dianges. jiler concludes that the large traders have the best forecasting record, with the large hedger better than the large speculator. The small traders were notably worse. Guidelines were stated as:

The most bullish configuration would show large hedgers heavily net long more than normal, large speculators clearly net long, small traders heavily net short more than seasonal. The shades of bullishness are varied all the wav to the most bearish configuration, whidi would have these groups in opposite positionslarge hedgers heavily net short, and so forth. There are two caution flags when analyzing deviations from normal. Be -warjof positions that are more than -40° fran their long-term average and disregard deviations of less than 5%.

11 Jersey lerrcE QtyNJlSe*

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NEPWT«>LE PDSITIIMG

(MM LOW on BMWT .( AND »0<1 C0»«I»c1*L TOTAL

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« on LESS TRADERS LESS mMCRS

FIGURE 14-3 jilers normal trader positions.

This result is confirmed by Curtis Arnold/ who compared positions of large and small speculators with commercials for a 1-year period spanning 1983-1984. Arnold shows (Figure 14-4) that the position of commercials and small speculators tend to be opposite, with the commercials positioned to profit fran the subsequent price move.

Over a wider group of 36 maricets from 1983 to 1989, a study conducted by Bullish Review showed that a large weighting of long or short positions held by commercial hedgers correctly forecasts sigoificant maricet moves 67°o of the time. In refrospect it seems likely that a large commercial trader, banlc investment house, or other institution would take a longer-term view of the market, setting positions to take advantage, or avoid the ride of a potential price move. Because of their size, institutions are not likely to change their positions on minor maricel variations. Analjsts should be aware, however, that a qualified hedger, one that is registered with the CFTC to set large positions due to their ongoing risk of holding physicals, may also take large speculative positions under the same umbrella.

OPINION AND CONTRARY OPINION

Maricet sentiment seems to be a driving force in the market, yet it is very difficult to measure and even harder to deliver those results in a timely fadiion. For that reason, analjsts often substitute a combination of volume, open interest and price for true sentiment hoping that the recorded actions of traders closely relate to what they are thinlchig Opinion, however, weighs on the marketplace and governs future actions in the same way the high volume may not move prices today, but provides a platform for a potentially large price move.

Public opinion is also fast to change. A prolonged bull market in stoclcs may show a gradual increase in bullish sentiment however, the collapse of a bank an increase in rates by the Cenfral Banlc a sharp downtum in the economy of another region, or a single sharp drop in the stock index could quickly change the publics opinion. Oddly enough, sentiment indicators are most popular for trading in the direction opposite to the unified public opinion

Contrary Opinion

The contrarian lies somewhere between the fundamentalist and the technician, basing actions on the behavior of crowds, in this case the maiket participants. The contrarian sees the end of a bull maifcet occurring when everyone is bullish. Once all long positions have been set there is diminishing influence by the bulls; moreover, opportunities ahvajs lie in the reverse direction from crowd thinfcing.

Contrarj opinion alone is not meant to signal a new entry into a position; it only identifies situations that qualify It lacfcs the timing. It is more of a filter than a trading sjstem, a means of avoiding risfc and finding an opportunity. Consider the pattems that appear in every prolonged bull or bear move. First, there is a place where the direction is generally accepted as the major trend. After that, fraders wait for a reversal to enter in the direction of the trend at a more favorable price. These price corrections become smaller or even disappear when everyone wants to buy a lower open or sell a hier open until you have the ultimate blow-off and a reversal of a major bull or bear maifcet. The djnamic end of a prolonged move is generally credited to the entrance of the public; when the masses are unanimously convinced that prices are going higher, who is left to buj?

The other important ingredient for a contrarian is that all the facts caimot be fcnown. The widely accepted belief that "prices will go higher" must be based on presumptions; if the final figures were out, the maifcet would adjust to the proper level. This idea is older than The Art of Confrary Thinfcing. In 1930, Schabacfcer discussed cashing out of a long position if the maifcet rallied on news that was general rather than specific.

The practical application of the theory of contrarj opinion is the Bullish Consensus and the Maifcet Sentiment Index, created fran a poll of maifcet letters prepared by the research departments of brofcerage firms and professional advisors, in the Bullish Consensus (see Figure 14-5), these opinions are weighted according to the estimated circulation of these letters until a final index value is ddermined.

Bullish Consensus =

Sum of (each source x its relative weight x opinion) Sum of (each source x its relative weight x bullish opinion)

The value of the Bullish Consensus will range fran 0 to 100° o, indicating an increasingly bulhsh attitude. Because of the bullish tendency of the novice frader, and the long-term upward bias of the stock maifcet, the neufral consensus point is 55>o. The normal range is considered from 30 to 80°o, although each maifcet must be individuallj

evaluated.

Hadadj also devised a simple mathematical way of displajing the bullishness of the maifcet. Using the formula below, he shows that when 80° of traders are bullish, then the average buyer will hold only 1/4 the number of contracts as the average seller. This leads to a precipitous drop in prices once a decline begins

, 20% TxN, 1

where 7= the number of traders in the market

W, = average number of contracts held by a single bullish trader , = average number of contracts held by a single bearish trader