Below is a video on the Commitment of Traders and hedging versus trend following. Do the Professionals primarily use the futures market to hedge their positions or trade with the market trend? In essence, should you follow or fade the Professionals?
HIGH DEF VIDEO – MAY TAKE 15 SECONDS TO LOAD
Commitment of Traders: Hedging vs Trend Following (10:37)
Below are a few charts taken from the video. The first chart shows when the Professionals are hedging versus trend following.
Commitment of Traders: Hedging vs Trend Following
Hedging activity is marked with red PaintBars and defined as:
- Market is up but Professionals have increased their Short positions, or
- Market is down but Professionals have increased their Long positions
The second chart shows that from 1986 (start of SP trading) to 2000 the Professionals were primarily using the SP futures as a hedging vehicle.
Commitment of Traders: Hedging vs Trend Following (1986 – 2000)
The red line under the price bars calculations the percentage of the last 52 weeks that the Professionals were hedging. During this period the percentage stayed consistently above 50%.
The third chart shows what the Professionals have been doing since 2000.
Commitment of Traders: Hedging vs Trend Following (2000 – 2010)
During this period there have been 3 phases when the Professionals switched from hedging to trend following:
- Early 2000 to late 2001 (start of the "Tech Wreck" decline)
- Early 2003 to late 2004 (start of the 2003 – 2007 rally)
- Early 2007 to early 2009 (start of the "Sub-Prime" decline)
In each case these were the early stages of market trend moves – either down or up.
The conclusion is that in the early stages of trend moves the Professionals use the futures market to take directional positions. However, as the market trend matures the Professionals switch into hedging strategies.
