Bloomberg Access:{OIAR<GO>}

WTI crude oil:

January WTI crude oil lost $1.94 on volume of 1,561,353 contracts. Total open interest increased only 5,239 contracts, a number that is dramatically below average. The January contract accounted for a loss of 44,844 of open interest, which means there were enough open interest increases in the forward months to offset the decline in January and increase total open interest slightly. Considering the magnitude of yesterday’s decline, the moderate increase of open interest is not significant.

As this report is being compiled on December 15, the January contract is trading 18 cents above yesterday’s close and has made a daily low of 49.95, which is the lowest print since 49.61 made on December 8. The 20 day moving average for the January contract stands at 49.48 and considering that the dollar index is trading sharply higher and making a new contract high, which is the highest print on the continuation chart since January 2003, crude oil is more remarkably firm. We think higher prices are ahead and clients should call us for recommendations.

Dollar index:

The March dollar index advanced 66.3 points on volume of 98,534 contracts. Total open interest declined by 4,133 contracts, which relative to volume is approximately 55% above average meaning liquidation was extremely heavy on yesterday’s strong advance. The December contract, which expires shortly lost 14,473 of open interest and there were insufficient open interest increases in the forward months to offset the decline in December.

Likely, there was a  high degree of reticence on the part of potential market participants to be involved in the dollar index due to the Federal Reserve interest rate announcement. Additionally, after the announcement the market rallied sharply to a high of 102.345, which may have been powered by distressed short-sellers covering positions.

As this report is being compiled on December 15, the March contract is rocketing higher, up 1.40 points on heavy volume and has made a new contract high of 103.535, which is the highest print on the monthly continuation chart since 103.670 made by the March 2003 contract during the January 2003. Additionally, in today’s trading, the March contract has made a low above the pivot point of 101.338 that we said in yesterday’s research note would indicate the rally had resumed. Though the dollar index is substantially overbought, this does not preclude a continued move higher. Much of this will depend upon action in the euro, which on December 15 also has reached lows last seen during January 2003. Do not enter new bullish positions at current levels.

Euro:

The December euro lost 62 pips on heavy volume of 599,527 contracts. Total open interest increased by 14,352 contracts, which relative to volume is approximately 10% below average, however, the total open interest increase in yesterday’s trading indicated that short-sellers were piling into the euro and driving it to a new contract low of 1.0498, which takes out the previous contract low of 1.0510 made on December 5.

The December contract accounted for a loss of 83,922 and expires shortly, but there were enough open interest increases in the forward months to offset the decline in December and increase total open interest substantially. Yesterday’s action was extremely bearish because it indicated that short-sellers were willing to enter new bearish positions at or near new contract and multi-year lows.

As this report is being compiled on December 15, the December contract is trading sharply lower, down 1.51 or -1.43% on heavy volume and has made a daily low of 1.0367, which is the lowest print since 1.0305 made during January 2003 by the March 2003 contract. Though, the euro is massively oversold, this does not preclude it from continuing its move lower, however a substantial rally is likely in the near term. Do not enter new bearish positions at current levels.

From the December 8 research note on the euro:

“As this report is being compiled on December 9, the euro is trading 66 pips lower and has made a daily low of 1.0533, which is not far from his recent contract low of 1.0510 made on December 5. As we have said in previous reports, we think the euro is headed to parity with the dollar and concerns about the French election in April will continue to keep the currency on the defensive against the dollar.”

Yen:

The December Japanese yen lost 83 pips on volume of 337,895 contracts. Total open interest increased by a massive 33,358 contracts, which relative to volume is approximately 300% above average, an astounding number. The December contract accounted for a loss of 26,145, which means there were enough open interest increases in the forward months to offset the decline in December and increase total open interest massively.

The COT report released last Friday revealed that leverage funds added 8,141 to their long positions and also added 24,882 to their short positions. As a result, leverage funds were short the yen by a ratio of 1.41:1, which was up substantially from the previous week of 1.09:1 and the ratio two weeks ago of 1.03:1.

As this report is being compiled on December 15, the December contract is trading sharply lower, down 112 pips or -1.31% and has made a daily low of .8427, which is the lowest print since .8236 made during the month of February 2016 by the March 2016 contract. Do not enter new bearish positions at current levels.

10 year Treasury Note:

The March 10 year treasury note lost 16.5 points on volume of 1,771,798 contracts. Total open interest declined by 13,241 contracts, which relative to volume is approximately 60% below average. As this report is being compiled on December 15, the March contract has taken out yesterday’s contract low of 122-305 with another contract low of 122-145, and this is below the print on the weekly continuation chart of 122-225 made during the week of March 31, 2014, which is the lowest print since 121-225 made during the month of July 2011 by the September 2011 contract. Today, the yield on the 10 year note has doubled from its July low, which is going to increase mortgage rates, interest on auto loans and credit cards. Additionally, with the dollar advancing strongly to decade plus highs, monetary tightening will begin to affect equity markets.

S&P 500 E-mini:

The December S&P 500 E-mini lost 17.75 points on heavy volume of 3,036,147 contracts. Total open interest increased by 30,675 contract, which relative to volume is approximately 50% below average and an open interest increase on yesterday’s decline is negative. As this report is being compiled on December 15, the December contract is trading 3.50 points lower and has made a daily high of 2272.75, which is below the all-time high of 2278.25 made on December 13.

As we mentioned in the December 9 report, yesterday’s decline was expected and in essence was a sell on the news event. The market is in a consolidating/corrective mode for now and while we do not think the rally is over, it will struggle to inch its way higher. The rally since November 9 is rooted in the narrative accompanying the newly elected president that there will be massive fiscal stimulation and tax cuts. We tend to think those who are pinning their hopes on massive tax cuts and infrastructure spending will be sorely disappointed.

From the December 9 research note on the S&P 500 E-mini:

“As this report is being compiled on December 12, the December E-mini is trading 3.00 points lower on the day after making a new all-time high in the overnight session of 2270.25. The market is massively overbought and is well overdue for a correction. Conceivably the conference on Wednesday by the Federal Reserve Chairman will be the catalyst for further corrective activity.”