Saturday, December 1, 2007

COT warning signs

11/27/07---- 25.80
11/20/07---- 28.03
11/13/07 ---- 37.02
11/6//07 ---- 35.53
10/30/07 ---- 30.58
10/23/07---- 31.91
10/16/07---- 26.89
10/9/07 ---- 36.46
10/2/07---- 38.02
9/25/07---- 38.87
9/18/07---- 64.24

I'm going to try and explain what's happening in the COT's that has me concerned. Let's start on 9/18 we see a combined contract (S&P, Nasdaq, Dow & Russell large and e-mini) net long position of 64 billion dollars. The next week on 9/25 that position was almost cut in half. A move like this almost never happens in the COT. It's something that needs to be taken notice of. This happened as the market was rallying. It's not unusual for the commercials to add to hedges as the market rises. So the direction of the move wasn't surprising it was the one week rate of change that was unusual. The next big move came on 10/16 when the commercials dropped their long position by 26% from the prior week. As you can see on the chart this corresponded very closely to the market turning down. Last week they dropped another 24%. Now the first two reductions in longs make sense to me. The commercials usually sell into strength so they were just doing what they do, hedging their longs as the market rallied. The last one is very strange. They dropped a huge amount of longs as the market was going down. Now let's look at the data from 10/16 to 11/27 a little closer. Granted they did increase longs a bit as the market declined but notice they aren't anywhere close to the 64 billion that they had on 9/18. Does anyone remember what happened on 9/18? That's right the Fed cut interest rates. The very next week (correction: the chart has the week of 9/18 marked and it should be the next week)all those longs that had been building up for months got basically cut in half. Hmm??? They then increased longs slightly as it became apparent the Fed would cut again. This time however the increase never came close to the 64 billion we saw before the first cut. Now it's widely believed the Fed is going to cut again but instead of building long positions the commercials are drastically trimming longs and they are doing it as the market has moved down. This is completely out of character with what the smart money normally does. Hopefully this clarifies what I mean when I say the COT has been giving warning signs for a while now.