When presented with sentiment data, you'll need to know when to follow the crowd or be a contrarian. In our continuing look at using the COT index to predict market direction for commodities, here's a study on the COT report as an indicator for trading pork bellies.
"Although the meat complex is also seasonal in nature, it doesn't follow a fixed supply and demand cycle as do corn and the rest of the grains. As such, the conventional interpretations of the Commitments of Traders report are much more accurate for the meat complex, especially for pork belly futures. In this article, we'll examine the price of the February pork belly contract from June of the previous year through January of the contract year with a comparison to the Commitments of Traders report and the Commitments of Traders index for each of the three trader classification groups."
Figure 1b: SAMPLE TRADE, SHORT SALE. Here's a sample trade in pork bellies showing a short sale when the COT index for commercial hedgers is less than 10%.
Figure 1c: SAMPLE TRADE, BUY. Here's a sample trade in pork bellies showing a buy when the COT index for commercial hedgers is greater than 90%.
"Our examination of the Commitments of Traders data relies on the use of the COT index. The COT index is simply a measure of how the net positions by reporting class compare with a certain number of previous reports, where the net position is defined as longs minus shorts by reporting class."
