It Ain't Necessarily So—by Barbara Rockefeller

"Follow the Commercials." This is what commodity futures trading experts say, looking at the high correlation between price and positions revealed in the Commitment of Traders report from the CFTC. The logic is simple: the commercials are the ones who actually deal in the commodity itself, and must have the inside edge as to the true supply and demand of any particular product. The Commercials are the "smart money" in futures.

The facts show that this is not necessarily the case. No single group of the Commitment of Traders report groups is in control at all times in all commodities. Sometimes it's Non-Commercial traders (Large Speculators), and less often, it's Small Traders.

Financial futures offer a good example. Here is a Swiss Franc chart showing the Commercials as blue, the Non-Commercials as green, and the Small Traders as red:

Notice that Commercial traders are taking a large number of long positions in a downward trending market from February to mid-July. Non-Commercials are short at the beginning of the downtrend, and then take a net long position right when the trend is becoming exhausted. Small traders are following their larger speculative brothers all through this period. Commercials were long and wrong, specs were short and profitable.

Conclusion: don't listen to self-appointed experts when it comes to COT information. Conventional wisdom is not written in stone; it can change. The price of trading profits is constant questioning of old rules.

You can read more of Barbara Rockefeller at http://www.rts-forex.com