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Strange Divergence In Insiders/Commercial Holdings In Commodities

November 8, 2009

“In 2010 the US Dollar is going to tank, and commodities are gonna fly—hyperinflation here we come!”  Source:  retail newsletter author whose name shall remain confidential

The market is no simple beast, its actions are rarely as obvious as people believe. Often it seems to lull unsuspecting traders into “obvious” setups just in time to take your money away in one quick swoop. Its is plainly obvious that the Federal Reserve is printing money with no end in site, thus it should be obvious that inflation will creep in with a vengeance-taking the form of rising commodities and gold. So far, we have gold hitting new all-time highs and other commodities like oil and copper have rallied significantly since the bottom. I remember times like this in early 2008, where it seemed as if every commodity would rise to the moon (i was long). I also remember looking at the COT report and noticing that the insiders had their lowest position in the CRB commodity index as well as Oil and Gold—ie the COT stochastic was at zero. I barely got out alive with a few scraps of remaining profit as the CRB crashed at rapid speed. So here we are again, its late 2009, and strangely we are in the same spot–the commercials are at zero http://www.insidercapital.com/BullishReview/COTINDEX.HTM  I wish I knew why this was the case and I can only speculate, but I will say that if these insiders were really convinced that commodities would be rising 20 or 30% more in the near future they certainly wouldn’t have such a small position. It appears that they are hedging their bets, and perhaps afraid of a double dip. Why should we watch the insiders? Because trading on inside information is perfectly legal in the futures markets in direct contrast to the stock market. Insiders must disclose their positions, yet obviously they will want to profit from superior information. Thus their moves are worth watching.

What is the “little guy” or small trader doing? He is absolutely backing up the truck on Oil in this spot. The record for small traders needless to say is quite poor relative to the big boys. Now I wouldn’t run out and short every commodity I could find on this information (for one gas is highly bullish right now based on insider positions). I would wait for a major channel to be broken, or go short  incrementally on a new 20 day low, 50 day low and 100 day low. For now, if I was long, I would trim positions and keep a trailing stop in place. The risk/reward may be to the downside in the future—but the probability is not neccessarily high. It is just that crowded trades end badly when everyone stampedes for the exits. A rise in the US dollar will cause the carry trade to unwind and massacre commodity related positions.

2 Comments leave one →
  1. ryan ballentine permalink
    November 9, 2009 10:30 am

    david,

    very interesting. can you clarify exactly what the “0%” and “100%” measurements indicate? also, what do commercial hedger, large speculator, and small trader correspond to on the actual COT reports? thanks.

  2. November 9, 2009 12:12 pm

    David,
    Not sure if you know that site but I follow the COTs Timer report from a Canadian journalist that actually back-tested and devised a system to trade off the COTs reports (its a bit more sophisticated than BUY when commercials are long, etc.):
    http://cotstimer.blogspot.com/

    It gives a good view of the markets from the insiders/other participants point of view.

    PS: and I did get badly “burnt” too with my long commodities position in 2008
    Now I am long USD/short XAG and it’s starting getting hot!! ;o
    Really time to ditch discretionary trading!

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