COT shows that extremely large number of small speculators is buying the market since the mid October when we had the typical, favorable seasonality. Note the amount of small investor participation during Nov 05 vs Nov 06. Comparing to the last year, the small speculator buyers are extremely high, Nov05 20000 vs Nov 06 550000 which is 26 times more of small investors bought the market. There is no explanation of the large amount of small investors' participating during this year vs last year except that the real estate cash is transferring to stock market and that large cash was sitting on side line.
Commercials are increasing their hedge positions with large amount of Puts as shown on the chart. This suggests that commercials are also positioned themselves with large LONG position. When commercials and small speculators bought the market, there is no other to buy market; hence, this is often a contrarian indicator which is a sign of coming market decline.
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