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By Kenneth H. Shaleen
Every trader has thought at one time, "Wouldn't it be amazing to view a market where the positions of all participants are known?" This would give the trader the perspective of looking into a goldfish bowl; the movement of each player would be readily observable. This situation, of course, does not exist. However, in the U.S. futures markets, the Commitments of Traders reports, prepared by the Commodity Futures Trading Commission (CFTC), do yield some important insights into the internal makeup of the markets each month. This article will explain what the reports are and how they can be used, and will examine a practical application.
Exchange clearing members, futures commission merchants, and foreign brokers are required to file daily reports with the CFTC listing any trader's position on their books that exceeds the reporting level. The reporting level for the IMM Eurodollar futures, for example, is 400 contracts. The live hog futures contract, which will be analyzed in this article, has a reporting level of 50 contracts.
Positions of the reportable traders are classified as to whether they are commercial or non-commercial. "Commercial" is applied to any reportable position used for hedging. For purposes of analysis, this reporting commercial category will be referred to as the "Large Hedgers." The other large trader category (the non-commercials) will be labeled the "Large Speculators."
The non-reporting category is derived by simply subtracting the reported positions from the total level of open interest. These "Small Traders" consist of both hedgers and speculators. The exact number of non-reporting traders is not known.
The CFTC releases the reports on about the eleventh day of each month. The data are as of the end of the previous month. A sample page from the September 29, 1989 Commitments of Traders, Chicago is shown in Figure 1.
The pertinent facts from the reports are published in tabular format as a regular feature of the Commodity Research Bureau (CRB) Futures Chart Service. Information from the September 29 Chicago Commitments report is shown in Figure 2.
Pioneering work in the analysis of the Commitments reports has been chronicled by William L. Jiler in previous editions of the CRB Commodity Year Book. A particularly insightful article can be found in the 1985 Year Book. Graphs of the normal long or short positions by category of trader have been updated through 1988 and are included at the end of this article. Ten years of data from 1978 were used to construct the graphs. No information is available for the year 1982, when the reports were temporarily discontinued.
Examine the current open interest line on the Dec. 1989 live hog daily futures price chart in Figure 3. In the two month period ending September 29, total open interest showed an increase of 6,909 contracts. The smooth open interest line on the hog chart represents the 6-year average of total open interest. Note that open interest would normally be expected to begin declining at this time of the year.
The September Commitments report can be used to determine which category of trader was increasing (or reducing) holdings during September and what direction (net long or short) each group faced. The next step is to compare the current situation to the historic net long or short position of each group at the end of September. This can be accomplished by using the updated graphs located at the end of this article. The more the current postings deviate from the historic norm, the more strongly this category of trader feels about the direction of prices.
Prior testing by the CRB has determined that the "Large Hedgers and Large Speculators had the best forecasting records, and the Small Traders had the worst by far." In addition, "the Large Hedgers were consistently superior to the Large Speculators." Armed with this knowledge, a trader can compare his views with that of the "smart money."
The net long or short position in percentage terms is found in the CRB version of the Commitments reports in Figure 2. The data in the CRB table are derived from the actual Commitments reports. From Figure 1, the non-commercial reporting traders (Large Speculators) were long 10,386 contracts of the 30,875 contracts open at the end of September; this represented 33.6 percent of the total open long positions. The percentage that each category is long and short is found on the "all" line in the middle of the Commitments report. Notice that the Large Speculators were short 9.4 percent.
The CRB Commitments report lists the (rounded) percentages that each of the three main categories (spreaders are excluded) are long and short. The Large Speculators were 34 percent long and 9 percent short at the end of September (Figure 2). The "net" column is derived by simply subtracting the percent short from the percent long. Thus Large Speculators were 34% - 9% = 25% net long hog futures on September 29. The Large Hedgers were 13% - 21% = -8% or 8% net short, and the Small Trader stood at 45% - 62% = -17% or 17% net short.
The change in positions from the previous month is shown in both reports. In Figure 1, the change in number of contracts is seen. The CRB details the shift in the "delta" column. For example, the Large Speculators were adding to longs (+3,590 contracts) and decreasing shorts (-325 contracts) during September, This shift is reflected in the + 12 percent figure in the delta column for the Large Speculators in Figure 2. This means the Large Speculators increased their net long positions by 12 percent.
This brings the analysis to an intermediate state. It is evident that the Large Speculators correctly determined that live hog futures were in a price uptrend. However, the Small Traders were fighting the price trend. A look at the changes in open interest from the prior month yields these observations:
Next, the seasonally normal live hog graph can be utilized. From this graph, the month-end normal percentage long or short position for each category can be obtained. The results are summarized in Table 1.
The current situation shows an extreme imbalance from normal. Small Traders are heavily net short, when this category would be expected to be net long. The Large Speculators' position is also far from average; it is much more bullish than normal, ie. + 25 percent, versus only + 3.6 percent ordinarily. The Large Hedger class is more bearish (short hedged) than usual. But the deviation from normal (the difference between -3,9 percent and -8 percent) is less than 5 percentage points. Prior investigation by the CRB has shown that deviation of less than 5 percentage points should be disregarded. Also, deviation of more than 40 points from the normal should not be used to forecast prices; something extraordinary would be occurring in that particular year.
Using the past "track records" of each category, a long position in live hog futures is favored. The price of the Dec. 1989 hog futures contract on October 12, 1989, when the report was available, was 46.57 cents/lb. Quotes moved higher, setting a life-of-contract high at 51.90 cents on November 27, and continued even higher into the expiration month, trading at 52.85 cents on December 14.
Using the Commitments reports in conjunction with historic normal graphs can be a powerful addition to a technician's use of open interest. The conclusions of the original research, begun in the early 1960s by the CRB, appear to be equally applicable to the markets of the 1990s.
Editor's Note: For further information on the use of open interest in technical analysis, refer to Mr. Shaleen's book Volume and Open Interest: Cutting Edge Trading Strategies in the Futures Markets, Probus Publishing, Chicago.
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