Invest With the Smart Money (Or the Dumb)

Ever wonder what the smart money is doing in the markets? What are the people with the deepest pockets and best information buying and selling?

A small handful of analysts has found one way to tell: the Commitments of Traders reports. Devoted fans say they may be the closest thing in the public domain to a Holy Grail of market forecasting.

These obscure reports are issued free every week by the U.S. Commodity Futures Trading Commission. The "COTs," as they're known to fans, list trillions of dollars of futures and options holdings in 100-odd markets - everything from the S&P 500 to orange juice, cruide oil, silver, Treasuries and the U.S. dollar. They include many of the world's largest investment firms, commodity producers and hedge funds.

Market Info for the Rest of Us

The government has been publishing various incarnations of this important data since 1924, when it first started to put out information on speculation and hedging in grains futures. Until fairly recently, it was available only by paid subscription. But since 1995, the CFTC has released the futures and options positions of traders for free each week.

Why is all this information important to have in the public domain? The CFTC says why itself: The data is collected and published to shed transparency on the markets and provide some much-needed accountability.

Which is why I think it's so valuable. It's being provided for the public to use. So let's use it. I see it as a great leveler. The big investment firms have their armies of analysts and banks of proprietary data and trading systems.

What do the rest of us have? The COTs!

So why don't ordinary people know about it more? Why aren't we using it? Read on, below, and you will learn, my friend...

How to Use the COTs: A Breakthrough

Unfortunately, the raw COTs numbers aren't obviously usable for trading or investing. Moreover, they don't neatly correlate with market ups and downs. Many analysts know about the COTs, but few seem certain how to use them. Even analysts who have studied the data suggest it doesn't give trading signals per se, but rather a roadmap for possible future market direction. They say it must be combined with technical analysis to come up with actual trades.

But I thought it would be interesting to apply technical analysis directly to the COTs data. Using Microsoft Excel, I found there is indeed a way to have generated highly profitable trading signals solely from the COTs - signals that beat the underlying markets by wide margins.

For example, my trading setup for the NASDAQ 100 index would have generated a 1,025-percent profit between 1998 and May 2007. Meanwhile, buying and holding the NASDAQ gained 59 percent. And that's with only 14 trades - leaving lots of spare time to kick back, relax and not fret about minor market gyrations.

Check the market-beating results of my other setups at my "Latest Signals" page.

To my knowledge, my system is the first one to suggest the COTs data alone can generate a historically market-beating trading system. I've written stories about my surprising results in the magazine Technical Analysis of Stocks & Commodities, Futures & Options Trader and the Canadian Journal of Technical Analysis.

I've already found market-beating trading setups in two dozen markets, and I'm only getting started. I've been using my COTs-based system to invest my family's savings since January 2007. I plan to expand this blog with more research and welcome your comments and suggestions.

Check here often for my latest signals and findings.