Skip to main content

The Commitments

SAN FRANCISCO -- Hoping the third time is a charm, we continue to

search for meaning in the Commitment of Traders' report.

Tuesday, I observed that the

Commodity Futures Trading Commission

(CFTC) reported that the net short position by commercial hedgers on

S&P 500

futures contracts had extended a recent string of records as of Nov. 28. Simultaneously, the net long position of small traders was approaching record high levels.

So the question remains, does a huge level of short positions by the hedgers signify the market is set up for a massive short-covering rally, as perhaps contributed to Tuesday's blockbuster gains? (Friday's report will include data through Tuesday's close, revealing how much covering, if any, occurred.) Or will hedgers live up to their "smart money" nickname at the expense of retail speculators? The latter has been a more compelling argument of late, and was again today when the

Dow Jones Industrial Average

fell 0.4%, the S&P 500 declined 0.6% and the

Nasdaq Composite

shed 1.6%.

Certainly it's heartening that tech stocks -- and the market overall -- weren't crucified today after the disappointments from




Scroll to Continue

TheStreet Recommends

National Semiconductor


. But down is down, and that was before


(INTC) - Get Intel Corporation Report

announced after the close that fourth-quarter revenue would not meet expectations.

Notably, both S&P 500 futures and

Nasdaq 100

futures were up (the latter significantly)

Thursday evening in


trading, despite Intel's warning. With the employment report out tomorrow morning, futures activity this evening suggests tomorrow could be the breakout rally optimists have longed for, or a potentially debilitating failure.

Which brings us back to the Commitment of Traders' report. Looking at things from a different angle (as he is wont to do), Jim Bianco, president of

Bianco Research

in Barrington, Ill., focused on the commercial hedgers vs. large speculators rather than hedgers vs. small traders. Why? Because "small traders" refers specifically to the volume of activity rather than style (hedgers or speculators), Bianco explained. Large speculators are just that, he said, "trend-following technical types" with no position in the underlying asset, in this case the S&P 500 cash. In the latest report, the large speculators were net long 10,721 contracts -- near-record levels as well.

Historically, "commercial hedgers have been right the vast majority of time and the speculators wrong," Bianco said plainly. How wrong? Large speculators were net short S&P 500 futures every week except five for the

six years

ending May 16, while commercial hedgers were net long roughly 95% of the time, or all but about 16 weeks, he reported. (Given that the S&P 500 went from roughly 300 to 1500 in that span and these are "naked shorts," Bianco wondered how speculators managed to stay in business. He mused that there probably has been a big turnover in their ranks.)

Bianco offered two caveats to analysis of the report:

  • One, when commercial hedgers get it wrong, it's usually in a "major way" where they miss a major secular change. For example, commercial hedgers were net short crude futures for much of 1998 and 1999 as the commodity plunged to $10 a barrel, but remained so during the initial phase of its recovery to above $30 this year. "Eventually, they got back in synch, but struggled in the beginning."
  • Two, May 16 is significant because the hedgers and speculators swapped positions (the former getting short, the latter long) in conjunction with a change in the reporting requirements by the CTFC. Previously, trades above 600 contracts were considered "large" vs. small. Since May 16, the threshold has risen to 1000.

"The CTFC is not going to recalculate

the reports going back in time so we effectively have six months of history and can't read into this either way," Bianco said.

Oy vey.

Remain Calm, All Isn't Well

Bianco's take notwithstanding, analyzing the commitment report isn't necessarily for naught; at least, it hasn't stopped folks from trying.

"Despite damage to stocks, the 'smart-money' shorts have continued to climb -- and they're not just edging higher, they are blowing the old records away almost on a weekly basis," co-editors Steven Hochberg and Peter Kendall wrote in the December issue of

The Elliott Wave Financial Forecast

. Conversely, "despite months of being clawed, the public is betting -- like never before -- that its old friend the bull is just around the corner." That's one of a host of sentiment indicators signaling investor psychology has yet to become negative enough to say the selloff has ended.

Kendall acknowledged the high levels of shorting by hedgers could lead to a huge short-covering rally, but observed it's never happened when

speculators are buying at record levels. Hedgers' net short position rose more than 50% from early September through late November, even as the market kept going down, he noted.

For those wondering: Yes, the president and CEO of

Elliot Wave International

(which publishes the newsletter) is Robert Prechter, who achieved fame for calling the crash in 1987 but fell from gurudom by remaining steadfastly bearish for years thereafter. Kendall acknowledged as much, but said "it's wrong to say we've been wrong since 1987."

Longer-term performance figures were unavailable, but the Elliott Wave newsletter underperformed the S&P 500 by nearly 20 basis points in 1999, according to Jim Schmidt, editor of

Timer Digest

, which monitors only the newsletter's intermediate-term calls.

"It's fair to say they're primarily bearish

but they've got a great following among institutions," Schmidt said. "You don't get that if all

calls are 20% off the market. They close the doors."

Hochberg dismissed as moot the question of rightness and wrongness, noting nobody is infallible. "If the standard is 'you've been wrong, I won't listen to you,' " he wondered, then "why listen to

Abby Cohen

, who's been

calling for a bottom

repeatedly for

many months?" (I'd flag him for unnecessary roughness, except it's true.)

Many readers will no doubt dismiss the Elliott Wave theorists as "permabears," but that doesn't change the fact that they've been mainly right in the last year. For the 12 months ended Dec. 1, the newsletter has outperformed the S&P 500 by nearly 12 basis points, according to Schmidt.

As for specific short-term calls, Elliot Wave made a (what else?) bearish one on Jan. 14, when the Dow peaked intraday at 11,750. On March 3, the newsletter predicted the Comp "appears to be on the cusp of a significant price decline."

In late October, Elliott Wave recommended speculators adopt "a larger-than-normal leveraged short position," which would have paid healthy dividends.

In the December issue, Hochberg and Kendall predicted the Nasdaq "could still fall another 50% before the immediate onslaught is over."

Tuesday's advance did nothing to change their outlook, Hochberg assured me (offering little comfort to most readers, I'm sure). Asked about the possibility of

Federal Reserve

rate cuts aiding (saving) the market, Hochberg recalled that the

New York Fed

cut its discount rate repeatedly and rapidly in 1929, to no avail. (An extreme point, certainly, but worth remembering for those prostrate before the altar of Greenspan.)

In conjunction with Elliott Wave principle, which catalogues long-term price patterns and seeks to use them in predicting future market trends, the newsletter writers use Fibonacci turn dates to make short-term calls.

The Fibonacci turns have successfully predicted trend reversals this year near the Dow's June 5 and Sept 1 highs, Hochberg said. In the December issue, the newsletter tabbed Dec.1 or Dec. 4 as potential turn dates for the Dow, which appears to have established a short-term bottom on Dec. 1.

"The turn windows don't indicate direction, just time," he explained. "Whichever direction the market is moving into a turn window, we expect a reversal in the opposite direction coming out."

The newsletter has identified Dec. 11-12 as the next potential turn window.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.