Commercial Traders vs. Small Speculators

This week I’d like to use the Commitment of Traders Disaggregated Futures and Options report to illustrate exactly why we follow the commercial traders as well as why most individual small speculators lose money on their own in the markets.

First of all, “the markets” is a generic term intended to describe anything that an individual has direct access to and can use to make their own financial decisions regarding the predicted direction of that instrument. These include individual stocks and bonds as well as exchange traded funds, mutual funds and commodity futures markets.

Most individuals whether planning for their own retirement or actively trading investment capital will scour their information sources trying to find an individual stock, ETF or mutual fund manager who consistently beats the markets. The truth is, very few actually do. Furthermore, the individual banking on continued outperformance is usually buying in at the tail end of what has been a successful run. Finally, the successful run usually has more to do with the manager or stock fitting the right part of the business cycle at the right time to gain alpha rather than the company being run better than its peers or the manager having an inherent knack for their market. Study after study has been done to prove that chasing high returns will lead to lower realized returns in one’s individual account over time.

This same mentality can readily be seen in the commodity markets and is reported on a weekly basis in the Commitment of Traders Reports. The Disaggregated Futures and Options report is simply a subset that breaks down the larger report into individual trader types and totals their actions in several select markets. Last week, the commercial traders were on the dead opposite side of the money managers and small speculators.

Before we look at the numbers it’s important to remember that many of these markets were over extended near their highs or lows.

Crude oil’s decline in price wiped out more than 12,000 managed money and small speculator long positions while the commercial traders purchased more than 8,000 contracts. Crude oil sold off more than $10 per barrel and has now bounced $7 off of its lows.

The corn market, which we had suggested, had become overbought above $7 per bushel sold off to $6.30. Commercial traders had accumulated a net short position of more than 450,000 contracts and repurchased nearly 10% of their position on this break at a significant profit. Managed money, on the other hand was washed out of more than 48,000 contracts on the market’s decline. The same pattern can be seen in the other grain markets as well as cattle and cocoa.

We’ve also picked up the same pattern in the S&P 500 and the Euro currency. Both of these markets were driven by individual investor sentiment and had moved well beyond the collective commercial traders’ value area. The results of one way sentiment could be seen as both of these markets rallied sharply in the face of individual and managed money short covering as their, “end of the world” bets failed to pan out.

These reports are compiled on Thursdays. Therefore, I don’t have the information on gold and silver’s sell off, yet. However, I do expect it to follow the same pattern. This week, buying the Euro and the stock market when every news outlet was putting their own spin on doomsday seemed very counter intuitive. However, setting aside one individual’s opinion and trading on the collective opinion of those who know far more than I do put us on the right side of some very volatile markets. Our firm will continue to focus on their collective knowledge and sizeable bankrolls to help filter out the news and focus on the opportunities.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

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