WTI crude oil:
January WTI crude oil lost $1.85 on volume of 1,222,871 contracts. Total open interest increased by 6,469 contracts, which relative to volume is approximately 75% below average, but a total open interest increase on yesterday strong decline is bearish. The January contract accounted for a loss of 3,747 of open interest. As this report is being compiled on November 30 the January contract is rocketing higher, up $3.83 or +8.47% on very heavy volume due to the rumor of an impending restriction on crude oil production by certain OPEC countries.
The COT report released on Monday November 28 revealed that managed money added 24,948 contracts to their long positions and liquidated 5,980 of their short positions. Commercial interests liquidated 7,755 of their long positions and also liquidated 13,906 of their short positions. As a result, managed money is long WTI crude oil by a ratio of 1.87:1, up from the previous week of 1.67:1 and a slight increase in the ratio two weeks ago of 1.81:1.
The current low ratio indicates that speculators are leery about aggressively adding to bullish positions. Additionally, open interest action in crude oil leaves much to be desired. It will be interesting to see what kind of numbers are revealed in the final report for today’s trading. For the January contract generate a short term buy signal, the low of the day must be above OIA’s key pivot point for November 30 of $46.99. Stand aside.
The Energy Information Administration announced that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.9 million barrels from the previous week. At 488.1 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 2.1 million barrels last week, and are well above the upper limit of the average range. Both Finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories increased by 5.0 million barrels last week and are well above the upper limit of the average range for this time of year. Propane/propylene inventories fell 1.9 million barrels last week but are near the upper limit of the average range. Total commercial petroleum inventories increased by 0.5 million barrels last week.
S&P 500 E-mini:
While total open interest action has been relatively positive for the E-mini, it certainly has not been anything to write home about. As we pointed out in the November 21 research note (see below), we said the market (S&P 500) can continue to inch its way higher. However. there are indications this is going to be a very labored a fair. For example, the October 25 high of 4911.76 for the NASDAQ 100 cash index has NOT been taken out, nor has the October 25 high for the Nasdaq 100 E-mini futures index.
Despite the much ballyhooed rally, the fact remains that the new all-time high made by the S&P 500 cash index of 2214.10 on November 30 is approximately 1% above the previous all time high of 2193.81 made on August 15. During the month of November through November 28, the S&P 500 has gained 3.55%, which is the highest since 5.74% made during November 2009. Also, this month’s performance takes out the November 2013 gain of 2.80% and 2014 advance of 2.45%.
We examined the S&P 500 cash index’s performance during the months of November and December 2015. The low of November 2015 occurred on November 16 at 2019.31. The low for 2016 occurred on November 4. From November 16, the index made its December high of 2104.27 on December 2, 2015, or a rally from low to high of 84.88 points. From the December 2 high, the index fell 111.01 points to the December 2015 low of 1993.26 on December 14. From the December 14 low, the S&P 500 rallied to a high of 2081.56 made on December 29, 2015, or a gain from low to high of 88.30 points.
We bring this to your attention because during December 2015 the Federal Reserve raised interest rates one quarter percent and this was the first increase in many years. There is no reason to think the analog of 2015 is not applicable in 2016, especially because large numbers of participants have entered the markets during the past three weeks. This has created an over extended condition and in our view, clients should be on the defensive and have exit parameters in place for their portfolios.
The schizophrenic performance of the major equity indices are underscored in today’s trading: the S&P 500 E-mini is trading +0.15% while the NASDAQ 100 E-mini is trading down 0.82% on the day the S&P 500 made its all-time high. Another troubling sign is that the massive rally in the petroleum complex is not boosting equity prices to any great degree. As this report is being compiled on November 30, the December S&P 500 E-mini is trading only 1.25 points above yesterday’s close and is down several points from its all-time high.
Although, the E-mini remains on short and intermediate term buy signals, as the date of the Federal Reserve meeting approaches, per the 2015 analog, the market may experience a correction due to its overbought condition. This may be exacerbated if the 10 year treasury note continues its decline thereby increasing interest and mortgage rates, which in turn helps strengthen the dollar. In summary, we think there is some tough sledding ahead and it will become increasingly difficult to make money.
From the November 22 research note on the S&P 500 E-mini:
“We took a look at the monthly S&P 500 and SPY charts for 2015 and 2016. What jumped out was the fact that the pace of new all-time highs is slowing. For example, the ETF, SPY, a proxy for the S&P 500 made its 2015 high of $213.78 during May 2015 and the high for 2016 thus far is 220.79 or a gain of $7.00, or +3.5%. If an investor had purchased SPY at its 2015 high of 213.78, they would have been subjected to a horrific draw down to $181.02, the low made in January 2016 or approximately $32.00 per share.”
“In summary, the investor would have had to sit through horrific losses while waiting to make approximately 3.5% during the following 18 months. With the pace of the equity advance slowing there are some terrific option strategies that can be employed to take advantage of this. Please call or email with any question.”
From the November 21 research note on the S&P 500 E-mini:
“We took a look at the E-mini during the past week when it rallied and the surprise has been the abysmal volume even as the E-mini moved up to all-time highs.”
“For example, on November 17, the December contract gained 11.50 points on volume of 1,357,544 and total open interest increased by 28,375. On November 15 the December E-mini advanced 18.75 points on volume of 1,450,548 contracts and total open interest increased by 12,698. It’s positive that open interest continues to advance along with prices, but average volume during the three rally days was 1,348,666 contracts.This is substantially below the average daily volume for October 2016 of 1,549,153 contracts and year to date average daily volume of 1,896,575. It is apparent that many would be participants remain on the sidelines.”
“However, we think this is a positive for now and that the market will continue to inch its way higher during the strong seasonal period of the year, which typically lasts through January. Once the new president is sworn in on January 20, we think all bets are off, but barring a major catastrophe, the market is likely to move ahead at least through the end of December.”