Why is the Smart Money Buying?

Discussion in 'Trading' started by MKTrader, Aug 3, 2007.

  1. According to this week's commitment of trader's data, the "commercials" have one of the strongest net long positions they've held in recent years. Before anyone dismisses this too quickly, understand that this is one of the most effective long-term market timing indicators out there...at least among simple systems that anyone can build/test with a spreadsheet and Internet connection. (I'm not going to say how to use it, but a recent TASC gave some ideas and I've seen others that work even better.)

    Rumor has it that corporate insiders are buying heavily as well, but I haven't seen that substantiated yet.
  2. Does the data include futures contracts only or does it somehow incorporate options data also?
  3. Futures only for this one.

    The long-term trading systems using this data have sat through drawdowns in excess of 10% a few times before, but the commercials almost always turn out to be right.

    The 10-15% corrections I'm referring to occured during the 1990s. The commercials were strongly bearish throughout the 2000-2002 bear market.
  4. jasonjm


    where is the best place to pull the data from?

    especially the historical data?
  5. If that is such a reliable indicator, why were the commercials net short until April of this year, when we entered into the 1500 range on SPX? Do you have statistical data that back up your assertion beyond the instances you mentioned that may or may not be coincidental (can you reject the null hypothesis?; spurious correlation)? Have you backtested the thesis?

    Sounds like snake oil to me, based on the data I see here:


    Also, can that insider buying "rumor" be substantiated?


    Be careful what you base your trading decision on.
  6. Insider buying is true, but I can't give you a link, it's a site that you have to buy a subscription to get all types of sentiment data. Also, as this correction has been in play, commitment of traders has shown an increase in net long positions. Before the february decline, cot reported smart money selling.

    My conclusion is that this selling is mainly due to blow ups in hedge funds and once they're done we will get a huge roaring bull market. There's plenty of data to support that the PE is quite cheap right now and once the risk parameters re-adjust to a new credit environment, stability will re-enter.

    My short term position is still to scalp on the short side, but longer term, this is a great time to buy on the cheap stocks that have been leading the bull run.
  7. Sure, the commercials were net short prior to the February decline, but they had been net short since late '05! I smell data mining on the part of the COT believers.


    If anything, the large traders were the better market timers than commercials in the last 3 years.
  8. piezoe


    "this is a great time to buy on the cheap stocks that have been leading the bull run."

    perhaps patience here will be rewarded. Why should this be anywhere close to the bottom. As i see it, there is no reason to think it should, coming, as we are, off the largest liquidity bubble in modern times (Thanks Alan!).

    We have, in actuality, near double digit inflation, huge federal deficits, and collapsing housing/building/real estate/mortgage sectors, and possibly some serious damage is being done to the investment banks. We have junk and mortgage/CDO bond markets that are worsening. Our currency has been driven down to historic lows by our a desire to monetarize the debt . And on top of everything else we are mired in a no win war with no way out except ignominious defeat.
    Why, therefore, do you think this is a great time to "buy on the cheap," or am i overlooking some positive aspect that overshadows the apparent reality?

    I would think it is a great time to be long-term short! Why on earth would the market, under these circumstances, bottom after only a 7 % correction (barring a miracle of course). And why, under these circumstances, wouldn't it be more likely that we would eventually see a 10 or 15 % decline in the S&P from its 1555 high. Of course it would be foolhardy to predict how rapidly the market should fall and where it will eventually stabilize, but i would think it equally foolhardy to suppose that it will, anytime soon, retrace to its 1555 high and then move higher. I'd be truly shocked if it did that before it falls at least another 3 %, and I don't think a 20% decline is out of the question.

    So wouldn't the prudent course here be to adopt a wait and see attitude?
  9. technically and fundamentally I agree, there are many reasons why this ain't over.

    take for instance, the war. alone it is draining billions of dollars a month from america's treasury. if (most) republicans had their way that trend would continue for ohhh, about the next 15 years or so.
    let a few more hedge funds die out and see how determined the US is at creating a pro-american petrodollar islamic state

  10. 1) I look at more than net long/net short. My method looks at the trends over a certain time period. Net longs/shorts has a good track record, but can go years without a signal. I think it was thrown off a bit when the e-mini contracts were introduced.

    2) Yes, I've backtested it, and seen several other variations that have done quite well in backtesting/real-time. This is true for stock indices, gold, and bonds. I haven't systematically tested currencies, but others have and reported similar results.

    #10     Aug 4, 2007