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By William L. Jiler
Each month, the Commodity Futures Trading Commission (CFTC) issues a report entitled "Commitments of Traders in Commodity Futures" which provides a breakdown of month-end open interest of reporting (large) and non-reporting (small and/or foreign) traders. The statistical tables in the report indicate how open interest is allocated among large speculators and large hedgers. And, by subtracting large traders' commitments from total open interest, the positions of small traders (both speculative and hedging) are also derived and presented in tabular form.
At Commodity Research Bureau, Inc. (CRB), we have developed techniques to utilize these statistics as a valuable aid in the technical forecasting of commodity price movements. Our original research was completed seventeen years ago, and forecast results based on this approach have survived the test of time. The pertinent statistics have been gleaned from these reports, recalculated, and published in a tabular format as a regular feature of CRB's weekly COMMODITY CHART SERVICE®. These statistics are analyzed continuously, and when they provide clues to future price trends, findings are published in the "Technical Comments" section of the same weekly publication.
We will more fully describe these reports, explain how they are used to help forecast prices, and give examples of how, and under what conditions the method actually worked. And, along with these examples, we have provided you with basic charts that can help you utilize the same techniques for do-it-yourself forecasting in the future. These charts depict the normal levels of open interest for the various categories of traders in specific markets.
"Commitments of Traders" Reports
The official CFTC report is scheduled for release on the 11th day of each month, or the next business day if the 11th is a Saturday, Sunday or holiday. There are a number of terms used that require further explanation that will aid in your understanding of the report. Open interest refers to the number of futures contracts that have been entered into and not yet liquidated or fulfilled by delivery. A purchase of one contract, when balanced by a sale of one contract, is considered as a total of one open contract. A reporting (large) trader is one who holds or controls a position in any one future of a commodity on any one contract market equaling or exceeding the quantities established by the CFTC as a reporting level; e.g., in May 1980, the reporting level for wheat, corn and soybeans was 500,000 bushels. In the tables, OLD refers to old-crop futures based on marketing seasons. In spreading, ALL futures in each commodity includes each trader's long and short positions without regard to which crop year/calendar year or market is involved. It is very important to note that because of intermarket spreading, long and short spread positions in a given futures market will not be equal. This causes confusion because percentage figures usually do not add up to exactly 100%. For your examination, a copy of a recent table on soybean open interest appears in figure 1.
The open-interest reporting series was started way back in the late 1930's under the Commodity Exchange Authority, the predecessor government agency to the CFTC. Over the years, the coverage was greatly expanded. The latest additions were made in July of 1978 and they included imported commodities, some metals, and the most active financial futures markets. Because of the relatively short time that these new statistics have been available, it is too early to tell how effective our method will be for these markets. At this writing, there are still some very important markets not covered, such as copper, gold and silver.
The Forecasting Methodology
Basically, we tried to determine the "forecasting" performance of the major identifiable groups of market participants—large hedgers, large speculators, and small traders. It was logical to assume that the larger and more sophisticated traders should have market insights that would enable them to predict futures price movements, if not infallibly, at least more accurately than the small traders who presumably included the "uninformed public." We also thought it was possible that the sizes of the various market positions, at different times, could well result in a type of self-fulfilling prophecy.
From the statistics in the "Commitments of Traders" report, we were able to approximate the net positions at the end of each month for large hedgers, large speculators, and small traders. We averaged their month-end statistics over a number of years to find out what their normal positions would be at any given time of the year. We then compared each group's actual position with their so-called normal position. Whenever their positions deviated materially from the norm, we took it as a measure of their bullish or bearish attitude on the market.
By studying subsequent price movements, we were able to establish "track records" for each of the groups. As anticipated, we found that large hedgers and large speculators had the best forecasting records, and the small traders the worst, by far. We were somewhat surprised to find that the large hedgers were consistently superior to the large speculators. However, the predictive results for the large speculators varied widely from market to market.
The differences between their current net open interest position and the seasonal norm supply us with a tangible percentage measure of the degree of bullishness or bearishness of each group towards a particular market. From these "net-net" figures, we obtain a configuration of market attitudes of the principal players. From our research and long experience we have drawn up some general guidelines:
The most bullish configuration would show large hedgers heavily net long more than normal, large speculators clearly net long, small traders heavily net short more than seasonal. The shades of bullishness are varied all the way to the most bearish configuration which would have these groups in opposite positions—large hedgers heavily net short, etc. We would caution analysts to disregard patterns that only deviate less than five percent. We found that such small deviations had little predictive value.
In figure 2, we reproduced the Open Interest table from our weekly COMMODITY CHART SERVICE, which shows how we presented all the statistics from the April, 1980 "Commitments of Traders" report. Under soybeans, we rounded off these same figures to show large hedgers long 57%, short 42% and net long 15.1%. We also showed the change from the previous month of -1%, indicating that they had decreased their net long position by 1%. You can also see the appropriate statistics for large speculators and small traders for soybeans and all other commodities in the report.
In order to find out what the normal open interest positions were for each commodity at the end of any particular time of the year, we averaged the end-of-month statistics for each reported market over a period of years. Our original research, in the late 1960's, only went back three years. Later, we expanded it to five and ten years. Our most recent seasonals were updated for the ten-year period 1970-1979, and are shown in chart form at the end of this presentation. It is interesting to note that the patterns of the three-year study didn't change much when expanded to include more recent years. In the examples that follow, we refer to our latest updated charts for illustrative purposes.
To demonstrate the technique of forecasting commodity price movements with the use of the "Commitments of Traders" reports, we decided to give concrete examples of recent actual forecasts published by us in the "Technical Comments" section of CRB's weekly COMMODITY CHART SERVICE. We believe that regression analysis has a great deal of validity, but it is much more meaningful to show how analysis worked in "real time." It is only fair to point out that we also found analyses that proved to be completely misleading, but these were surprisingly few. Most of the time, the "Commitments" reports show that the three main market participants follow their normal patterns, and rarely get very much out of line. But even minor abnormalities can hold predictive values. We recall that shifting positions were often harbingers of the end of major moves. We are focusing our examples on the more extreme distortions, which resulted in unusually large moves.
The first example relates to our comments on the corn market, and is from our issue of June 16, 1978. We quote, "The latest open interest figures look bearish to us, with large hedgers net short 26.2% and small traders net long by 19.4%." If you will look at the corn open interest chart, you will see that large hedgers at the end of May are normally 12% net short and small traders about 8% net long. Therefore, the positions of large hedgers were short over 14% more than usual. At the same time, small traders were top-heavy on the long side, holding over 12% more than their usual pattern. On June 16, the price of March 1979 corn closed around $2.60 a bushel. By August 11, it had dropped to $2.22 a bushel at the low. In the same June 16 issue, we interpreted the open interest positions for the soybean complex as bearish, and prices of all three commodities moved lower in the following months.
In our July 13, 1979 comments, we wrote, "The Commitments of Traders report showed bearish configurations for soybeans, soybean meal, and soybean oil. Large hedgers were bearishly net short, and small traders more net long than usual." The special open interest table that appeared in the July 13 issue of COMMODITY CHART SERVICE presented the pertinent statistical prone and is extracted in figure 3.
For the month ended June 30, 1979, large hedgers not only increased their short positions 6-7% for soybeans and their products, but were net short by much higher than normal levels. Refer to the 10-year average charts, and you will see that large hedgers had a 17% net short position for soybeans compared with a norm for June 30 of 3%. Soybean meal, at 31% short, was much larger than its normal 8% for that date; and finally, soybean oil, at 26% net short, was some 15% larger than average. If you examine the numbers for the net long position for large speculators and small traders, you will find that their net long positions were much higher than normal. In retrospect, our comments at the time did not do full justice to the bearish implications of the open interest positions.
The prices in early July proved to be the highs for a long time to come. As a matter of fact, the "Commitments" report foreshadowed bear markets that were to last for more than 10 months.
Oat futures in November and early December of 1979 were steady to firm; however, we noted in our Technical Comments of December 14, 1979, "The latest 'Commitments' report continues quite bearish. Small traders are 50% net long, and large hedgers are 43% net short." The 10-year average chart for oats shows small traders normally 18% net long at the end of November, and large hedgers 20% net short. On December 14, the May oats contract closed at $1.65, and by the end of March, it reached a low of $1.31.
While we have shown only some relatively recent examples of this kind of open interest analysis, our experience with the technique goes back over a decade. The performance patterns are fairly consistent. Yet, there were exceptions that proved to be quite dramatic. Therefore, it is important also to utilize other available technical and fundamental tools to arrive at a high probability of success in forecasting prices. The nature of the events that shape price trends of futures contracts should keep even the most proficient of technical and fundamental analysts on their guard and flexible at all times. International developments, weather, and politically. motivated legislation are among the unpredictable forces that can change the direction of the markets in an instant. There is no master key that can unlock all the doors to successful price forecasting. Nevertheless, we believe that the proper interpretation of the "Commitments of Traders" reports is valuable and belongs on the analyst's key ring.
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