One of the more interesting tools I use in my work is the weekly Commitment of Traders (COT) report. To quote the Commodity Futures Trading Commission (CFTC) definition:
The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for market reports in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.
Basically, the COT breaks down the positions of the three major types of futures (and futures options) position holders – Commercials, Large Speculators, and Small Speculators. Each weekly report shows the total number of contracts long, short, and spread for all of the traded contracts for all markets.
Commercials are generally producers. For example, agricultural producers and miners would be in the this category as they are the producers of commodity products. The focus of this group’s futures market participation is on hedging.
Large Speculators or Professional Traders are hedge funds, banks, and other institutional traders with a focus on speculative profits. These folks tend to trade in large size. This is generally considered the “smart money”.
Small Speculators are normally small individual traders. Since the trading public is normally seen as being wrong most of the time, the position of these traders can be viewed as a contrary indicator.
For my day job I focus on the stock indices. It’s interesting (and useful) to see how the positions of the different groups change with market events (like Small Specs piling in to longs through the FOMC meeting while Commercials were getting flat). I also sometimes look at what’s happening in the fixed income, currency, and other futures market. It’s a good way to see where buying and selling pressures could come from in the future.