Given the carnage in the grains yesterday I’m guessing we are set to hear a great deal of buzz about the COT when it’s released later today. I’ve been observing a common trend on Twitter for at least 20 months now where there is continuous chatter about “record fund shorts” after these sort of moves and I thought it might be a good idea to put some thoughts in writing on the topic. The constant assumption seems to be that “record shorts” indicate a massive rally is about to happen and that is all the analysis that is needed but you can all observe the overall price trend in grains for yourselves. What I’m going to present here is the idea that looking at the overall absolute contract level and thinking specs of today are the same as specs yesterday is ignoring larger industry trends and that’s why, at least in part, this commentary and its ability to forecast future price reversals has been so bad.
Some of you that follow the twits stream may be familiar with this table above as I’ve discussed it there before. I pull this each quarter from Barclay Hedge which is a large database tracker for hedge fund and managed futures programs. If you’d like to monitor this moving forward then click here and use the Agricultural Traders link. This particular table is Barclay Hedge’s listing of CTA programs specific to Ag meaning within their disclosure doc they have identified the trading program as agricultural focused only. It is important for me to make that distinction because when considering the COT and the table above we have to keep in mind that many other trend following programs operating in the CTA/CPO space are also going to trade the ags but they won’t be listed under this particular Barclay Hedge index. Many trend following programs will trade 100 markets or more so they’ll fall under other categories in Barclay’s database but they likely trade ags as well especially when we have such persistent directional action like this. Consider this table for overall managed futures industry AUM:
The trend in overall managed futures assets is obvious. Over the last decade the amount of capital in this space has grown considerably. A secondary factor you can consider through this link is that margins do not remain constant. When you consider the assets in the tables above and the margin changes you will probably start to wonder what the absolute level of net longs and shorts in the spec space telling you on its own? I think the answer is not a whole lot.
Personally I find much more value in constant review of the commercial positions in the COT. In particular their rate of change in establishing positions and the price levels they’ve done this at as well as their position size relative to open interest. I was heavily influenced by Larry Williams book on this topic so if you are interested in digging deeper on the subject I’d start there and also check out his various presentations.
Best of luck in your trading.