"Trade Stocks & Commodities with the Insiders: Secrets of the COT Report"
Transcription of Audio Interview, November 5, 2005
Editor's Note: We have edited the interview in this transcription for clarity and readability. The original audio interview may be heard on our Ask The Expert page
JIM PUPLAVA: My guest this week is Larry Williams. He’s a hedge fund manager, and based on books in print, perhaps the most widely read futures author of all time. He is the unsurpassed winner of the Robbin’s World Cup Championship of Futures Trading, taking $10,000 to $1.1 million in less than 12 months. He has served on the Board of the National Futures Association, and twice ran for the US Senate in Montana. He has been featured in such publications as Barron's, The Wall Street Journal, Forbes, and Fortune. Mr. Williams has been one of the most widely quoted and followed advisors over the past twenty-five years. His other books published by Wiley include Long-Term Secrets to Short-Term Trading, The Right Stock at the Right Time, and Day Trade Futures Online. His new book is called Trade Stocks & Commodities with the Insiders: Secrets of the COT Report.
Larry, there’s a quote in the beginning of your book that you start out with, and it says, “warning! futures trading, stock trading, currency trading, options trading etc, involve high risk and you can lose a lot of money.� Your book starts out with this warning, but you point out none of these warnings are for brokers, financial news organizations that give us advice, who tend to be wrong and at the end of a trend. Why is that?
LARRY WILLIAMS: Oh, well, I think it’s politics. He gets money I’m certain. It’s always amazed me, especially if you go to Las Vegas, there’s no warning signs there, you’re going to lose your money if you gamble at Las Vegas. That’s all there is to it. If you stay there long enough you will lose it. And there are no government warnings there, but throughout all these warnings all over the place. But the other side of that warning, you know, if people are losing it, somebody is making it, and I’ve always looked at it that way. If I can find a place where people are losing a lot of money, like Las Vegas, well then you want to become the house. And that’s what I’ve tried to do in my career as a commodity and stock trader: be the house. [2:27]
JIM: Now, you talk about these super powers in the market. These are the people who move the charts, and most people today � I think most investors � spend a lot of time following the charts, but you’re talking about the people who have the power to move the charts. Who are they? And in your book you talk about they leave a trail. Where do you find them?
LARRY: First, let’s talk about who the group is. You’re absolutely right, I don’t think the charts move markets. I think the conditions move markets, I think large players move markets. Now, who are those large players? In the futures market � commodities � there is a group of people called hedgers, these are the people who use the commodity or produce the commodity � that would be a wheat grower or a miller as a good example � these are professional people. Now, the reality, Jim, is these markets are set up for the Commercials to transact business in. The rest of us are just speculators. We give the markets some depth and liquidity, but really the markets exist for these guys. They know a lot more than we do. So, I want to follow their action on balance. I’ve been following these guys since 1969. They’ve got a great record of usually buying and selling at the right time. So, where do you follow � how do you find this information? It’s released by the United States government. These people are so powerful that they actually have to report all their buys and sells once a week to the United States government. It’s released late Thursday night on a website called cftc.gov. That’s just the beginning though, because you still have to understand what to do with the numbers. It’s great data, but you still have to able to work with the numbers. [4:01]
JIM: Most people when they look at the financial markets today, they’re thinking of the stock market, or the bond market, but the market you’re talking about, Larry, is five times bigger than the stock and bond markets. And I wonder if you might relate the comparison of size to the two, because I think most people are unaware of this.
LARRY: That’s a good point. I think they are totally unaware, but when they stop and think about it, everybody needs wheat, and we need gold, and we need silver, and we need soybeans, and soybean oil, every single day in our life. We need crude oil, we need heating oil, we need gasoline, but you really don’t need to have a share of IBM or Microsoft. You could get by the rest of your life without having to have a share of Microsoft. And that means there is a real supply and demand ratio in these futures markets. These things are needed by people, they’re used, they’re consumed, there’s supply and demand. Whereas in the stock market the supply side is how many shares a company decides to print, and the demand is whatever the emotions of the moment are. So, we have real supply and demand factors in the futures markets. [5:05]
JIM: Commercials � these big players you’re talking about � are somewhat unique. Commercials have, for example, no limit of how much they can buy or sell versus, let’s say, an individual investor like myself. They have deep pockets, and what makes them different, as you point out, is they use the product or they produce the product, and they see the market as a business, not for speculation. I wonder about the difference between business and speculation, and if you might comment on the difference, and what gives them such an edge.
LARRY: Sure, let’s take an example of, let’s say, Pillsbury. They want flour because they’re going to make rolls. So, if the price of wheat goes down they’ll buy wheat because their actual cost of the bread dough they’re making is lower because the price of wheat is lower. If wheat goes down a little bit more the percentage of cost of that product is less because the cost of wheat is less now. So, these people really accumulate and distribute commodities, whereas what we try to do as speculators is buy the low, sell the high. That’s not their game. They go into the market to buy to take delivery so they can use the product. They’re actually taking delivery of that product. They’re using that product to make something that they’re then going to sell to the retailer or commercial market place. So, their need is different.
The other side of that is of course the producer who’s selling, and if he sees prices are higher than what it costs him to produce he’ll sell it, and if the price goes higher he’ll sell more. He’s not making his money from trading in the market, he’s making his money from selling what he’s produced, whether it’s from mining gold or wheat or whatever it happens to be. [6:42]
JIM: That’s a major difference. I think it’s hard for investors to realize this concept of how important it is because, let’s say, that if I’m selling a product for $2 in the market place, my input or cost is $1, and I know I’m going to be selling this product all year. So I buy my inputs at a buck, if it drops to 80 cents I keep buying...
LARRY: That’s a great deal for you, isn’t it?
JIM: Yeah! Because all I’m doing is expanding my profit margin.
LARRY: Absolutely. So they will buy lower. And that’s why a lot of people, when they look at the Commitment of Traders report, especially at the universities, in their mind, if the Commercials are net long they think prices should rally. If they’re net short, it means prices should decline. This is not a light switch that’s on or off. It’s all about how these people are viewing price structure itself. Are they buying at high levels, are they buying at low levels? And looking at the trend of the market, you have to think a little bit about the market place. There’s no magic number to any of these markets, but we can certainly use these inputs from the Commercials to understand when they become aggressive buyers, that’s when markets have big up moves. Or aggressive sellers � recently they became big sellers in the gold market. Well, here comes gold to the downside. Why? Most likely because the Commercials were large short sellers. [7:57]
JIM: Now, the advantage on the other hand, to an investor, is they can wait till the right time when the Commercials have been unusually bullish or bearish. And explain that as really [being] a key in terms of timing when you enter the market.
LARRY: Boy! You’ve just nailed that on the head. And so few people understand that concept: that the markets get set up by these Commercials. And they may buy a little bit early because they’re accumulating, they can’t buy everything they need in one day. We as speculators can wait, and wait, and wait, we’ll see a market that’s set up, and set up, and wait, and then when we see a short term trend change, then you can bring in your technical stuff and become a buyer, but only because the condition has been set up by these super powers of the world. [8:43]
JIM: When you look at this Commitment of Traders report, which is really where we find the trail in terms of what these guys are doing, there are 3 trading people that are reported in that report: the Commercials (Hedgers); the large traders; and the small speculators. Talk about the three of them.
LARRY: Well, first of all, the small traders of course don’t have to report. So the small traders are just what’s left after the two reporting requirements, which are large traders and the Commercials. So we know what’s left over is just the average trader in the street, if you will. The Commercials, we know, are the hedgers in the marketplace of users and producers. The large traders are deceptive. Now, when I first started doing this in the 1960s, the large traders were guys like myself: people who like to trade large amounts in the marketplace. But that’s changed, and now for the most part the large traders are trend-following commodity funds. And these funds are trend-followers, there’re not many individuals anymore � some in there, but predominantly it’s the commodity funds, and they for the most part trade as trend-traders. So if the market rallies in trend, they’ll increase buying, and buying, and buying because they like to buy new highs. So it appears that they’re wrong if we look at the total number of contracts they have. They usually have on the largest long position close to a high in the market, and their largest short position close to a low. But you have to remember: these are the funds, these are the trend followers, they’re not the trend enders of the market place. [10:12]
JIM: Now, we’ve talked about who these people are and what they do, and how to follow them. Let’s talk about this Commitment of Traders report that is � as of the previous Tuesday � released towards the end of the week. Talk about that for a minute, and what an investor should be looking for.
LARRY: Well, first of all, there’s no rush, you don’t have to get the data this instant, though it’s a week old. That bothers some people. When I first started doing this it was a month old, and we got it a month after the fact. So we really had almost a two month lag. So it isn’t [that] the market spins on a dime on this report. Not even many people know about the report, more have now I think because we’ve brought this forward over the last few years, but it’s a tool that sets up the market. So the immediacy is not as critical as, say, price itself breaking above a trend line or something like that. It’s really all about setting up. And what I like to do � we also have another figure in the market called open interest � that’s the total number of contracts that are being traded not volume like in one day, but the total number of open positions. And I like to watch this open position and see who owns this open interest. Is it Commercials, small traders, or large traders? And I think there is a world of information that’s very helpful in understanding the markets, based on who’s controlling open interest. The fellow who first taught me so much about this, Bill Meehan, always looked at open interest, but he didn’t have the insight that we have now to see who’s moving open interest: small players or good, smart money. [11:43]
JIM: I wonder if you might just explain some of these terms: open interest; reportable position, and concentration ratios because all three of those are significant in understanding the COT.
LARRY: Open interest is the total number of positions that are open at any given time. Unlike stocks where we have a float � how many stocks are outstanding � we can increase the numbers of buyers and sellers in the market place. The easiest way, I think, for the average person to think about open interest is to forget the word open and just think of the interest. It shows how much interest is in the market, and that’s actually a really good indicator if you just look at an oscillator of open interest. It’s really fascinating what you find. At low levels of open interest, in other words, nobody is interested in the market � usually associated with major buys. High levels of open interest is usually associated with major tops. That’s one way I like to use that indicator.
There are reportable positions as you mentioned. There are certain levels that the government says if you own this much of a commodity you have to report, generally speaking it’s 100 contracts. If you have 100 contracts or more, you have to report your ownership of those contracts. And the government wants that, and it’s one of the few things I approve of the government doing, being such a libertarian as I am, is that it does make certain that we have an idea if, say Russia or somebody is coming in and controlling the market, because we’ve seen markets get squeezed where say a George Soros attacks a currency as he did in Thailand and just destroys an economy. So it’s probably a pretty good idea that we have an idea if any one or two players are going to totally dominate a market. [13:22]
JIM: One of the common assumptions that are made by some investors [is] if some Commercials go net long prices will rally, why is that a fallacy?
LARRY: Again they accumulate and they distribute, and they’ll start buying early. I think this is one of the keys to the Commitment of Traders report, [there] is no absolute number to their net long or net short position. I guess I’m going to need to explain that, huh? They have a short position and they have a long position, so we simply extract the longs from the shorts to get the net position. What I’ve found is these guys have about a half year, six month time span, of what they’re doing. So I like to look at their net position versus where it’s been over the last six months. They may actually be net short, but they’re less net short, if you will, now than at any other time during the last six months. Now, if that’s true that tends to be very bullish. And they really seem to operate on about a six month basis. So it’s relative to the last six months. Have they been aggressive buyers or aggressive sellers? I think that’s what sets up the best buys and sells. Now, it didn’t used to be that way, in the 60s and 70s the window � the timeframe � was wider, but it means in volatile, up, down, back forth markets they’re on a six month basis now. [14:40]
JIM: In your book you show, for example, wheat prices versus long and shorts and there is some significance to the charts you show. Why don’t you take us through that?The short positions doesn’t necessarily mean a decline and a net long for the Commercials [means] eventually the rally is down the road.
LARRY: Usually [it] hits eventually down the road. Now, the Commercials can be wrong, some of them make errors, just like there’s no perfect business, nobody plays any business perfectly, but generally speaking when their net position gets excessively long that is a low. But here’s an even easier way of doing it I’ve found. If you find a market that is in a significant up trend, then the Commercials become buyers, that’s very unusual: Commercials like to buy low prices. As we talked about earlier in the show, it has more money in their product. So, if you think about it, they are buying at high prices, it means they’re frightened, they’re scared, they’re afraid prices are going to go higher, because that’s not their normal buying posture. So the best Commitment of Traders reports I’ve found are an up trending market and these guys become buyers at high prices. A good example would be the S&P market. The S&P had a big up trend a year ago � October, 2004 � Commercials were really heavy buyers and that was the low point in the S&P market. So I like to look at the trend of a market and see how these guys are doing in overall up trend. Gold was in an up trend � in a pretty good-sized up trend � the last couple of years, and the Commercials were buyers in July of this year. They were buyers in June of 2005 as well. Great buy points in a market, but what really demarked that from just any COT large position [was] that market was in an up trend. [16:28]
JIM: This is something that I think, once again, bringing it back to who these people are, you could have a market rally when they are selling product they own. For example, let’s say I’m a farmer and the market begins to rally and I know that at $3.50 for a bushel of wheat I have profit. If wheat goes to $3.80 or $4.20, I may continue to sell because all I’m doing is locking in profits for myself, so...
LARRY: Yes, that’s what the average speculator doesn’t understand. They think that that means you’re going to lose money because you sold it here as a Commercial. But you didn’t. You produced that wheat for $1.50/bushel, whatever, and you see wheat at $3.00/bushel, you’re making money on it, you’re selling it. So, it’ll go in the sell-ledger, if you will, but that doesn’t mean you expect the market to go down, it means, you could go home and say, “hey, Mama, I made some money, we sold our wheat at a profit this year.� So, it doesn’t mean you’re negative on the market as a producer, it means you’re really happy you sold it and made some money. It’s just like if you had a store and you sold sweaters and somebody came in and said, “I’ll give you $110 for that sweater,� that you paid $50 for, you’re going to sell it. It doesn’t mean you think it’s a bad sweater, it means you made some money. [17:40]
JIM: Another thing that’s important here when you look at the reports that you cover: the key observation is it’s the extremes, rather than the crossover that matters most. Look for extreme levels of, for example, bullishness or bearishness to help spot tops and bottoms.
LARRY: I would call that my football field analogy. If you think about a football field, in the middle of the field all you’ll find are mud and blood � and I guess drugs in these days in football � but that’s not where the scores are made. The scores are made in the end zones, and the end zones are the extremes of the field. So I like to focus on where the money’s made: the touchdown area. And it’s really interesting if you bring in technical analysis to this analogy. The play in football that scores the most is the quarterback sneak, that’s because it’s usually run from the one yard line. But if you run that from say the 50 yard line it doesn’t score much at all. It’s probably never scored, I don’t know. But you can’t take a technical play � a quarterback sneak � and use it without understanding the context of where to use it. If you’re close to the end zone, then you can use a trend change, if you’re in the middle of the field with the mud and the blood who knows if a technical thing will work. That’s the importance I think of going to these extreme bullish or bearish levels, and then you can bring in the technical analysis playbook of buy and sell signals. [19:03]
JIM: So, in summary, when you see these multi-year high buying, it usually means a bull market; just as a multi-year low net selling could translate into a bear market. So you’re talking about extremes on both ends.
LARRY: I am. And then of course when you find a market that is in a nice, large up trend, and you can see that the Commercials are doing what they usually don’t do � buying some weakness in an up trend � that’s extremely bullish. A good example going on is right now, and it’s a real battle in the marketplace. Crude oil and heating oil have been in big up trends and the Commercials, about 4 weeks ago, became pretty heavy buyers in this marketplace, which would suggest we’re going to see another up move in the energy market. Probably a couple, 3 month, move in the energy market because the Commercials are buyers and they’re buyers at high prices. [19:51]
JIM: In your book you talk about putting this into something [where] you can get additional analysis and give you an understanding in terms of buying. You construct a COT index � + 80 buy rally, +20 decline � I wonder if you might talk about that for a minute as a tool.
LARRY: Sure. There’s a couple of things. I like to, again, look at the net position at this week’s reading as a percentage of the range of the readings over the last six months. Let’s say over the last six months the high was 100 and the low was 20, so that’s a spread of 80, and the current reading is 60. So I would take the difference between the low and this week’s reading, and divide that by the total range of the last six months to give me a percentage basis of where this week is, versus the last six month’s reading. So that allows me to put all of this Commitment of Traders report in an absolute, finite, percentage index that is then equal across time. I can go back and look at 1973, or 83, or 93, and see on a relative basis where were we. That way I have something I can analyze statistically. [19:59]
JIM: The other thing you also look at in terms of not only what their long and short positions are but you also relate that to open interest. Talk about these relationships that matter between long and short positions by the various players, and that relation to open interest.
LARRY: I think the big thing there is to see who is controlling open interest. At times, the funds will have the majority of the open interest in the market. They will have more long positions than the Commercials. What I like to see is a market that has been declining and open interest has been declining, in other words, on balance nobody is interested in the market, but as that happens, what you’ll see � not often � is suddenly, for two or three weeks, the Commercials will start increasing their long positions. So, while everybody else is getting out of the market, the Commercials are actually buying. So you see open interest coming down � so a slip in open interest and you say, “well, nobody’s interested in this� � but if we microscopically inspect open interest we’ll see actually what’s happening is that what’s increasing, or causing the open interest to even be there, is the Commercials are coming in buying. It looks like a bubble on a chart, you have Commercials coming up and open interest going down. It sets up some great buy points.
JIM: This is a real key too in terms of analyzing these markets. Normally, when you see open interest in any kind of contract � oil, gold, or whatever � and it’s at an all time high, that’s probably a turning point, and you’ll probably start seeing the Commercials getting out. Just as, conversely, you described a market starts drifting down, the open interest starts to contract, hardly any trades in that area, this is almost the great entry point that you’re looking for.
LARRY: It is. I like to back it up with a couple of things. I like to see if I’m undervalued or overvalued in the market. I like to look at the seasonal tendency. I like to look at what the newsletters, and what the brokerage firms are saying. And my preference if I want to be a buyer is to see about 80% of the brokerage firms and newsletters bearish on the market, because these guys are usually wrong at the turning point. So I like to see very few of them bullish. The ideal scenario, to me, would be to see a lot of Commercial buying, a lot of professional, or a lot public bearishness � newsletters’, brokerage firms’ bearishness � and then it’s time to get aboard the market. [23:18]
JIM: One of the keys, once again, [with] open interest is when you look at a change to open interest � open interest is rising � is figuring out who is really moving it. In other words, if the traders, trend followers, or small investors are really what’s moving it, that’s not as bullish for you, would it be?
LARRY: That’s correct. In fact, one of the things I was first taught about open interest by Bill Meehan, who has kind of just helped me so much � he’ll set off the Campbell brothers who have put together the largest commodity trend following management company in the world, I think they have more money under management than anybody � and what Bill always said is the Commercials account for about 60% of open interest. So what he liked is a market that’s in a down trend and goes sideways. If open interest increases it probably means the Commercials are increasing their short position and we should expect the market to break more to the down side. Commercials tend to do most of the selling in the market place, so usually, if open interest expands, it means the Commercials are probably selling. And in a down trend, Bill and I both made a lot of money trading on [this] pattern. [24:23]
JIM: Larry, putting this altogether, talk about Commercial’s high-low open interest, and how you put this into...in other words, as you start looking at making a move, there are a certain number of sequences or indicators that all have to give you sort of the go ahead, and I wonder if you could draw all of this together in terms of how you use this in ways of playing the market.
LARRY: Jim, let’s try that. There’s several things I look at. The Commercials is the basis point. What are these large super powers doing? I then like to look at a few other things, I like to see if the market is over valued, or under valued. I don’t mean over bought or over sold. But we can actually measure value of a commodity. I want to know if it’s over valued or under valued. So, if I see the Commercials are buying, the market’s under valued. I then turn my attention to the newsletters, the brokerage firms. What are they saying? Most of the time, the newsletters � the advisory services � are just dead wrong. I’ll never forget, before Enron collapsed � the week before it collapsed � 97% of the people we polled � newsletters � were saying buy Enron. At the all time high in Microsoft, 98% of the newsletters were saying buy Microsoft. So, I like to see this juxtaposition of the public newsletters etc, saying, “buy it!,� and at the same time, the Commercials are saying, “sell it!,� or vice versa. If the Commercials are heavy buyers and the newsletters are saying, “Aww, you don’t want to buy this stock, you want to sell it� � or commodity � that’s a beautiful, psychological set up. Then I look for valuation. Seasonal tendency is usually the time of year this market rallies. Those are the conditions. Then I can go into a short term, looking for some kind of a trend change � very short term trend change in the market � it could be a moving average, or a trend line, or a whole variety of things, but that’s really how I trade for what I call my set up trades: trades that usually last for anywhere from six days to 25 to 30 days. [26:12]
JIM: And the other thing about what you do, and I think this is important to emphasize, if you’re going to get into this market, and that is money management. What does an investor need to know about this, because obviously when you’re going into the futures, you buy a futures contract, you’re on margin, you’ve got to have good money management skills, control your emotions, and be professional about this.
LARRY: You really have to have that. It’s interesting, I was in Chicago yesterday talking to one of the heads of one of the largest brokerage firms in the world, and that was our main topic of conversation, about all of the people who have lost so much money, and it really wasn’t that they were wrong on the market, Jim, it was that their bet was too big. So, I think the best rule of money management is make small bets. You can have a big move on a small bet and make a lot of money. Generally speaking, I think for every $10,000 a person should trade one contract and one commodity. If you do that you’re not going to blow up your bankroll, or if you do it’ll take a long time to do it. But most people like to bet big. There is an adage in Las Vegas, that to win big you have to bet big. Well, that’s how they get your money. You don’t ever want to bet big, you want to bet small � small bets � you never want to put all your money in one trade. I’ve done it, I’ve been there, done that. It’s fun on the upside, it’s a disaster on the downside. [27:28]
JIM: In addition to analyzing fundamentally what’s going on in the commodity markets, the Commitment of Traders, you have a section in your book on charts. Talk about the charts and the meaning and how they become supplemental tools to your overall analysis on entry points and exit points.
LARRY: I think the second, or maybe the third, thing you look at, I try to find these unique set ups in the market. A situation says we should have an up move in the market, then I go and look for when to get aboard. I think you can do that with price structure. As I see it, really Jim, prices move say from $10 to $30 because of the fundamental conditions, but along the way they get there because of the emotions of the marketplace, the news � some news is bogus news, some is planted news, some news is correct news � but it’s the emotions of the market that cause these price swings along the way. So I need to understand those price swings, or if you will, really the trend of the marketplace, and really to me it’s about trend change. And a good example would be, let’s say the market has a disastrous down day, and the very next day it immediately takes out the high of that disastrous down day, that’s very unusual, it shouldn’t have happened. So, that would most likely give me a buy signal. In other words, I look for lack of follow through. I look for a reversal of what shouldn’t have taken place to take place, and that to me suggests the market has finally flushed out the sellers and is now going to rally to the upside. [28:56]
JIM: We’ve talked about understanding the Commitment of Traders, the different key points, who the players are and what’s significant and what isn’t. We’ve talked a little bit about these charts. I wonder, Larry, if you might just take us through 3 examples, let’s say, using the stock market, the gold market, and perhaps the bond market. We’re pretty much going to cover some major markets in that example.
LARRY: Let’s start with Treasury Bonds. That’s a market I like to trade, one of my favorites. I’ve been trading them for quite a while. And I’ll talk about it right now so listeners will actually be able to know in the future how good or bad this stuff was. About a week and a half ago, the Commercials � the large interests � became very, very heavy buyers in this marketplace, and my Commitment of Traders report stuff wanted to start buying a week ago Friday, that would have been October 28th. So now it’s time to look for a rally in this marketplace. Any trend change to the upside, you want to be a buyer. Additionally, I see there’s a strong seasonal tendency for this market to rally, a couple of weeks ago 91% of the advisory letters said sell bonds, they weren’t saying buy bonds. So, that to me is a set up in the market. It’s under valued. So at this point I will simply take any buy signals on this bond market. Contrast that, if you will, to a few weeks ago on September 2nd of 2005, the newsletters had 87% of them saying you should buy bonds, and bonds have been down 8 weeks in a row. At the same time, the Commercials net short position was about 90% short, and down comes the price of bonds. So, markets respond to those conditions. There’s one good example.
Gold is an example where the Commercials got negative recently in this market. They moved to an almost fully 100% short position on October 7th. At that same time, the advisory newsletters were 84% bullish or mildly bullish, suggesting the market should decline, and usually by October 15th the price of gold declines. Well, lo and behold, the price of gold got whacked in the marketplace, not because of some mystical thing but because the Commercials were on the sell side of the marketplace.
The last one to look at is really fascinating because so many people say this doesn’t work in the Commitment of Traders report in the stock market. But we see the market has been in a nice rally the last 3 weeks. Three weeks ago 87% of the Commercial action was on the buy side, they were heavy buyers. And the guys that write the newsletters only 17% of them wanted you to buy stocks 3 weeks ago, and the S&P and Dow had a great big rally. They’re up again today real well. At the same time the market has a seasonal tendency to rally. So, that’s kind of how I put the synthesis of getting all this stuff together, and not just looking at any one indicator. I think it’s like being a good cook, you have to have a couple of things to make a nice cake, or stew, or whatever you’re cooking up. [31:49]
JIM: In your years of trading the markets, and you’ve been doing this successfully for decades now, you’ve had some great mentors, you’ve had great experiences, you’ve learned from those experiences, and have had great success as a result. Larry, what would you say, if you were to boil it down, is the single most important thing you’ve learned as a trader? And if you could only just have that one single lesson that you’ve learned.
LARRY: Bet small.
JIM: Bet small.
LARRY: Because you’re going to be wrong in this business. I’m not right all of the time. Nobody is right all of the time. It’s like Russian Roulette. If you play Russian Roulette, eventually that bullet is going to come up, and you’re going to get killed with it. And if you’re betting large, eventually you’ll have a losing trade, and you will lose all your money or else a huge amount of your money. So, you just know this is not a business that’s easy. It’s hard. There is risk. It means you’ve got to bet small so you can stay in the game, and then the wins will come, but you’ve got to control your losses. [32:49]
JIM: It seems too, just to throw this out, even the Commercials who are in this business, who either produce this stuff, or use this stuff, how do you forecast a Katrina, or a Rita, or an earthquake in San Francisco, or Northridge, or something that happens in the Middle East, or 9/11? These are the kinds of things that all of a sudden appear out of nowhere and we know, Larry, if you’re looking at a bell shaped curve, those fat tails, they’re out there.
LARRY: The randomness. There’s a huge amount of randomness in the stock market and commodity markets, and that’s why you bet small because at any given time, while I may have a market that’s perfectly set up, Greenspan says something and literally in 3 or 4 words can change everybody’s � all the investors, the Commercials’ the public’s � view of the marketplace. Because the markets are uncontrolled, there’s such a high degree of randomness in them, that’s why you’ve got to bet small, because you’re absolutely right. I remember when President Eisenhower had his heart attack and the market just crashed. It came back a little, well, it did come back in almost a couple of days. The same thing in the Kennedy assassination, the market broke real bad. Nobody knew that was going to happen, but a lot of money was lost. The crash of 1987 was a 3 or 4 day event, but it wiped out billions and billions of dollars. So, you have to have your protection against those excess moves in the marketplace that I think are totally unpredictable. And like you said, I’ve been doing this for 45 years. I’ve seen everybody try to predict the market and nobody � and I’ll underscore, nobody � has ever been able to correctly predict the market for very long. Maybe they’ll get lucky. I’ve gotten lucky a couple of times � called a high and a low � but can I do it successfully all the time? Nobody does it. Nobody’s ever done it. So you’re going to have losses. You got to protect yourself from that. [34:40]
JIM: You know, your book, Larry, on analyzing the Commitment of Traders provides investors with a lot of insight. One of the things � I’m just curious � sometime you see these black box programs that come along, someone invents a software package or a new technical indicator and all of a sudden everybody starts using it, and it’s no longer useful. The analysis that you’ve provided of the Commitment of Traders makes so much business sense because that’s what it is for the Commercials: it’s a business, it’s not speculation. Why don’t you think more people use this to their advantage to trade successfully? In other words, if I was a large commodity trading fund, which as you highlight, these guys have mainly become trend followers, chart followers, I � as I read your book � would be more interested in the guys who are big enough to create the charts, rather than following the charts.
LARRY: I think we’re seeing more interest in that. Certainly this book, which is the first ever book in the history of the world on the subject, I think is opening eyes to it. Most people simply haven’t known it’s there, and/or they haven’t known how to use it. You know I am in touch � I live in St. Croix in the Virgin Islands � and there are a lot of funds there for a lot of reasons � there’s billions and billions of dollars on a little tiny island � and most of these guys are trend followers, they’re just concerned about the price in the marketplace. And John Henry, the guy who ended up owning the Boston Red Sox: trend follower. But these guys have had a real tough couple of last 3 or 4 years, so now they’re coming to me and saying, “well, hey, explain this to me, because we want to be more than trend followers, we have to be,� because trend following has its ups and it has some really big downs to it in terms of time. I think you’ll find more people � and I would yet point out the Campbell brothers, who as I understand, that are using non-price based [data] � which are opposite of me means Commitment of Trader data � in their analysis of the markets. And they’ve had a real good run in the market here. I think we’ll see more and more emphasis on it. [36:39]
JIM: Larry, finally as we close, tell people about your website, give out the website, and what would they find if they went there?
LARRY: I appreciate that. The website is www.ireallytrade.com, because unlike a lot of people that write books I really do trade. So, it’s ireallytrade.com and you’ll see a couple of things: a lot of free stuff there, and I don’t need to make money from websites. There’s a great section there on seasonal tendencies in the market, so you’ll be able to see what all of the seasonal tendencies are in the major markets. And once a week I do a little mini seminar where I talk about a market, I think it’s set up to be long or short, it’s really cool you can see the chart, you can hear my voice talk about it, and of course I refer a lot to the Commitment of Traders report on that, and I think it’s called the Larry Live Learning Center, or something like that, but if you click through I think you’ll find it. A little report, the most current one is for subscribers, but the one that’s a week old everybody can look at it for free. So there’s a lot of educational stuff on there and I think most people would probably enjoy it, and it’s free. [37:38]
JIM: I can tell you, if you’re listening to this broadcast, as you know every week we talk about the Commitment of Traders, but if you’re looking for a book that will help you to understand what the Commitment of Traders are, and how you can use this, I’d highly recommend Larry’s book. It’s called Trade Stocks & Commodities with the Insiders: Secrets of the COT Report.
And Larry, I want to thank you for joining us on the Financial Sense Newshour. And I just want to let our listeners know that we’re going turn this broadcast into a transcript, and Larry’s going to be nice enough to send us 3 charts, so you can sort of get an idea of how all of this is put together.
Larry, thanks so much for joining us on the program.
LARRY: Well, thanks to you very much, Jim, I really appreciate it. It’s a wonderful opportunity and I thank you and hope that your listeners will learn a little bit today
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