Positioning: reading the COT report

Step back and look at what this asset class has handed you. The curve photographs the physical balance daily. Open interest counts the market's commitments nightly. And the COT report, weekly, names who is holding them. Balance, commitments, players: commodities publish all three, and no other asset class you will trade publishes even two. FX made you infer everything from price; commodities put the market's books on the table. This lesson opens the last of the three.

What the report says

Every Friday the regulator sorts each futures market's open interest by who holds it: commercials - module 1's producers, merchants and consumers, hedging physical business - and the managed money on the other side, with smaller categories around them. Two readings matter. The net position of each group: are the funds long or short this market, and how hard? And the extreme: where does today's positioning sit against its own multi-year range?

How the two sides read differently

• Commercial positions mirror business, not opinion - lesson 3 of module 1 stands. Heavily short commercials usually mean producers locking attractive prices, which says something about value, said by the people who see physical flows.
• Managed-money positions are opinion, leveraged and crowded. An extreme here is a market where nearly everyone with discretion has already taken the same side - and module 2's open-interest logic says the fuel for continuation is thinning.
• The classic tension - commercials record-short while funds are record-long - is not a signal. It is a description of a crowded trade sitting on top of sceptical physical players, and worth exactly that description.

The honest limits

The report is three days stale by publication, its categories are imperfect - a merchant can speculate, a fund can hedge - and extremes resolve late: record positioning has a habit of becoming more record for months. Use it the way this module uses everything: as context that disciplines a read. A bullish balance-sheet view held alongside record-long funds is a view the crowd already holds, and lesson 1 told you what an undifferentiated view is worth. That check - is my read already everyone's position? - is the COT's daily job, and no other asset class lets you perform it at all.