On the predictive role of large futures trades for S&P500 index returns: An analysis of COT data as an informative trading signal

• We examine the role of large institutional futures trades in shaping S&P500 index returns.
• Commercial firms’ net positioning level is positively correlated with future index returns in the short-run.
• Structural breaks impact on the relationship between net traders’ positioning measures and future index returns.
• The COT-based sentiment index is not stable across time.
• COT-based trading signals are not reliable/profitable.

This study examines the information role of large S&P500 futures trades (commercial, noncommercial, dealers, asset managers, and hedge funds) in shaping index returns. Using consolidated data across both standard and E-mini futures contracts, we find that commercial firms’ net trading level appears positively correlated with future index returns but the relationship is not stable across time. Based on more recent data, amongst specialist traders, hedge funds appear superior in terms of access to information and/or trading ability but this advantage is only preserved at high frequency. Therefore, the current weekly Commitment of Traders (COT) report – published with a 3-day delay – prevents timely public access to this type of information. Also, trading signals generated by a popular, position-based sentiment index do not produce significant average returns. Overall, this calls into question the reliability of COT-based trading signals used by market professionals.