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STOCHASTICS


Large Specs Selling To Commercials

09/29/11 09:53:13 AM
by Mike Carr, CMT

Several futures markets show a similar pattern of speculator selling being met by commercial buying.

Security:   DBC
Position:   Buy

Recent stock market declines can truly be thought of as steep and sharp. Whether they crashed is largely a question of semantics and means little in the real world. Rapid losses in stocks tend to create liquidity issues for leveraged investors, and we can sometimes see that in commodity charts. A pattern emerging now is signs of selling by hedge funds and buying by commercials, which could indicate that commodities are priced low from the perspective of those who know markets very well.

The chart of the euro (Figure 1) illustrates the pattern. The Commodity Futures Trading Commission (CFTC) releases the Commitment of Traders report every week and it lists the positions of various groups of traders. The reports can be easier to interpret by converting the raw data to an index by applying the stochastics formula. This is an idea taught by Larry Williams and is the way the data is presented in the charts.

FIGURE 1: EURO, WEEKLY. Euro futures contracts have seen a sharp drop in demand from large specs, while commercials have been buyers.
Graphic provided by: Trade Navigator.
 
Using this approach, high values near 100 would indicate more buying. Looking back over the past six months with the calculation, the indexes shown represent the percentage of buying pressure in the latest report relative to the recent action. We see that commercials have been buying more than they were early in the year, while specs have been selling more. The chart of unleaded gas futures (Figure 2) shows the same pattern and it can easily be seen in almost any futures contract.

FIGURE 2: RBOB, WEEKLY. Specs are also selling unleaded gas as commercials are buying.
Graphic provided by: Trade Navigator.
 
Large specs are generally thought as the hedge funds that are big enough to report positions to the CFTC. Commercials are the producers and users of the commodity and are generally thought of as the smart money in the markets. When they buy, they could be signaling that they consider prices to be low. An example is seen in the rectangle that is highlighting a low in the euro in Figure 1.

Specs could be selling to meet cash needs in other markets. That is not uncommon when we see stocks decline. Margin calls are a reality in a leveraged account, and that could explain the selling seen in the data. Commercials don't have to buy, and the fact that they are stepping up purchases could indicate they think commodities are priced low. As a whole, the data points to higher commodities and the euro points to a lower dollar.



Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

Website: www.moneynews.com/blogs/MichaelCarr/id-73
E-mail address: marketstrategist@gmail.com

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