The Commodity Futures Trading Commission (CFTC) requires futures traders to categorize themselves as Commercials or Speculators (in 2009 they changed that to provide more clarity on the possible motivations behind groups of traders.) Bloomberg, however, still receives the old data, so the three groups are:
- Non-Commercials (clever)
Over time, the parties have become known as hedgers and speculators, so the groups can be re-grouped as follows:
- Large speculators
- Small speculators
Furthermore, because they tend to be wrong at turning points, the speculators have become known as the Dumb Money, leaving the hedgers as the Smart Money. In the case of traditional commodities, like gold or corn, the hedgers are the producers–in our case the mining company and the farmer. To generalize a lot, the speculators tend to be trend followers, thus, they buy/sell as trends continue, leaving themselves over-exposed when the trend changes.
Every Tuesday, futures participants report to the CFTC whether they are long (expecting higher prices) or short (expecting lower prices) and by how many contracts. The CFTC makes this Commitments of Traders (CoT) report available on its website, and Bloomberg makes it all available for charting and other analytics. As a result, we can see how all the groups are positioned, specifically, whether they are, in aggregate, long or short a particular commodity. And by the way, financial futures (e.g. stock indexes) are commodities, too. Also, the corrolary to the farmer in financial futures are the big money center and investment banks.
They’re an important group to watch because, while they all have spokesman/strategist types who tell you what you should do with your money, they never tell you what they’re doing with their money. The CoT report, however, gives us an idea of what their firms are doing at least.
Enough of the background…
Right now, the Commercials/Hedgers/Smart Money have the largest net-long position in almost four years. They’re not infallible, as they’ve been wrong in the past, but it presents a far better picture for the market than were they net-short to a record degree.