commitments of Traders report, the COT report. Below are some ideas for using the COT to find good trades and make trading decisions.
I mainly use the COT for to find markets that are overheated or overcrowd in trades. If you know anything about the COT report, you know that it’s separated into basically three groups, hedgers, large speculators, and small speculators. What I look at are two things. I don’t pay attention to the hedgers because they’re hedging. They’re not speculating. The large specs I look to see if they are too long, are they too short, for example, in corn if within the last month or so we’ve had record net short positions in corn futures. At some point, those traders that are short, they’re going to want to get out right so my bet would be at some point, maybe you want to buy out-of-the-money calls or maybe you want to do something to try to play upside. Fundamentals might not change but that doesn’t matter. It’s just a matter of people getting out in the short squeeze and stops being run and that sort of thing so that’s what I look for. I look for somebody or a trend that I think is overdone and it’s time to get out.
However, you have to remember there’s a delay with the release of the Commitment of Traders, which kind of makes it a lagging indicator. The data that the CFTC takes is based on a Tuesday night’s close and then the report comes out on Friday so there’s obviously a couple of days of trading that we don’t know exactly what happened but you can usually look at price action and see, for example, if you take corn; if corn on Tuesday when the measurement comes out had record net shorts, on Friday if you look at prices and the corn market’s rallied 10 or 15 cents, you know that there’s probably still a heck of a lot of people short but probably less than was on Tuesday so you can get a pretty good idea.
Another thing I look at, too, is the small speculator. Not that necessarily I think the small spec is going to move the market in a big way, but unfortunately small speculators are usually wrong and so if I see a big position being amassed in the small spec space, sometimes I’ll take that as a cue to maybe start thinking about taking the other side of it.
We have different strategies to take advantage of this information. Usually like if we’re selling options or something like that, normally, we’ll try to get in before it turns because the problem with something like that when a trade is so crowded or so overtraded, when it turns, it’s not like you get memo saying “hey, things are turning around.” It just happens. You wake up one morning and it’s done and if you weren’t in, you already missed it.
You can get the Commitment of Traders report on the CFTC’s website, but to be 100% honest, it’s in “governmental-ease” so it’s not necessarily user friendly but if you go to barchart.com, they actually have it for free, charted so you can visually see the numbers. It’s awesome.
Carley Garner is the senior strategist for DeCarley Trading, a division of Zaner, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit DeCarleyTrading.com.