June 23 Weekend Wrap

COT Tabulation Period:  Wednesday June 12- Tuesday June 18

This week, the USDA will release its stocks and acreage report on Friday, June 28. This is a major report and will have a significant impact on the grain markets. There are contradictory narratives in many of the commodity markets, which will make them difficult to trade. For example, in the grain markets, it appears that a decent size corn crop is in the making, however negative weather during the crucial period pollination period between July 15 and August 15 could change a potentially bearish situation. However, there has been a considerable amount of demand destruction in corn because of extended stratospheric prices that has negatively impacted the live stock market.

With respect to soybeans, supplies are very tight in the United States, but Brazil has a huge surplus of soybeans. Then of course there is China, which appears to be tightening its money supply, and this is going to negatively impact on the economies of the West. On the other hand, it appears that China is likely to stockpile supplies of soybeans and corn and possibly wheat, because of last year’s drought when China was caught with low stocks and had to pay significantly higher prices as a result.

To put the commodity deflationary cycle in perspective, consider the performance of the Greenhaven Continuous Commodity Index. This is an equally weighted index of 17 major commodities and it is tradable under ticker symbol GCC. The fact that the index is equally weighted is important because it shows the trend of the commodity complex in general without it being dominated by a particular segment. As of Friday’s close, GCC is trading at the August 2010 level. In short, the bias for the commodity complex is down. In recent weeks, there have been a number of false buy signals according to OIA’s methodology, and we will provide a summary of these in next weekend’s report. In this weekend’s report, we will summarize the false buy signal in the platinum market. This is a recent example of the chop type trading inherent in many commodity markets. As a result, we recommend that clients trade small, select trades carefully and use tighter than usual risk parameters. We think it is extremely important to remain flexible-tactical and realize that it is going to be extremely difficult to hit a home run in the current environment. With expectations tempered, clients will not have unrealistic expectations about any particular trade’s outcome.

We think the best trade among the commodities we follow is the initiation of bearish positions in the S&P 500 E mini. Please see this section for more commentary.

Soybeans:

For the week, July soybeans lost 23.25 cents, August -20.25, November -24.75. The COT report showed that managed money liquidated 10,692 contracts of their long positions and added 4,721 contracts to their short positions. Commercial interests added 9,703 contracts to their long positions and liquidated 6,010 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 3.68:1, which is down from the previous week of 4.29:1 and the ratio of 2 weeks ago of 3.98:1.

Soybean meal:

For the week, July soybean meal lost $3.00, August -3.40, December -6.00. The COT report showed that managed money liquidated 1,270 contracts of their long positions and added 4,170 contracts to their short positions. Commercial interests added 8,289 contracts to their long positions and also added 1,081 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 4.25:1, which is down from the previous week of 5.39:1 and the ratio of 2 weeks ago of 4.98:1.

Soybean oil:

For the week, July soybean oil lost 46 points, August -48, December -96. The COT report showed that managed money added 633 contracts to their long positions and also added 5,370 contracts to their short positions. Commercial interests liquidated 8,166 contracts of their long positions and also liquidated 302 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.42:1, which is up from the previous week of 1.33:1 and the ratio of 2 weeks ago of 1.41:1.

Corn:

For the week, July corn gained 6.75 cents, September +20.25, December +23.25. The COT report showed that managed money added 1,278 contracts to their long positions and also added 6,994 contracts to their short positions. Commercial interests liquidated 1,765 contracts of their long positions and also liquidated 10,331 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 1.71:1, which is down from the previous week of 1.78:1 and the ratio of 2 weeks ago of 1.82:1.

Wheat:

For the week, July wheat gained 17.25 cents, September +16.25, December +15.50. The COT report showed that managed money liquidated 2,615 contracts of their long positions and added 11,491 contracts to their short positions. Commercial interests added 4,807 contracts to their long positions and liquidated 2,756 contracts of their short positions. As of the latest report, managed money is short wheat by a ratio of 1.41:1, which is up from the previous week of 1.24:1 and the ratio of 2 weeks ago of 1.23:1.

COT Report June 12-June 18   Year to Date
July corn        +2.08%                      -5.09%
July bean oil  +1.60%                       -5.14%
July wheat      -1.33%                       -12.06%
July beans      -1.93%                       +7.02%
July meal       -2.50%                       +9.92%

Cotton:

For the week, July cotton lost 6.14 cents, December -4.80. The COT report showed that managed money added a massive 13,466 contracts to their long positions and liquidated 7,975 contracts of their short positions. Commercial interests liquidated 12,434 contracts of their long positions and added 2,976 contracts to their short positions. As of the latest report, managed money is long by 7.41:1 which is more than double the previous week’s ratio of 3.13:1 and the ratio of 2 weeks ago of 3.57:1.

On June 13, December cotton generated a short-term buy signal and was already on an intermediate term buy signal. Total open interest numbers have been distorted by the fact that the July contract is about to expire. Therefore, we examined open interest numbers for the December contract to get a better idea of what was occurring among market participants. From June 11 through June 18 (COT tabulation dates) open interest increased 36,309 contracts in the December contract. As the table below indicates, cotton advanced 2.14 cents in this time frame and the long to short ratio increased by 135%. In short, the open interest increase and massive increase in the long to short ratio from June 11 to June 18 confirms that managed money has piled into the long side of December cotton. The trading that transpired after the recent COT report shows that during June 19 and 20, open interest in the December contract declined by only 59 contracts, but December cotton declined 1.96 cents. In other words, the 2.14 cent advance generated an open interest increase of 36,309 contracts while the 1.97 cent decline generated a 59 contract loss of open interest. This tells us that longs are digging in.Although cotton has not yet reversed its short-term buy signal, this could occur on Monday. In any event, we think the bull move is over for now, and that more liquidation is ahead for December cotton.

COT Tabulation Date         Closing Price     Long to Short Ratio
June 18                                      87.32                7.41:1
June 11                                       85.18                3.13:1
June 4                                        85.44                3.57:1
May 28                                       81.42                 5.20:1
May 21                                        83.86                9.01:1
May 14                                        86.92               13.41:1
May 7                                          87.15                 8.76:1
April 30                                        87.47                  6.32:1
April 23                                        85.10                  4.60:1
April 16                                        85.42                   4.15:1
April 9                                          86.61                   4.27:1
April 2                                          90.34                   5.81:1
March 26                                     89.33                    5.55:1
March 19                                      91.53                    5.89 1
March 12                                      88.16                    6.66:1

Crude oil:

For the week, August WTI crude oil lost $4.38 and August Brent lost $4.93. The COT report showed that managed money added 19,755 contracts to their long WTI positions and liquidated 5,742 contracts of their short positions. Commercial interests added 6,221 contracts to their long positions and also added 3,110 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 9.99:1, which is up substantially from the previous week of 7.62:1 and the ratio of 2 weeks ago of 6.13:1.

From June 3 when the crude oil rally began through June 18, August crude oil advanced $6.75 or 7.34%. During this time, open interest increased by 126,214 contracts. On June 4, August WTI closed at $93.55 and the long to short ratio on that date was 6.13:1. From June 4 through June 18, August WTI advanced $4.93 and on June 18 closed at $98.67, which was the highest close for the move. From June 4 through June 18, open interest increased by 129,301 contracts. In other words, the massive increase in open interest occurred during 11 days of trading when the market was moving higher. From the decline that began on June 19 through June 20, open interest has declined by a total of 27,024 contracts. The final stats for trading on June 21 will be released by the exchange Monday morning, but preliminary stats indicate that open interest declined only 13,560.  Relative to volume this is approximately 20% below average. In short, the open interest increase during the period that WTI was rising along with the massive increase in the long to short ratio from the COT report of June 4 to June 18 tells us there is a significant amount of liquidation ahead. Based upon our analysis of the open interest increase, we know there are large numbers of speculative longs who put on long positions  after June 4 (close $93.55), which means on June 21 when August crude made a low of $93.12 and closed at 93.69, most longs that were initiated after June 4 have losses, or at best breaking even. In addition, Brent, heating oil and gasoline could generate short-term sell signals this week. If this occurs, the downtrend in WTI will accelerate, and this will be fed by large numbers of speculative longs who will be forced to liquidate.

Heating oil:

For the week, August heating oil lost 12.10 cents. The COT report showed that managed money added 8,076 contracts to their long positions and liquidated 6,976 contracts of their short positions. Commercial interests liquidated 6,643 contracts of their long positions and added 7,205 contracts to their short positions. As of the latest report, managed money is short heating oil by a ratio of 1.14:1, which is down substantially from the previous week of 1.78:1 and the ratio of 2 weeks ago of 1.64:1.

Gasoline:

For the week, August gasoline lost 13.63 cents. The COT report showed that managed money added 6,429 contracts to their long positions and also added 400 contracts to their short positions. Commercial interests liquidated 726 contracts of their long positions and added 5,909 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 3.30:1, which is up from the previous week of 3.00:1 and the ratio of 2 weeks ago of 2.86:1.

Natural gas:

For the week, August natural gas gained 3.4 cents. The COT report showed that managed money liquidated 10,108 contracts of their long positions and added 3,310 contracts to their short positions. Commercial interests added 8,573 contracts to their long positions and also added 3,324 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.06:1, which is down from the previous week of 1.11: 1 and the ratio of 2 weeks ago of 1.19:1.

COT Report June 12-June 18   Year to Date
August natural gas +4.69%               +6.41%
August heating oil  +3.77%                -4.95%
August WTI            +3.33%               +0.20%
August ethanol       +3.11%               +10.72%
August Brent          +3.06%                 -5.58%
August gasoline      +2.36%                 -1.13% 

Copper:

For the week, July copper lost 10.60 cents. The COT report showed that managed money added 914 contracts to their long positions and added 11,209 contracts to their short positions. Commercial interests added 7,102 contracts to their long positions and also added 397 contracts to their short positions. As of the latest report, managed money is short copper by a ratio of 2.08:1, which is up  from the previous week of 1.72:1, and up substantially from the ratio of 2 weeks ago of 1.23:1.

Palladium:

For the week, September palladium lost $56.95. The COT report showed that managed money liquidated 508 contracts of their long positions and added 11 contracts to their short positions. Commercial interests liquidated 405 contracts of their long positions and also liquidated 351 contracts of their short positions. As of the latest report, managed money is long palladium by a ratio of 24.19:1, which is down from the previous week of 25.02:1 and the ratio of 2 weeks ago of 28.52:1.

Platinum:

For the week, July platinum lost $77.90. The COT report showed that managed money liquidated 354 contracts of their long positions and added 2,996 contracts to their short positions. Commercial interests added 1,014 contracts to their long positions and liquidated 2,725 contracts of their short positions. As of the latest report, managed money is long platinum by a ratio of 2.61:1, which is down substantially from the previous week of 3.48:1 and the ratio of 2 weeks ago of 3.17:1.

Diagram of a false buy signal: Platinum

In this week’s report we are examining the false buy signal in July platinum that occured on June 5. We have reprinted the relevant reports from June 5, June 6, June 10, June 12, June 14 and June 17. Is important for clients to know how we approach a market once it generates a buy signal. As reports below indicate, even though platinum had generated a short-term buy signal, no position was recommended because the market didn’t act in accordance with our protocols.

“Platinum: On June 5, July platinum generated a short-term buy signal, but remains on an intermediate term sell signal.”

“July platinum gained $19.50 on volume of 13,504 contracts. Open interest increased by a massive 672 contracts, which relative to volume is approximately 100% above average. As this report is being compiled on June 6, July platinum is trading $16.20 higher and has made a new high for the move at $1534.50, which is the highest price since April 11 when July platinum made a high of $1535.20. As is usually the case after the generation of a buy signal, the market has a pullback lasting 1-2 and possibly 3 days. Do not chase the rally.”

In the June 6 report, we again advise caution with respect to initiating new long positions.

From the June 6 report:

“We should see at least one more day of a decline before contemplating bullish positions. Our reticence about platinum is that the equity market is in a corrective mode, and if the correction becomes severe, platinum will likely setback more than usual. Therefore, we advise caution on initiating new long positions.”

From the June 10 report:

“In our report of June 7, we stated that an additional pullback for third day could occur. However, our concern is that the pullback on June 11 is significantly greater on a percentage basis than gold or silver, which have been the weak sisters. No positions have been recommended as yet because of the anticipated multi-day pullback. If the equity market continues to move lower, it will likely drag platinum and the precious metals lower as well.”

From the June 12 report:

“We have been wary of the move in platinum after it did not conform to the usual pullback scenario. In the June 10 report (below), we expressed our trepidation about the trading of platinum. Platinum appears to be destined to reverse the short-term buy signal generated on June 5.”

From the June 14 report:

“Platinum will generate a short-term sell signal on June 17, which reverses the short-term buy signal generated on June 5. As it turned out, the buy signal on June 5 was false. However, our protocol dictates that a pullback of 1-3 days was in the offing and therefore positions were not recommended. By the third day, it was apparent the buy signal was suspect and we informed readers about this.”

From the June 17 report:

“Platinum: On June 17, July platinum generated a short-term sell signal, which reverses the short-term buy signal generated on June 5. Platinum remains on an intermediate term sell signal.”

Since the generation of the short-term sell signal on June 17, platinum has fallen from its close of $1434.80 on June 17 to a close of  1369.50 after making a low earlier in the day at 1332.30 on June 21.

The Take Away

It is important for clients to know that our methodology is sound in the event of a signal reversal. Even though platinum generated a short-term buy signal, our method precluded our advising clients from entering long positions. Occasionally, a market will continue to advance, but this does not change our underlying philosophy, only the timing changes. Once stretched to the limit, markets have pullbacks regardless of whether or not they conform to our time frame.

For example, we saw this in cotton after it generated a short-term buy signal on June 13. The market continued to rally on the 14th, but then began to fall apart on June 18. Another example of a market continuing to rally after the generation of a buy signal occurred in the euro. It generated a short and intermediate term buy signal on June 6 and 7 respectively and continued to rally beyond the June 6 close of 1.3254 to its high close of 1.3411 on June 18. On June 19, the euro began its pullback and closed at 1.3146 on June 21, or 1.08 cents below the June 6 and 7 close.

Gold:

For the week, August gold lost $95.60. The COT report showed that managed money liquidated 6,077 contracts of their long positions and added 9,988 contracts to their short positions. Commercial interests added 2,945 contracts to their long positions and liquidated 6,594 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.55:1, which is down substantially from the previous week of 1.90:1 and the ratio of 2 weeks ago of 1.91:1.

Silver:

For the week, July silver lost $1.995. The COT report showed that managed money added 111 contracts to their long positions and liquidated 121 contracts of their short positions. Commercial interests liquidated 851 contracts of their long positions and also liquidated 744 contracts of their short positions. As of the latest report, managed money is short silver by a ratio of 1.02:1, which is down slightly from the previous week of 1.03:1 and dramatically below the ratio of 2 weeks ago when managed money was long by a ratio of 1.08:1. 

COT Report June 12-June 18   Year to Date
July silver        –   0.14%                        -34.08%
August gold       -0.74%                        -23.06%
July copper        -1.27%                         -15.58%
July platinum    -2.73%                         -11.00%
Sept palladium  -5.48%                         -4.03%

Canadian dollar:

For the week, the September Canadian dollar lost 2.68 cents. The COT report showed that leveraged funds liquidated 1,869 contracts of their long positions and also liquidated 10,038 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 5.73:1, which is up from the previous week of 5.66:1 and the ratio of 2 weeks ago of 4.24:1.

Australian dollar:

For the week, the September Australian dollar lost 3.47 cents. The COT report showed that leveraged funds added 19,722 contracts to their long positions and also added 4,391 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.43:1, which is down dramatically from the previous week when they were short by a ratio of 2.03:1 and the ratio of 2 weeks ago of 1.89:1.

Swiss franc:

For the week, the September Swiss franc lost 1.37 cents. The COT report showed that leveraged funds added 7,930 contracts to their long positions and liquidated a massive 14,800 contracts of their short positions. As of the latest report, leveraged funds are long by a ratio of 1.99:1, which is a dramatic reversal from the previous week when they were short by a ratio of 3.23:1 and the ratio of 2 weeks ago of 3.68:1.

British pound:

For the week, the September British pound lost 2.73 cents. The COT report showed that leveraged funds added 13,752 contracts to their long positions and liquidated a massive 35,566 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.26:1, which is down substantially from the previous week when they were short by a ratio of 2.81:1 and down dramatically from the ratio of 2 weeks ago when they were short by a ratio of 3.95:1.

Euro:

For the week, the September euro lost 2.01 cents. The COT report showed that leveraged funds added 17,280 contracts to their long positions and liquidated 8,730 contracts of their short positions. As of the latest report, leveraged funds are long by a ratio of 1.45:1, which is a substantial change from the previous week when they were short by a ratio of 1.04:1 and a dramatic change from the ratio of 2 weeks ago when leveraged funds were short by a ratio of 2.10:1.

The rally in the euro began on May 29 and extended to June 18 when it topped out at a closing price of 1.3411. The rally consisted of a 5.27 cent advance or 4.09%. During this time, open interest increased only 19,447 contracts, which is a paltry increase during a period of 15 trading days. From this, we conclude that market participants were not enthusiastic about the long side of the euro. The COT stats reflected this until the latest reading when leveraged funds switched to the long side with the COT ratio at 1.45:1. In short, leveraged funds piled into the long side at the top of the market.

On June 19 and 20 after the tabulation date of the most recent COT report, September open interest increased by a total of 3,188 on the decline of 2.10 cents (June 19 Sept+707, June 20 Sept +2481). In other words, those that entered new long positions near the top of the market apparently have not been shaken out by the declines of June 19 and 20. The increase of open interest on the two-day price decline is bearish. The euro remains on a short and intermediate term buy signal..

Dollar index:

For the week, the September dollar index gained 1.67 points. The COT report showed that leveraged funds liquidated 23,645 contracts of their long positions and liquidated 1,185 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by a ratio of 2.20:1, which is a dramatic reversal from the previous week when they were long by a ratio of 1.16:1.  Two weeks ago leveraged funds were short by a ratio of 1.06:1.

The dollar index began its rally on June 19, and through June 20 (the dates that we have final open interest) open interest increased by 704 contracts while the September dollar index advanced 1.347 points. At this juncture, we cannot ascertain whether the dollar rally is for real. It has not generated a short-term buy signal, however the 50 day moving average on the September chart is a full point above its 150 and 200 day moving averages. The 10 year note is overdue for a significant rally, which would cause interest rates to pullback. This should negatively impact the dollar index.

COT Report June 12-June 18   Year to Date
Sept Japanese yen  +0.89%            -11.54%
Sept euro                 +0.73%            -0.66%
Sept Australian $   +0.53%             -9.90%
Sept Swiss franc     +0.52%             -2.49%
Sept pound             +0.06%             -4.99%
Sept Canadian $     -0.11%               -4.51%
Sept dollar index    -0.57%              +3.09%

S&P 500 E mini: On June 21, the September S&P 500 E mini generated a short-term sell signal. This is the first sell signal of 2013. The E mini remains on an intermediate term buy signal

For the week, the September S&P 500 E mini lost 34.30 points. The COT report showed that leveraged funds liquidated 21,688 contracts of their long positions and added 53,264 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.96:1, which is up from the previous week of 1.78:1 and the ratio of 2 weeks ago of 1.80:1.

As we said earlier in this report, we think the bearish side of the S&P 500 E mini is most likely the best trade on the board. The emerging market indices have fallen sharply, and it appears that the carnage is beginning to hit the markets of Europe and North America. If the 10 year treasury note yield continues to climb and stays at elevated level for a number of months, the impact on a number of business sectors is going to be severe, especially anything construction related. In addition, interest rates are rising in Europe and its the periphery. This is especially worrisome because of the precarious state of peripheral economies. The fact is the Federal Reserve may have been worried about inflation, but the real worry may be deflation because rising interest rates in a relatively weak economy is massively deflationary.

Another factor to consider is that Wall Street sentiment seems to lean towards a shallow correction and capitulation is certainly nowhere on the horizon and the AAII survey (below) confirms this. On June 19, Apple Computer generated a short-term sell signal and Apple has been on an intermediate term sell signal for several months. We think Apple will take out the low of $385.10 made on April 19 and trade down to the low 300 level.

The market has had a couple of days of downside action and we expect a rally, which would enable clients to initiate bearish positions. As is usually the case when a short-term sell signal is generated, a countertrend rally lasting 1-2 and possibly 3 days should occur in the days ahead. This would be the prime opportunity to initiate bearish positions for a sustained move lower. We think the treasury note market can rally at any time due to its massively oversold condition, and this could spark the rally in the E mini.