Find Valuable Commodity Market Signals

09/30/2011 3:30 pm EST

Focus: COMMODITIES

Floyd Upperman

Author, Commitments of Traders

With commodities on the move, look for more subtle changes in the Commitment of Traders (COT) data to signal where major players are getting in and out, explains Floyd Upperman.

Does the Commitment of Traders (COT) report signal a new paradigm? Let’s ask Floyd Upperman.

Floyd, we used to see commodities go in boom/bust cycles, very predictable. What about this new paradigm now?

Well, every so often, we do see this happening with commodities. When you’re in this kind of period where it’s like an accelerated boom that doesn’t bust, you look to the COT data, and you look for smaller movement in that data to gauge when we may be in a correction.

See related: How to Interpret the COT Report

We’re not going to get a bust all the way back to the previous price range; that’s totally unlikely now with where we’re at now and where we are post-2008 as well. 

Remember, in 2008, we got these highs and the market really broke, but it did not break lots of markets. Most of them did not break back to the old previous ranges. 

So those lows that were made then are likely the lows in this new range. If you go all the way back to, say, 1970, those lows that were made at that break with the financial collapse of 2007-2008, those lows were the old highs in many cases, and that’s what happens when we get into these paradigm shifts: The old highs become the new lows.

So you look for that as well in your price analysis, you look for when you get back near those lows, and if you happen to get that size of a correction, you can of course look at the COT data and see how that looks at that time.

What’s most likely to continue to happen here with all this money pouring in from the swaps and from the pension funds, from the endowments, the demand from overseas, until something clearly changes all this—which I don’t see anything yet that’s going to change it—then you’re just going to have to look for the small corrections.

The COT data can point you to that as well, but it won’t be the kind of COT set-ups that we’re used to seeing, like what we saw in the 90’s and even in the 80’s, because that’s just not the kind of market environment that we’re in right now.

The newer players of course mean much better liquidity. Is there a downside, is there a disadvantage to having this bigger market, more players, and smaller moves in the Commitment of Traders report?

Well, it used to be that the small speculators provided the liquidity for the commercials, but nowadays, with the markets all being electronically traded, and you have dealers in there, professional market makers that are providing the liquidity. It’s good actually for all the participants, especially the smaller participants, because the spreads between the bid and asks have gotten very narrow and there’s hardly any slippage nowadays, which is one of the nice things about trading during this period. 

That’s not just because of the electronic market, that’s also because of all these different participants that are involved now, the market makers and so forth that didn’t exist before.

Makes for much more efficient trading?

Yes, that’s right.

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