Copper - Small Speculators Are Still Overly Optimistic About Copper Prices

Not many analysts, if any, bother about the so-called small speculators. However, in my opinion, the Commitments Of Traders (COT) reports on this class of investors deliver quite important information about the state of the futures markets, for example, the copper futures market.

How do I define the so-called "small speculators"? Generally, according to the COT reports, there are three groups of investors:

• big speculators (mainly hedge funds)
• commercial traders (mainly investment banks)
• small speculators - the traders not classified as big speculators or commercial traders

I calculate a position held by these traders as:

• net position held by big speculators plus net position held by commercial traders
• then the above calculated sum has to be rewritten with the opposite sign

Let me take copper futures as an example. As of March 21, 2017:

• big speculators held a net long position of 21,670 contracts, which may be written as +21,670 contracts
• commercial traders held a net short position of  25,857 contracts, which may written as -25,857 contracts

After summing up these two figures I am arriving at minus 4,187 contracts. After changing a minus sign into a plus sign I arrive at plus 4,187 contracts - that is a net position held by small speculators.

Now, look at the chart below:

The chart shows net positions held by small  speculators in copper futures, applying the above discussed formula. Note that when small speculators are overly optimistic on copper prices (red circles) the prices of copper print local tops. It means that a position held by small speculators may be considered as a nice contrarian indicator. Practically, any position above 4 thousand contracts may be regarded as overly optimistic.

Last time the small speculators were overly optimistic was during the first week of March, when a net long position held by these traders was standing at 6,650 contracts. Since that time copper prices have retreated by around 3% but it looks like the pattern is still bearish for copper prices in the short - term (small speculators still hold quite a large net long postion of 4,187 contracts).

However, in the long-term I am bullish about copper prices so I believe that each strong correction should be regarded as a buying opportunity.