New! Complimentary Weekly Report

NEW! Complimentary Weekly Report

Introducing the Strategic Trade Index (STI), a new and innovative report from Industry veteran Sterling J. Smith. This dynamic trading tool is easy-to-use, and was developed with the commitment to provide up-to-date market information to all types of traders. See for yourself the power of this tool, sign up for this COMPLIMENTARY weekly report today!

While some traders view the COT (commitments of traders) reports as a bible, still others view it as old data, and of very little use. A lot of this depends on one's time frame and trading perspective. In today's herd-like mentality where all the markets seem to be taking their cue from one market, COT analysis needs to change some to deal with the new circumstances.

Being a fan and follower of COT data, I have devoted plenty of time and research to this subject, and have changed my approach to the reports and this is how I developed my new product -- the Strategic Trader's Index.

These COT reports are issued every Friday by the CFTC and come in two basic types: futures only and futures plus options.

For my purposes, I stick with the futures plus options version. Over the years, much has been written about these reports. Some hold the view that options are only traded by small accounts and small investors; my experience here at the Chicago Board of Trade has largely dispelled that myth. Options are used by institutions, large traders and commercial entities with nearly the same regularity as futures contracts. This allows the inclusion of the professional option sellers into the analysis.

As both index and traditional funds increased their participation in the market, things changed and trade became very one sided, and the "mostly everything up/mostly everything down" phenomenon developed. This made normal analysis in the market place more and more difficult, especially as the market place became more hostile.

The word on the street is "de-leveraging". This in part means fund participation is winding down, and will become less of a factor going forward. What I further believe this means is that, at some point, we will see decoupling of the markets. In other words, markets will begin to trade on their own merits - as opposed to this polarized atmosphere that we are currently enduring in the futures markets.

If my appraisal of the situation is correct, more traditional forms of analysis like COT will come back into vogue in a big way. The silver lining in all of this market mayhem we are currently living through is that we will have better markets to trade, and perhaps a little easier to analyze.

In dealing with the market environment currently (which, by the way, is no easy task), managing and understand your risk is more important than ever. With trade being so one way or the other, you need to be aware readily of how your positions are correlating and make sure you don't get too overloaded on one side of which ever way the wind blows. I have also been recommending smaller than normal positions to help deal with the way things are slamming around.

We are right now in the unwinding process after the real estate bubble popped -- along with, in many ways, the commodity prices bubble. There is little doubt out there that we are heading into a recession right now, and we could be looking at least at a couple of quarters of economic contraction which most likely will be followed be several quarters of economic stagnation.

It is my opinion that economic growth of meaningful manner will not occur until the foreclosure situation is brought under control and comes down to the 10-year moving average -- as, when this occurs, we should see housing prices stabilize. However, there will be a large inventory to be absorbed and it may be quite a while before we begin to see housing prices move up in a broad way.

All of this chaos does not mean that we will not have many opportunities in the futures markets moving forward. The markets are very durable and there are many ways to approach them. However, the broad-based buying of all commodities is probably not the approach going forward. Economic slowdown means lower demand and that leads to lower prices which will lead to decoupling which, in turn, will mean that each market will need to be analyzed on it own merits.

Another aspect of the deleveraging I think we will begin to see is an eventual drop in the insane levels of volatility we are currently experiencing, leading to a development of relative market stabilization. This may very well mean that option selling strategies like selling strangles may once again become an effective way to extract gains from the market.

An economic slowdown does not have to mean a slowdown in trading opportunities. However, the days of easy credit, easy real estate markets, easy commodities markets and easy stock markets is for all practical purposes over for the foreseeable future. What this does mean is that we have to be more informed, and much cleverer in approaches to what is happening.

It has been theorized that it isn't the strongest creature that survives, but the one which adapts to its conditions the best. There will be many, many opportunities for those who learn to adapt to the post leveraged world.

If you are new to trading, or are trying to learn to adapt to the new environment, now is the perfect time to get your ducks in a row, to get your homework done and to take advantage of the many opportunities that await you.

REPRODUCTION OR REBROADCAST OF ANY PORTION OF THIS INFORMATION IS STRICTLY PROHIBITED WITHOUT THE WRITTEN PERMISSION OF FUTURESONE AND STERLING J SMITH. THE INFORMATION REFLECTED HEREIN IS DERIVED FROM SOURCES BELIEVED TO BE RELIABLE; HOWEVER, THIS INFORMATION IS NOT ASSURED AS TO ITS ACCURACY OR COMPLETENESS. OPINIONS EXPRESSED ARE SUBJECT TO CHANGE WITHOUT NOTICE. THIS MATERIAL AND ANY VIEW EXPRESSED HEREIN ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED IN ANY WAY AS AN INDUCEMENT TO BUY OR SELL COMMODITY FUTURES OR OPTIONS CONTRACTS. FUTURESONE AND ITS OFFICERS, DIRECTORS, EMPLOYEES AND AFFILIATES MAY TAKE POSITIONS FOR THEIR OWN ACCOUNTS IN CONTRACTS REFERRED TO HEREIN. TRADING FUTURES INVOLVES RISK OF LOSS. DO NOT DUPLICATE.

NEW! Complimentary Weekly Report

Introducing the Strategic Trade Index (STI), a new and innovative report from Industry veteran Sterling J. Smith. This dynamic trading tool is easy-to-use, and was developed with the commitment to provide up-to-date market information to all types of traders. See for yourself the power of this tool, sign up for this COMPLIMENTARY weekly report today!