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Cocoa Report Focus #2a: Everything You Ever Wanted to Know about the COT *but were afraid to ask

Updated: May 24

Updated: May 21, 2024

In this second part of my series on essential reports for traders following the cocoa market, we will look at the #COT.

This report is a must for every #cocoamarket participant to follow because it provides crucial information for making price #forecasts. In the sections that follow, we will look at the 3 versions of the COT, How to read the COT and I will also share a key metric that I provide on my free report subscriptions (that isn't provided by most other distributors of this report).


The Commitment of Traders (COT) report comes out every Friday from the Commodity Futures and Trade Commission (#CFTC) and it reports the positions (amount of #cocoafutures owned: long or short) of all the market participants. Most importantly, these participants are divided into categories based on their type of business.

The participant categories are different based on the type of report. This report comes in 3 different flavors and we will look at each of them which will also provide some clarity as to what the categories are.

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Original (Old) COT:

The COT had ancestors in the form of annual reports going back to the 20s but by the 60s it was monthly and gradually increased in frequency until we got weekly reports in 2000. The reason for these reports was simple: people then (as now) did not trust speculators and wanted to know what they were doing.

The oft-maligned #spec is actually a very necessary and important part of the market, and actually, the COT proves this. The reason being is that there always needs to be another side of every #trade, so without the spec, natural #hedgers would not have anyone to #hedge with.

Inverse Relationship between Specs and Commercials

Even though the spec is unfairly maligned, there is a reason why we pay attention to the specs. Spec position taking often drives price action (at least in the short term).

Specs drive price action in two ways.

First, they are largely trend followers so they tend to exaggerate moves in either direction by buying strength and selling weakness.

Second, unlike commercials who are natural hedgers, specs are more aggressive in taking positions and will place large market orders. Commercials by contrast tend to be patient and place GTCs in the market to be filled when the market reaches their price.


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Supplemental COT (CIT):

The second type of COT is the Supplemental version (also called the #CIT) and in addition to commercials and non-commercials it shows the positions of index funds. The index funds are what we call "dumb money" because they do not care about the #technicals or #fundamentals of the #commodity, they are simply adding or subtracting to their positions based on their desired exposure to a basket of #commodities.

For many traders, this is the go-to version of the COT that they refer to and there are two things that traders try to glean from it. One is the "roll" and the second is the "rebalance".

The Roll

It used to be that the index funds would roll their futures contracts forward as they approached first notice day in a rather heavy-handed fashion. Traders would observe the size of the #indexfunds and try to anticipate the impact on the #calendarspreads.

However, the funds have gotten more sophisticated in how they do this and in my estimation there is not a lot of value to trying to front-run this kind of operation unless the position is very large.

The Rebalance

The other area where traders tried to outsmart the index funds is with the "rebalance". Since the index is trying to maintain a distributed basket of exposure to commodities, they rebalance their exposure every period (often quarterly).

For example if an index fund has $1m each in coffee, cocoa, sugar and cotton futures, and suddenly the cocoa futures double in value because of a drought, then now the cocoa position has gone from 25% to 40% of the total value of the portfolio. Now any cocoa price moves will have an outsized impact on the total portfolio.

To offset this imbalance, the fund will #rebalance by selling any overvalued positions and purchasing any undervalued. If the exposure is very large, then at the beginning of the quarter we could see a big price movement from buying or selling of the index funds.

However, like the roll, the index funds have gotten more sophisticated in their rebalance and varied their timing and strategies to try and limit front-running.

I have observed traders invest a lot of time and effort trying beat the index funds at this game and have not seen a lot of success. So again, I would advise that this is not something that should really be taken into consideration unless the index positions are very large.

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