Weekend Wrap for December 15, 2013

The current COT reporting period reflected in this report is from Wednesday, December 4 through Tuesday December 10

Soybeans:

For the week, January soybeans advanced 2.00 cents, March +3.25, May +0.50. The COT report showed that managed money added 8,873 contracts to their long positions and liquidated 3,230 contracts of their short positions. Managed money added 9,266 contracts to their long positions and also added 22,408 contracts to their short positions. As of the latest report, managed money is long soybeans by a stratospheric ratio of 9.08:1, which is a fairly dramatic leap from the previous week of 7.50:1 and the ratio of 2 weeks ago of 7.03:1.

At this juncture, clients should only have short call positions that we recommended earlier last week when soybeans were trading at their highs.

Based upon our analysis of the COT report, price and open interest action, we think soybeans remain extremely vulnerable to downside action. Here is why: the COT report of November 26 (long to short ratio of 7.03:1) showed that managed money was net long 146,456 contracts and by the December 10 COT report (long to short ratio of 9.08:1) were net long 169,465 contracts, or an increase of 23,009 contracts or approximately 16%. Commercial interests were net short 211,450 contracts on November 26 and by December 10 were net short 222,925 contracts.

From November 27 through December 10, January soybeans advanced only 9.00 cents while March +10.00. In other words, managed money significantly increased their net long position by 16%, but this was only able to move prices fractionally higher. Additionally, commercials increased their short position by a pittance and yet soybeans were only able to show a tepid advance. If commercial interests were adding a significant number of new shorts, this could have kept a lid on prices. From November 27 through December 10, total open interest for all contracts increased by 35,325 contracts, or almost 6%, yet this was unable to move beans significantly higher.

With the stratospheric long to short ratio, managed money longs will provide fuel for a continued downside move. Although soybeans have not generated a short or intermediate term sell signal, we expect a short-term sell signal to be generated next week. Once this occurs, we will advise when to initiate bearish positions.

Soybean meal:

For the week, December soybean meal advanced $15.60, January +5.20, March +4.10. The COT report showed that managed money added 4,559 contracts to their long positions and liquidated 94 contracts of their short positions. Commercial interests added 175 contracts to their long positions and liquidated 959 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 4.21:1, which is up from the previous week of 3.96:1 and the ratio of 2 weeks ago of 3.61:1.

Soybean oil:

For the week, December soybean oil lost 81 points, January -66, March -69. The COT report showed that managed money liquidated 2,530 contracts of their long positions and added 3,024 contracts to their short positions. Commercial interests added 3,323 contracts to their long positions and liquidated 1,629 of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 2.01:1, which is up from the previous week of 1.83:1 and the ratio of 2 weeks ago of 1.60:1.

Corn:

For the week, December corn lost 3.50 cents, March -8.75, May -9.00. The COT report showed that managed money added 2,426 contracts to their long positions and liquidated 17,728 contracts of their short positions. Commercial interests added 266 contracts to their long positions and also added 18,192 contracts to their short positions. As of the latest report, managed money is short corn by a ratio of 1.40:1, which is down from the previous week of 1.50:1 and the ratio of 2 weeks ago of 1.60:1.

Chicago wheat:

For the week, December Chicago wheat lost 19.00 cents, March -22.25, May -21.75. The COT report showed that managed money liquidated 2,058 contracts of their long positions and added 1,299 contracts to their short positions. Commercial interests added 5,271 contracts to their long positions and liquidated 6,404 contracts of their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.77:1 which is up from the previous week of 1.72:1 and the ratio of 2 weeks ago of 1.72:1. The current ratio is the highest for Chicago wheat in several months.

Kansas City wheat:

For the week, December Kansas City wheat lost 48.25 cents, March -23.00, May 20.50. The COT report showed that managed money liquidated 830 contracts of their long positions and added 2,150 contracts to their short positions. Commercial interests liquidated 1,381 contracts of their long positions and also liquidated 4,870 contracts of their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 1.71:1, which is down from the previous week of 1.91:1 and the ratio of 2 weeks ago of 1.80:1.

For some strange reason, managed money is as bearish on Chicago wheat as they are bullish on Kansas City wheat, but Chicago wheat has been the out performer for quite some time. During the 4th quarter to date, March Chicago wheat lost 8.48% while Kansas City wheat is down 9.15%.

Cotton: On December 9, March cotton generated a short-term buy signal, but remains on an intermediate term sell signal

For the week, March cotton advanced 2.81 cents, May +2.24, July +1.74. The COT report showed that managed money added 4,086 contracts to their long positions and liquidated 5,058 contracts of their short positions. Commercial interests liquidated 2,727 contracts of their long positions and added 8,201 contracts to their short positions. As of the latest report, managed money is long cotton by a ratio of 1.73:1, which is up from, the previous week of 1.29:1 and the ratio of 2 weeks ago of 1.27:1.

From the December 8 Weekend Wrap:

“However, there is more good news: the March-July 2014 spread closed at a 12 point premium to July, which is its best price since October 9 when March-July 2014 closed at a 6 point premium to July and March futures closed at 83.98 while July closed at 84.04. In other words, the spread has out performed the futures contracts. The recent high for the March-July 2014 spread occurred on September 30 when the July contract closed at 82 point premium to July and March futures closed at 86.98.”

During the past week, the March-July spread, widened to 95 points premium to July, which took out the September 30 high of 82 points premium to July when March futures closed at 86.98. The spread continues to outperform the futures, and this bodes well for the move higher. On December 13, the March-July cotton spread closed at the highest level since September 12, 2013.

Coffee: On December 12, March coffee generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, December coffee advanced 8.70 cents, March +8.85, May +8.80. The COT report showed that managed money added 823 contracts to their long positions and also added 1,961 contracts to their short positions. Commercial interests added 2,145 contracts to their long positions and also added 314 contracts to their short positions. As of the latest report, managed money is short coffee by ratio of 1.63:1, which is about the same as the previous week of 1.62:1, but slightly down from the ratio of 2 weeks ago of 1.68:1. As of the latest report, managed money remains net short 23,002 contracts.

Based upon the current short to long ratio of 1.63:1, and on December 11 open interest declined by 569 contracts while it increased by 543 contracts on December 12, managed money is still massively long. We do not have the stats for Friday’s trading, and will not know until tomorrow whether there was an open interest build or decline. However, March coffee closed at $1.1525, which is its highest price since October 22 when it closed at 1.1510. On October 22, which was the tabulation date for the COT report, managed money was short coffee by ratio of 1.73:1, Coffee is only slightly below that on December 10. Undoubtedly, there are large numbers of managed money longs who are showing losses as of December 13 and as the market moves higher will be forced to cover their positions. We think coffee is headed higher, but it is likely to find resistance at the 200 day moving average of 1.2300. Maintain bullish positions that were recommended last week and stops on futures positions should be moved up based upon sound risk and money management.

Sugar:

For the week, March sugar lost 32 points, May -32, July -34. The COT report showed that managed money added 2,827 contracts to their long positions and added a massive 51,496 contracts to their short positions. Commercial interests added 24,132 contracts to their long positions and liquidated 21,246 contracts of their short positions. As of the latest report, managed money is long sugar by a ratio of 1.24:1, which is down dramatically from the previous week of 2.02:1 and the ratio of 2 weeks ago of 2.91:1.

Remarkably, managed money has gotten significantly bearish at the very bottom of the move. The addition of 51,496 contracts of new short positions should give anyone who is short the sugar market a wake-up call. Apparently, the trend following black box crowd has been told by their computers they should now be short sugar after holding long positions since it topped out on October 18.

Clients of OIA had the benefit of knowing that sugar was headed lower when we notified our readers on October 29 that March 2014 sugar generated a short-term sell signal. This which was confirmed by the intermediate term sell signal on November 14. When the short-term sell signal was generated on October 29, March sugar closed at 18.45 and on November 14 when the intermediate term sell signal was generated, March sugar closed at 17.64. On December 13, March sugar closed at 16.27, which is the lowest close on the continuation chart since August 22 when October sugar closed at 16.28.

Live cattle: On December 10, February cattle generated a short-term sell signal, but remains on an intermediate term buy signal

For the week, December live cattle advanced 45 points, February unchanged, April +10. The COT report showed that managed money added 306 contracts to their long positions and liquidated 788 contracts of their short positions. Commercial interests liquidated 13,545 contracts of their long positions and also liquidated 4,351 contracts of their short positions. As of the latest report, managed money is long cattle by ratio of 5.69:1, which is up from the previous week of 5.45:1 and the ratio of 2 weeks ago of 4.38:1.

Last week, we discussed the massive decline of total open interest and attributed this to tired longs throwing in the towel. Based upon this week’s COT report, the tired longs were from the commercial side and managed money continues to hold their stratospheric net long position. If February cattle closes below 1.32330, this would be the first sign that cattle prices are headed still lower.

Lean hogs:

For the week, December lean hogs lost 42 points, February -1.83 cents, April -55 points. The COT report showed that managed money liquidated 4,413 contracts of their long positions and added 179 contracts to their short positions. Commercial interests added 448 contracts to their long positions and liquidated 283 contracts of their short positions. As of the latest COT report, managed money is long hogs by ratio of 4.61:1, which is down from the previous week of 4.95:1 and down dramatically from the ratio of 2 weeks ago of 5.91:1.

WTI crude oil:

For the week, January crude oil lost $1.05, February -97 cents, March -1.03. The COT report showed that managed money liquidated 3,444 contracts of their long positions and also liquidated 10,201 contracts of their short positions. Commercial interests added 2,986 contracts to their long positions and also added 3,616 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 7.12:1, which is up substantially from the previous week of 5.78:1 and the ratio of 2 weeks ago of 5.29:1.

Despite the unimpressive rally, which began on November 28, managed money is long crude oil by the largest margin since the COT tabulation date of September 24 when the long to short ratio reached 6.86:1. The January-April WTI spread bottomed at 65 cents premium to April on November 27 and rallied to 32 cents premium to January on December 10. On December 13 the spread closed at a 5 cent premium to January. The high for the spread occurred on September 6 when January WTI sold at a $4.62 premium to April.

Open interest action has been dismal on the rally and from November 28 through December 12 (we do not have Friday’s final stats yet), open interest has increased only 25,631 contracts while January WTI has advanced $5.07 or 5.49%. This underscores the lack of enthusiasm on the part of market participants to make commitments on the rally. The total open interest increase for the 10 day period of November 28-December 12 relative to 10 day volume is a number massively below average. A 25,631 contract increase would be a strong increase for one day, but not for 10 days of market activity.

The 200 day moving average of 98.59 on the continuation chart proved to be formidable resistance for the January contract, and with the large net long position of managed money, we expect lower prices ahead. A short-term sell signal will likely be generated this coming week.

Heating oil:

For the week, January heating oil lost 8.08 cents, February -8.21, March -8.13. The COT report showed that managed money added 5,739 contracts to their long positions and liquidated 356 contracts of their short positions. Commercial interests added 10,634 contracts to their long positions and also added 12,290 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.46:1, which is up significantly from the previous week of 2.09:1 and the ratio of 2 weeks ago of 1.49:1.

Gasoline:

For the week, January gasoline lost 9.76 cents, February -9.72, March -9.61. The COT report showed that managed money added 675 contracts to their long positions and also added 513 contracts to their short positions. Commercial interests added 14,717 contracts to their long positions and also added 17,513 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 7.05:1, which is down from the previous week of 7.46:1 and the ratio of 2 weeks ago of 7.54:1.

Natural gas:

For the week, January natural gas advanced 23.7 cents, February +24.0, March +22.4. The COT report showed that managed money added 16,182 contracts to their long positions and liquidated 14,048 contracts of their short positions. Commercial interests added 18,660 contracts to their long positions and also added 20,053 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.24:1, which is up from the previous week of 1.10:1 and a complete reversal from 2 weeks ago when managed money was short by a ratio of 1.07:1.

Copper:

For the week, March copper advanced 6.35 cents, May +5.80, July +5.05, September +4.45, December +4.00. The COT report revealed that managed money added 4,236 contracts of their long positions and liquidated 13,836 contracts of their short positions. Commercial interests liquidated 88 contracts of their long positions and added 6,441 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.04:1, which is down dramatically from the previous week of 1.63:1 and the ratio of 2 weeks ago of 1.67:1.

 From the December 8 Weekend Wrap:

“On a seasonal basis, December is a strong month for copper as it is traditionally for silver and gold. With copper stocks at near 5 year lows at two major warehouses, the risk of being bearish at current levels seems fairly high. We have never been advocates of naked futures positions in copper because it is extremely volatile and trading volumes can be low at times. Additionally, liquidity in options is nil, which makes premiums expensive and when entering and exiting copper positions, the bid/ask spread can easily chip away at profits, or add significantly to losses.”

“Our recommendation is to initiate a bull spread in March-July 2014 copper, and depending upon your risk tolerance you can move out further on the term structure to September or December 2014. If copper stocks tighten, the spread will work well and although it is not a barn burner trade, it is low risk with decent profit potential. If March copper can close above $3.2845 and 3.2922, a move to $3.4000 is likely. Another positive is the spread can be profitable in a sideways market.”

During the past week, the March-July 2014 spread widened to 1.30 cents premium to March while the March-September 2014 spread widened to 1.90 cents premium to March and March-December increased 2.35 cents premium to March. Stay with the spreads because we think managed money will begin to enter the market in substantial numbers if prices continue to firm. It is very important for March copper’s daily low to be above $3.2852 and $3.2923 for copper to continue moving higher. If we continue to see open interest increases and copper is not able to stay above these two lows, it may be vulnerable to a temporary setback or reversal in trend. Copper’s backwardation is very positive and bodes well for higher prices.

Palladium:

For the week, March palladium lost $19.95. The COT report showed that managed money liquidated 748 contracts of their long positions and also liquidated 445 contracts of their short positions. Commercial interests liquidated 1 contract of their long positions and added 530 contracts to their short positions. As of the latest report, managed money is long palladium by ratio of 16.28:1, which is up from the previous week of 12.60:1 and the ratio of 2 weeks ago of 13.57:1.

Platinum:

For the week, January platinum advanced $6.60. The COT report showed that managed money added 840 contracts to their long positions and also added 887 contracts to their short positions. Commercial interests liquidated 348 contracts of their long positions and added 308 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 2.16:1, which is down from the previous week of 2.23:1 and down dramatically from the ratio of 2 weeks ago of 2.94:1.

Gold:

For the week, February gold advanced $5.60. The COT report showed that managed money added 659 contracts to their long positions and liquidated 5,203 contracts of their short positions. Commercial interests liquidated 4,183 contracts of their long positions and also liquidated 2,152 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.20:1, which is up from the previous week of 1.12:1 and the ratio of 2 weeks ago of 1.21:1.

Silver:

For the week, March silver advanced 8.1 cents. The COT report revealed that managed money added 1,173 contracts to their long positions and liquidated 3,751 contracts of their short positions. Commercial interests added 2,175 contracts to their long positions and also added 5,291 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.04:1, which is a complete reversal from the previous week when managed money was short by a ratio of 1.31:1. Two weeks ago, managed money was long silver by a ratio of 1.07:1.

 Canadian dollar:

For the week, the March Canadian dollar advanced 62 pips. The COT report revealed that leveraged funds added 511 contracts to their long positions and added a massive 13,746 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.00:1, which is up from the previous week of 2.57:1 and up dramatically from the ratio of 2 weeks ago of 2.16:1.

The massive increase of short interest by leveraged funds is a potential signal, that the Canadian dollar has made a bottom or temporary bottom. The short to long ratio has skyrocketed from the November 26 report to the December 10 COT report, but to put numbers to these ratios, consider that the net short position of leveraged funds in the Canadian dollar was 28,422 contracts on November 26 and by December 10 this had grown to 57,873 contracts. However, the March Canadian dollar declined only 0.58% in this two-week period. Managed money has been massively increasing their short position, but it is not moving prices beyond a fractional decline.

Another problem is that the cash Canadian dollar chart shows support going back to June 2010 in the 93.60-93.80 area. It is almost always a bad idea to be short at multiyear support levels.

Australian dollar:

For the week, the March Australian dollar lost 1.30 cents. The COT report showed that leveraged funds liquidated 374 contracts of their long positions and added 2,382 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.47:1, which is up from the previous week of 2.33:1 and the ratio of 2 weeks ago of 2.14:1.

Swiss franc:

For the week, the March Swiss franc advanced 28 pips. The COT report showed that leveraged funds added 10,170 contracts to their long positions and also added 931 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 3.86:1, which is up dramatically from the previous week of 2.39:1 and the ratio of 2 weeks ago of 2.10:1.

British pound: On December 13, the GBP/EUR cross generated a short-term sell signal, but remains on an intermediate term buy signal.

For the week, the March British pound lost 51 pips. The COT report showed that leveraged funds liquidated 4,760 contracts of their long positions and also liquidated 1,221 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.86:1, which is down slightly from the previous week of 2.89:1 but up from the ratio of 2 weeks ago of 2.43:1.

We view the pound as being very vulnerable to further selling by managed money, and the generation of a short-term sell signal in GBP/EUR is indicative of more short-term weakness. The massive open interest increases on December 11 and 12 when the March pound lost 64 and 36 pips respectively is further confirmation that lower prices are ahead. With a significant large net long position held by managed money, this will add additional fuel to the downside move. Sterling-euro should find support at 1.1798, but if it closes below this, lower prices are in store.

Euro:

For the week, the March euro advanced 38 pips. The COT report showed that leveraged funds added 10,571 contracts to their long positions and liquidated 1,839 contracts of their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 1.78:1, which is up from the previous week of 1.49:1 and the ratio of 2 weeks ago of 1.26:1.

Yen:

For the week, the March yen lost 27 pips. The COT report showed that leveraged funds added 2,237 contracts to their long positions and liquidated 7,533 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 3.32:1, which is down from the previous week of 3.71:1 but up from the ratio of 2 weeks ago of 3.19:1.

Dollar index:

For the week, the March dollar index lost 10 points. The COT report showed that leveraged funds added 5,389 contracts to their long positions and also added 1,400 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 1.82:1, which is down significantly from the previous week of 2.58:1 and the ratio of 2 weeks ago of 2.90:1.

S&P 500 E mini:

For the week, the March S&P 500 E mini lost 30.10 points. The COT report showed that leveraged funds liquidated 38,363 contracts of their long positions and also liquidated 1,793 contracts of their short positions. As of the latest report, leveraged funds are short the S&P 500 E mini by a ratio of 1.23:1, which is up from the previous week of 1.16:1 and about the same as the ratio of 2 weeks ago of 1.21:1.