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Finding Overheated Markets

02/20/2014 11:16 am EST


Carley Garner

Senior Strategist & Broker, DeCarley Trading, LLC

Commodity trader Carley Garner explains how she uses the COT reports from the CFTC to find markets that are overheated or too crowded.

SPEAKER:  If you’ve been trading for any length of time, you’ve heard of the Commitments of Traders report, the COT report.  My guest today is Carly Garner to talk about that, so Carly, how do you use the COT to kind of find good trades and make decisions?

CARLY GARNER:  Well what I use the COT for is really to find markets that are overheated or overcrowd in trades.  Obviously 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 is I look at two things really.  I don’t pay attention to the hedgers because they’re hedging.  They’re not speculating.  The large specs I look to see if are they too long, are they too short like for example in corn just within the last month or so we’ve had record net short positions in corn futures.  Well 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.

SPEAKER:  Alright so you’re kind of looking for somebody or a trend that you think is overdone and it’s time to get out.


SPEAKER:  I know that there’s a delay though with commitment traders.  Is it a problem that it’s kind of lagging?

CARLY GARNER:  It is.  I mean 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 we look at too is the small speculator.  Not that necessarily we think the small spec is going to move the market in a big way but unfortunately small speculators are usually wrong and so if we see a big position being amassed in the small spec space, sometimes we’ll take that as a cue to maybe start thinking about taking the other side of it.

SPEAKER:  Now do you want to actually wait until you see the prices start to make that move or are you trying to front run it a little bit and get in right then?

CARLY GARNER:  We have different strategies and things.  Usually like if we’re selling options or something like that, normally honestly we’ll try to get in before it turns because the problem with something like that when a crowd a 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. 

SPEAKER:  Where can I get the COT report if I’m just a retail trader at home?

CARLY GARNER:  You can get it 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, they actually have it for free charted so you can visually see the numbers.  It’s awesome. 

SPEAKER:  Carly, thanks for your time.

CARLY GARNER:  You’re welcome, thank you.

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