Who is buying the pullback in stocks?

The Commitments of Traders report for Feb. 20 (released Feb. 23, 2007) showed a the “smart money” commercials holding preponderance of short contracts compared to their long positions. This pattern was very similar to the one that signaled the March 2000 market top. This signal got a prompt reaction as Tuesday, Feb. 27 was big down day. Conveniently, trader positions for the next CoT report were tallied on Tuesday’s close–convenient because if provided a glimpse of the trader reactions to the downturn.

What we see (in the report released Friday, March 2) is that both large trader groups, commercials and hedge funds, were net sellers as of Tuesday’s close. The only group who were net buyers were the small trader category. What was a profitable reaction during the long bull run is very likely to be a devastating tactic during the bear phase.

Dow futures posted a confirming signal as the smart money held a record net short position ahead of the downturn. Once again, small traders were the only net buyers for the week (ending Tuesday).