The Commitment of Traders Report Market Sentiment Indicator

The Commitment of Traders or COT Report, released by the Commodity Futures Trading Commission or CFTC every Friday at 3:30 PM EST, compiles information as of the market close on the preceding Tuesday, on positions traders hold and the net change in a variety of commodity futures and options. Two reports are released on Friday, the Futures-Only Commitment of Traders and the Futures and Options Combined Commitment of Traders. The report breaks down the open interest in markets where twenty or more futures traders hold positions which they are obligated to report to the CFTC when they reach certain reporting levels established by the regulatory agency. Reports are made available both in long and short form formats and show open interest in non-reportable and reportable positions. Reportable positions come with additional information for commercial and noncommercial holdings, net change from the previous report, spread positions, and the percent of open interest by numbers of traders and category.

Brief History of the COT

The COT report has its origins in an annual report first published in 1924 by the CFTCs predecessor, the U.S. Department of Agricultures Grain Futures Administration. The annual report covered hedging and speculation in the regulated futures markets. In June of 1962, the COT report began publication on a monthly basis and in 1990 became a bi-monthly publication. In the year 2000, the COT report became weekly, with data released on the third business day after the as of date. The as of date refers to the day a position was initiated.

What the COT Reports

The COT contains what it considers reportable positions, which are positions reported every day by futures clearing merchants or FCMs. The FCMs clear all trades and hold the traders capital in segregated accounts. These accounts are debited or credited daily depending on the closing price of the futures contract. The CFTC has established levels for the reporting of positions, and FCMs can tell each day from the marked to market closing price if any trader has exceeded the mandatory level for reporting. If a trader has exceeded these position size levels, his open positions are immediately reported to the CFTC as a reportable position. The CFTC classifies positions as Commercial or Non-Commercial or as NonReportable Positions. Commercial positions consist of positions held by hedgers and producers of the commodity, which offset their risk in the futures market. In the case of silver, these would include mines and industries where silver is used in the production of a product. It is unclear how large investment banks were allowed to be included in this category. Commercial positions are under scrutiny by the CFTC because commercial traders get reduced margin rates. If they are found to be speculating more

traders get reduced margin rates. If they are found to be speculating more than hedging, their status as a commercial trader can be revoked, increasing their cost of doing business. These positions appear on the COT report under the single heading Producer/Merchant/Processor/User. Non-Commercial positions consist of futures positions taken by large traders or speculators. Large traders include commodity trading advisors or CTAs, commodity pool operators or CPOs, and hedge funds. These positions appear on the COT report under the three headings entitled Swap Dealers, Managed Money and Other Reportables. The spreading header of the Non-Commercial component of the report contains the summed netted long and short positions held by traders. For example, if a silver trader is long 4,000 contracts in one month but short 3,000 contracts in another month, 1,000 contracts will contribute to the reports Long column, while the netted amount of 3,000 contracts will show up in its Spreading column. Open Interest represents all outstanding futures contracts not yet offset through a financial transaction or through the delivery of the commodity. Trends in the open interest of futures contracts can give traders a good indication of asset flows in the commodity.

Small Traders Numbers can be Inferred From the COT Report

Non-Reportable positions consist of the number of positions outstanding after subtracting the number of long and short Reportable Positions from the total open interest figure. These posititions are those held by what are commonly referred to as small traders. Small traders generally represent the retail side of the market and can often be used as a contrary indicator. When the small traders increase their position in either direction, it would be wise to reconsider your position, especially if you happen to be on the same side of the market.

How Open Interest, Net Shorts and Longs Can Indicate Market Sentiment
The information contained in the COT report illustrates how large traders, hedgers and small traders position themselves in the market. Nevertheless, the report is just a snapshot of one weeks worth of activity, so the real value of this information is in the net changes of futures positions over time. For example, an increase in open interest seen along with a rise in short positions can indicate that the market may be under pressure and ready to decline. Conversely, an excess of shorts in the market could prompt a short squeeze, which would drive the market higher. The chart below (not included in this version) clearly illustrates how large and small traders have increased and decreased their positions over time, with clear indications of buying and selling trends. While the information might be misinterpreted if used as a timing indicator, the way in which large and small traders behave gives clear indications of market sentiment.

What the COT Report is Telling Us Now

The graph above shows the phenomenal increase in commercial short positions that have been keeping the silver market from trading higher. Without these commercial shorts, the price of silver would be significantly higher than the levels where it is currently trading.

the levels where it is currently trading. While the commercial short position holders may not be in any rush to cover their positions, the fact that their positions have gotten so large indicate the level of price depressive manipulation that the silver market is presently operating under. Nevertheless, with concentrated short positions such as those seen in both the silver and gold markets, if the price unexpectedly spikes to the upside, the market could experience a substantial short squeeze, possibly driving the price to new all-time highs in both silver and gold.