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Warning on the Dollar COT Report

Stocks in this article: UUP UDN

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau

NEW YORK ( ETF Digest) -- The Legacy Commitments of Traders Report released by the Commodity Futures Trading Commission on Jan.13, 2012 is flashing a warning sign the trend may be running on fumes. This COT report was as of the cutoff date on Tuesday, Jan. 10, 2012.

The Legacy COT report is broken down into two categories: The Reportables and the Non-Reportables for the current "Open Interest." Each digit of open interest is a single contract between a buyer (long) and a seller (short).

In the reportable category, there are two types of traders, the Commercial trader and the Non-Commercial trader.

Commercial traders must prove to the CFTC that they have a legitimate reason to "Hedge" their business with the use of futures. They have deep pockets and "transfer risk." That is why they are known as the "Informed Money."

The commercial traders in the Dollar Index added to their short positions by a total of 3,792 contracts and went long an additional 156, for a NET increase in their current short position of 3,636 contracts. They are currently short 59,023 contracts and long a total of 6,061. A nearly 10 to 1 ratio of strong handed sellers.

Open interest is currently 69,024 contracts, which is an increase of 2,971 contracts from the prior report which to me is a sign of rampant speculation since price continues to make new highs in the face of continued commercial selling.

The Non-Reportable category shows an increase of 958 contracts in their long positions and an increase of 72 contracts in their short positions for a NET increase in their current long positions of 886 contracts. The Non-Reportable category is long 9,765 contracts and short 1,390. The Non-Reportable category has only one class of trader, and they are the "Small Speculators." They "accept risk," and it is usually with leverage trying to make a profit. They have a reputation for "weak hands."

In the Reportable Category the Non-Commercials increased their long position 1,882 contracts and decreased their short position 868 for a NET increase in their long position 2,750 contracts. They are now long 52,644 contracts and short 8,057. The Non-Commercials are "Large Speculators." They could be hedge funds, asset managers, a financial institution, a large trader etc. But the bottom line is they are heavy long. The boat is loaded up on one side with speculators. How much more speculation or demand can we get to the "long side"? To use a Texas Hold'em No Limit poker term, it's as if everyone is "All-In."

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