Trade Stocks and Commodities with the Insiders: Secrets of the COT Report

CHAPTER 11

A New Twist on the Commercials

Using Them for Stocks

The only commercials in the stock market are for brokerage firms.

Okay, enough of this psychobabbling. Let’s get back to work. For years I have tried to understand how the commercials act toward commodity prices. I know they buy on a scale down, sell on a scale up. In fact, years ago, when the data came out one month late, we tried to develop an estimate of their buying and selling. Guys like Lee Turnbull and myself along with Jimmy Murzyn and Bill Meehan went to work to see if we could create a synthetic form of this index.

While those early efforts were not successful, I think I may have finally cracked the code. Let’s start with a chart of soybeans, Figure 11.1. In addition to price I’m showing directly underneath that my stand-in proxy for the commercials, my estimate of what they are doing. The bottom panel is the actual COT commercials index on a six-month basis. Both the commercials and the proxy have been marked off at 80/20 percent bullish /bearish levels.

I have marked off with the vertical lines just the times the proxy index entered the buy zone. While not a perfect fit, the proxy index usually moves step for step with the actual COT index. Here’s another example. Look carefully at Figure 11.2 to see how closely the synthetic index models or assumes the general peaks and valleys of the actual COT index.

As you can see, most of the time the proxy and the COT index are in agreement on the buy or sell side. ...