Copper and the Cyclicality of the COT Report

Many markets have created key points due the increased volatility over the last few weeks. While some of these appear to be opportunities to sell into existing downward trends like the Yen or silver market, we’ll focus on the possible new shoots of a sustainable move in the copper market. We’ll examine the actions of the large and small speculators along with the commercial traders to determine where we are in the current cycle as well as how these cycles typically play out, using the last several years worth of Commitment of Traders data in the copper futures market.

First, we need to define the market’s players. For today’s purpose, we’ll be examining the behavior of the small speculators, large speculators and the commercial traders. These categories are pretty self-explanatory. The value in these data streams is that they represent the collective consensus of a given group of market participants. Furthermore, by measuring the intensity of their buying and selling relative to given price levels, we can determine how important a given price level may be to that group’s participants.

COT column bannerThe first chart is visually intuitive. We only focused on the buy side for the sake of clarity. Every Blue Area represents a peak in commercial buying pressure. Every Green Area represents a peak in the small speculators’ buying pressure. We’ll address the large speculators on the next chart. As you can see, the commercial traders are consistently on the right side of the market’s troughs and have typically built up their largest position as the market bottoms out and begins to move higher. There are several reasons for this but ultimately a picture really is worth a thousand words. The small speculators on the other hand typically arrive late to the party and build up their largest positions at the most inopportune moments. Is it any wonder no one argues with the, “95% of retail traders lose money” general statistic? This process represents the accumulation phase of commercial buying at the troughs through the distribution phase as the commercial traders off load their hedges.

Commercial traders are clearly the ones buying at the best times and prices while individual retail traders are at best a signal to be faded.
Commercial traders are clearly the ones buying at the best times and prices while individual retail traders are a signal to be faded.

The argument gets murky when we add the large speculators. Many argue that the large speculator position is a leader and not a follower due to the professional traders, CTA’s and money managers that fall into this category. The argument follows that because they only enter the market by choice and their actions are purely speculatively profit driven that significant moves by this trader group should be watched closely. My simple counterpoint is that individuals within this group come and go nearly as frequently as their small speculator counterparts. Statistical evidence is provided in the following chart.

Statistical analysis proves that the large speculators' actions are far more similar to the small speculators than they are to the commercial traders.
Statistical analysis proves that the large speculators’ actions are far more similar to the small speculators than they are to the commercial traders.

This chart plots the relationship between the large and small speculators as well as the relationship between the commercial traders and the small speculators. Finally, the bottom pane plots the correlation between the previous two data streams. Here’s what it means in English. The small and large speculator positions tend to move together while the small speculator and commercial trader positions tend to move opposite each other. Since we’ve already determined that the commercial traders are on the right side at the right time, we can deduce that the large speculators aren’t as successful as a group because their pattern more closely resembles the small speculators than the commercial traders. The one caveat regards the traders who’ve stayed in this category for years and years. Those are the 5% you want to pick from.


Commercial traders are currently building a position on the copper market’s decline. In fact, they reached their second largest net long position just a few weeks ago as the market traded below $2 per pound. This is a perfect example of analyzing their behavior around a given price level. Clearly, they find this to represent a good value going forward. Therefore, we’ll be monitoring pullbacks for a possible long entry point which we’ll publish via CotSignals, our Commitment of Traders research brand.

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