Commitments of Traders (COT)

The Commitments of Traders (COT) is an important report issued by the CFTC that shows the aggregated long and short positions in the futures market regarding all major asset classes including Forex currency pairs. The COT is considered an important indicator for analyzing market sentiment and future market conditions, especially as concerns the positions of non-commercial traders.

What is the COT (Commitments of Traders (COT) Report?

The Commitments of Traders or COT is a weekly report which measures total holdings of commercial and non-commercial participants in the US futures market. The COT report was firstly issued in 1962 incorporating 13 popular agricultural commodities. Originally the report was released on a monthly basis bust starting from the year 2000 it is released on a weekly basis. The COT report is available for all actively traded Futures contracts such is stock indices, interest rates, and currencies.

■ The Commitments of Traders includes a breakdown of the total futures positions of 3 different market participants:

(1) Non-Commercial traders / large speculators

(2) Commercial Forex traders / hedgers

(3) Small speculators (too small to be reported)

■ There are COT reports for many different asset classes including:

(a) Stock Futures (equity investors)

(b) Commodity Futures (precious metals, energy, etc)

(c) Currency Futures (including US Dollar against Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, Australian Dollar, Mexican Peso, Russian Ruble)

Read more: Commitments of Traders Report (CFTC)

Major Methods for Investment Valuation

Being able to evaluate a company's true value is very important in making profitable stock-market investment decisions. In this article, the most important evaluating methods are investigated. Here are the five most important evaluating methods:

1. Revenue Valuation

2. Earnings Valuation

3. Cash-Flow Valuation

4. Equity Valuation

5. Empirical-based Valuation

1) Revenue-Based Valuations (reliability 4/10)

In general, the total revenue of a company is generated by selling goods and services. The high revenue of a company indicates a strong competitive position. If you want to compare the revenue of a company to its market value you may use the Price / Sales ratio.

P/S Ratio = Share Price / Sales per Share (annual sales)

Depending on the industry and the company’s growth rate Price to Sales ratio may take values from 0.2 to 10 or even 50. Price to Sales at 0.2 is common for technology stocks that spend heavily on research. On the other hand Price to Sales 50 can be traced to industries with very low growth rates and historically low net profit margins. This method of evaluating stocks should be used mainly for newcomers in high-growth industries.

Read more: Investment Valuation Methods

Using Fundamental Analysis

Fundamental analysis is a very reliable method of investing in every financial asset class. Fundamental analysts focus on information and macroeconomic factors that are affecting the true value of financial security. This information may include both internal and external factors as mentioned below.

The Goals of Fundamental Analysis

The main goal of a fundamentalist is to trace and trade financial securities that are priced below their fair market value. Fundamental analysis is focusing on estimating the fair value of targeted financial security. Another important task for a fundamentalist is to identify and measure the potential risk of each investment decision. Risk identification is essential for managing your portfolio in an efficient and effective way. These are the main goals of fundamental analysis:

(1) Determine Fair Value of security (profit potential estimation)
(2) Identify and measure risk incorporated (loss potential estimation)

Fundamentals are based on internal and external factors affecting investment. For example, if you buy a US stock you must be aware of the company’s balance sheet but also be aware of US economic figures and especially about the corresponding industry figures.

Read more: Basics of Fundamental Analysis

TEN (10) SOURCES OF INVESTMENT RISK

Portfolio risk may adversely affect future cash-flows of an investment and even lead to a total loss of the initial capital. There are two major categories and ten individual sources of investment risk.

Investment risk is divided into two major categories: systematic risk and non-systematic risk as described in the (I) section.

(I) General Categories of Risk Separated by their Fundamental Nature

In order to deal with the investment risk first, we must identify its origin. In that way, we distinguish risk into two general categories: systematic and non-systematic risk. Systematic risk is unpredictable, and therefore, it can not be identified and managed. This category includes risk deriving from events in the overall macroeconomic environment. The worst-case scenarios include war and the nationalization of local companies by the force of state law.

In contrast, non-systematic risk can be anticipated through the implementation of a series of risk diversification techniques. The non-systematic risk can be mainly managed through a process called diversification of risk. The concept of that technique can be captured in the phrase "Do not put all your eggs in one basket". Risk diversification procedures are extremely important in every investment portfolio -especially to those investment portfolios heavily exposed to financial securities like corporate bonds and stock equities.

Read more: investment Risks