What’s Next After Spotting Sentiment Extremes?
Now that you know how to identify sentiment extremes, the next logical question is:
What do you do with that information?
Well, here's the catch:
Not every sentiment extreme results in a market top or bottom.
So, to improve accuracy, we need to dig a little deeper.
A Better Way: Use Speculative Position Ratios
Instead of just looking at net long or short positions, a more precise method is to calculate the percentage of speculative positions that are long or short.
This ratio helps determine whether the market is truly near a turning point.
How to Calculate the %-Long or %-Short
Here’s the formula:
Let’s look at an actual example using Canadian dollar futures.
Real Example: Canadian Dollar Futures
Let’s rewind to the COT report from August 22, 2008.
Speculators were net short 28,085 contracts.
Then on March 20, 2009, speculators were also net short, but by 23,950 contracts.
At first glance, it seems like the August report signaled a stronger bearish sentiment (more contracts shorted).
So, you might assume the market was closer to a bottom then.
But wait! It’s not that simple…
Looking Closer: % of Short Positions
August 2008
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Short contracts: 66,726
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Long contracts: 38,641
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% Short = 66,726 / (66,726 + 38,641) = 63.3%
March 2009
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Short contracts: 32,665
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Long contracts: 8,715
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% Short = 32,665 / (32,665 + 8,715) = 78.9%
Although there were more net short contracts in August, the ratio of short positions was higher in March.
What Does This Tell Us?
A higher percentage of speculative shorts (like 78.9%) usually signals greater bearish sentiment—and therefore, a stronger chance of a market bottom.
And that’s exactly what happened.
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In August 2008, the Canadian dollar was worth around 94 U.S. cents, but it kept falling.
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By March 2009, when the short ratio hit 78.9%, the Canadian dollar bottomed near 77 U.S. cents.
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After that? The currency started to climb again.
Key Takeaway
The percentage of speculative positions (rather than just the raw numbers) gives a clearer picture of market extremes.
So next time you're reading a COT report, look beyond the totals.
Check how heavily weighted speculative traders are on one side of the market.
It might just help you catch the next major turning point.