Weekend Wrap for December 22, 2013

The COT reporting period for this week’s report is December 11-December 17.

Soybeans: OIA strongly advises against initiating new long positions in soybeans.

For the week, January soybeans advanced 11.50 cents, March +17.25, May +19.00. The COT report showed that managed money added 7,241 contracts to their long positions and liquidated 1,315 contracts of their short positions. Commercial interests added 10,800 contracts to their long positions and also added 12,489 contracts to their short positions. As of the latest report, managed money is long soybeans by a stratospheric 10.05:1, which is up from the previous week of 9.08:1 and the ratio of 2 weeks ago of 7.50:1.

January March soybeans remain on a short and intermediate term buy signal, but we are seeing signs this may be in the process of changing. We watch spreads very carefully, and find they are the canary in the coal mine and often signals the beginning of a major uptrend or downtrend. The characteristic behavior of the front month soybean contract during the past couple of cycles is that the spread of the front month tends to widen against the next contract month and more deferred contracts as it nears expiration. However, this has not been the case with the January-March 2014 spread. For example, on December 20, the spread closed at 8.00 cents premium to March, which is the lowest close for the spread since August 15, 2013 when it closed at 8.25 cents premium to January. This is an extremely troubling development for anyone long soybeans. The extreme weakening of the spread signals lower prices ahead for soybeans in our view, especially since the Brazilian harvest is on the horizon and it is expected to be a bumper crop. However, there is another reason to expect lower prices. 

Our our analysis of the COT report, price and open interest action is another reason that leads us to think soybeans are headed lower. 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 17 COT report (long to short ratio of 10.05:1)* were net long 178,021 contracts, an increase of 31,565 contracts or approximately 21.5%. Commercial interests were net short 211,450 contracts on November 26 and by December 17 were net short 224,614 contracts, or an increase of 13,164 contracts.

From November 27 through December 17, January soybeans advanced only 17.25 cents while March gained 22.75. In other words, managed money massively increased their net long position by 21.5%, but this only moved prices fractionally higher. Additionally, commercials increased their short positions by a relatively small amount, indicating that heavy selling pressure was not coming from the commercial sector. The abysmal price action from November 27 through December 17 would be understandable if commercials were adding significant numbers of new shorts, which would have kept a lid on prices. 

From November 27 through December 17, total open interest for all contracts increased by 44,853 contracts, or almost 7.5%, yet the positive open interest increase was unable to move soybeans significantly higher. 

*In the 3rd paragraph, we discussed the long to short ratios of soybeans and the heavy net long position of managed money. To put this in perspective, we examined our COT records when soybeans were trading at, or above the current range of prices. In the table below, we are providing the dates of the COT reports, the closing price on that date, the closing price of the January-March soybean spread and the long to short ratio. This table sums up why we are bearish on soybeans. The closing price is for the January contract

COT Date         Closing price  Long to short ratio      January-March 2014 spread close on COT Date
August 27          $13.65 1/2           5.00:1                                29.75 cents premium to January
September 3       13.85                   7.14:1                                 26.75 cents premium to January
September 10     13.55 1/4            7.30:1                                 17.00 cents premium to January
September 17     13.43                   7.83:1                                 18.00 cents premium to January
September 24    13.14 3/4            9.52:1                                 16.25 cents premium to January
December 17      13.46 1/2          10.05:1                                 11.75 cents premium to January  
December 20  13.39                  N/A                                    8.00 cents premium to January  

The table clearly shows that the long to short ratio is much higher today than it was when soybeans were trading at higher prices than December 17. The collapse of the premium of January over March is evident when examining soybean prices that are equal to, or above the closing price on December 17. 

There are a couple of other factors to keep in mind when looking at current prices for soybeans. On the continuation chart, the 50 day moving average of 13.01 3/4 is significantly below the 200 day moving average of 13.86 1/2.  The moving average for the January contract YTD is 12.82 1/2 and January soybeans are only 2.29% higher YTD while March is +1.24% and its YTD moving average is 12.77 7/8. Another important point to remember with respect moving averages is the difference between the 50 day moving average in the January contract and its 200 day moving average is only approximately 22 cents. While the difference between the 50 day MA in the March contract and its 200 day MA is an even smaller 13 cents. In short, it wouldn’t take much downside action for the 50 day MA to cross below the 200 day MA .

With the stratospheric long to short ratio, the inability for soybeans to move significantly higher on increased open interest and the collapse of the January-March spread sows the seed for the upcoming decline. Managed money will provide the fuel for an extended move lower. Although March soybeans have not generated a short or intermediate term sell signal, we expect a short-term sell signal to be shortly. Once this occurs, we will advise when to initiate bearish positions. However, more adventurous traders may consider writing out of the money calls, which is a trade that we had advised earlier, but recommended covering it based upon price action at the time. Additionally, we did not have the data that we have included in this report which confirms our bearish views of soybeans. Another factor to consider, the WASDE report will not be issued until January 10, which means there is only a moderate amount of risk because soybeans will likely discount some of the report. In addition, holiday volumes and a lack of participation will likely keep prices in check. Our key pivot points are as follows: 13.06, 12.98 1/2 and 12.87. If March soybeans closes below any of these 3 points, the likelihood of a short-term sell signal increases. Soybeans remain on a short and intermediate term buy signal.

 Soybean meal:

For the week, January soybean meal advanced $14.00, March +10.40, May +11.30. The COT report revealed that managed money added 2,552 contracts to their long positions and also added 2,390 contracts to their short positions. Commercial interests added 3,640 contracts to their long positions and also added 1,513 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.87:1, which is down from the previous week of 4.21:1 and the ratio of 2 weeks ago of 3.96:1.

Soybean oil:

For the week, January soybean oil lost 39 points, March -46, May -47. The COT report showed that managed money added 1,171 contracts to their long positions and also added 1,276 contracts to their short positions. Commercial interests liquidated 570 contracts of their long positions and also liquidated 6,089 of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.99:1, which is down slightly from the previous week of 2.01:1 but above the ratio of 2 weeks ago of 1.83:1.

Corn:

For the week, March, May, and July each gained 7.75 cents. The COT report showed that managed money liquidated 411 contracts of their long positions and added 11,053 contracts to their short positions. Commercial interests liquidated 3,758 contracts of their long positions and also liquidated 12,560 of their short positions. As of the latest report, managed money is short corn by a ratio of 1.45:1, which is up from the previous week of 1.40:1, but down slightly from the ratio of 2 weeks ago of 1.50:1.

Chicago wheat:

For the week, March Chicago wheat lost 15.25 cents, May -14.00, July -12.25. The COT report showed that managed money liquidated 149 contracts of their long positions and added 963 contracts to their short positions. Commercial interests added 3,771 contracts to their long positions and liquidated 2,356 contracts of their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.79:1, which is up from the previous week of 1.77:1 and the ratio of 2 weeks ago of 1.72:1.

Kansas City wheat:

For the week, March KC wheat lost 15.25 cents, May -18.00, July -18.50. The COT report showed that managed money liquidated 4,741 contracts of their long positions and also liquidated 1,142 contracts of their short positions. Commercial interests added 2,947 contracts to their long positions and liquidated 1,687 contracts of their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 1.60:1, which is down from the previous week of 1.71:1 and the ratio of 2 weeks ago of 1.91:1.

During the past week, we are seeing some positive spread action in Kansas City wheat. For example, on December 13 the March-May 2014 spread closed at 3.25 cents premium to May and the March contract closed at $6.72 1/2. On December 20, the spread had narrowed to one half cent premium to May even though March declined 15.25 cents from December 13. In short, March was gaining on May even though both were declining. This is the  first signal, there could be a turnaround in KC wheat. The exact opposite is happening in Chicago wheat. On Friday, the March-May 2014 spread closed at 7.25 premium to May, which is the lowest close for the spread since September 10 when it closed at 7.50 premium to May.

Cotton:

For the week, March cotton lost 7 points, May +1, July +62. The COT report showed that managed money added 4,544 contracts to their long sessions and liquidated a hefty 12,560 contracts of their short positions. Commercial interests liquidated 4,049 contracts of their long positions and added 13,814 contracts to their short positions. As of the latest report, managed money is long by a ratio of 4.04:1, which is a dramatic increase from the previous week of 1.73:1 and the ratio of 2 weeks ago of 1.29:1.

In our reports of last week, we emphasized that prices were not advancing as they should be considering that the massive increase of open interest was moving prices only fractionally higher. The current COT report confirms that commercial interests added 13,814 contracts to their short positions, which is in addition to the 8,201 short positions added in the COT report of December 10. The COT report of December 3 showed that commercials liquidated 1,384 contracts of their short positions.

In other words, as cotton prices have advanced commercial interests have been getting increasingly aggressive about adding to short positions. No doubt, this is keeping a lid on prices even though managed money has gotten aggressive about initiating new long positions. Clearly, speculators are on the buy side and commercials are short. On December 9, March cotton generated a short-term buy signal, and we advised the initiation of new long positions at that time. We continue to advise writing out of the money calls and tightening sell stops on long positions.

Coffee:

For the week, March coffee gained 5 points, May +5, July +15. The COT report showed that managed money liquidated 1,481 contracts of their long positions and also liquidated 10,449 contracts of their short positions. Commercial interests liquidated 1,835 contracts of their long positions and added 4,769 contracts to their short positions. As of the latest report, managed money is short coffee by ratio of 1.40:1, which is down from the previous week of 1.63:1 and the ratio of 2 weeks ago of 1.62:1.

Sugar:

For the week, March sugar advanced 34 points, May +20, July +7. The COT report showed that managed money added 3,174 contracts to their long positions and also added a massive 43,172 contracts to their short positions. Commercial interests added 9,732 contracts to their long positions and liquidated 28,765 contracts of their short positions. As of the latest report, managed money is now short by a ratio of 1.05:1, which is a dramatic reversal from the previous week when they were long by a ratio of 1.24:1 and the ratio of 2 weeks ago when managed money was long by 2.02:1.

“What the wise man does in the beginning, the fool does in the end.”
Warren Buffet

On October 29, 2013, OIA announced that March sugar had generated a short-term sell signal and generated an intermediate term sell signal on November 14. On October 29 March sugar closed at 18.45 and on November 14 closed 17.64. On October 29, which was the tabulation of the COT report managed money was long by a ratio of 3.91:1. On November 19, which was the COT tabulation date after March sugar generated an intermediate term sell signal, the long to short ratio of managed money stood at 3.54:1. During the generation of the sell signals OIA was advising clients to trade sugar from the short side. 

On October 29, the number of reportable traders in the managed money category (traders who hold 10,000 contracts in a single month or 15,000 in all months) holding short positions stood at 21 and 52 held long positions. By the time OIA’s intermediate term sell signal was generated on November 14, the COT report of November 19 showed that traders holding reportable short positions totaled 31 with 35 holding long positions. By the December 17 COT report, traders holding reportable short positions stood at 47 with 32 holding reportable long positions. In other words, the largest hedge funds trading sugar were significantly net long on November 19 (November 19 close 17.65), a month after March sugar topped out on October 18 at 20.16. By the COT report of December 3 (December 3 close 16.81), 33 reportable traders held short positions and 33 held long positions. It was not until the December 10 COT report that reportable traders became net short (41) and 34 held long positions.

All told, managed money initiated new short positions totaling 94,668 contracts between December 4 and December 17 (this encompasses two COT reports of December 10 and December 17) and the high to low price range in this time frame was 16.87-15.91. In short, managed money got bearish in massive numbers at the very low-end of the trading range. On December 18, March sugar made its closing low at 15.89 and then proceeded to rally on Thursday and Friday closing at 16.45.

In our view, the only explanation of this lemming like behavior is the proliferation of trend following black box systems in which computers tell hedge fund managers when it is time to buy and sell and often do so at the top and bottom of markets.

Live cattle:

For the week, December live cattle advanced 65 points, February +1.05 cents, April +70 points. The COT report showed that managed money liquidated 533 contracts of their long positions and added 1,207 contracts to their short positions. Commercial interests liquidated 3,832 contracts of their long positions and also liquidated 4,313 contracts of their short positions. As of the latest report, managed money is long cattle by ratio of 5.32:1, which is down from the previous week of 5.69:1 and the ratio of 2 weeks ago of 5.45:1.

Lean hogs:

For the week, February lean hogs lost 92 points, April -33, June 1.00 cents. The COT report showed that managed money liquidated 4,773 contracts of their long positions and added 5,096 contracts to their short positions. Commercial interests added 2,075 contracts to their long positions and liquidated 4,119 contracts of their short positions. As of the latest report, managed money is long hogs by ratio of 3.91:1, which is down from the previous week of 4.61:1 and the ratio of 2 weeks ago of 4.95:1.

WTI crude oil:

For the week, February crude oil advanced $2.39, March +2.35, April +2.18. The COT report showed that managed money added 4,562 contracts to their long positions and also added 2,485 contracts to their short positions. Commercial interests added 2,335 contracts to their long positions and also added 9,187 contracts to their short positions. As of the latest report, managed money is long WTI by a ratio of 6.80:1, which is down from the previous week of 7.12:1, but up from the ratio of 2 weeks ago of 5.78:1.

As we said in our reports of last week, we have been unimpressed with the price and open interest action in WTI and Brent crude oil. However, we are mindful that the spread between February and April WTI has widened after making a low of 32 cents premium to April on November 27 to close at 59 cents premium to February on December 20. The low of the spread coincided with the low close in the February contract of 92.63 on November 27. In short, we do not like the price and open interest action of WTI, but the spread tells us the market wants to go higher. WTI remains on a short term buy signal, but an intermediate term sell signal.

Heating oil:

For the week, January heating oil advanced 10.24 cents, February +9.50, March +8.80. The COT report showed that managed money liquidated 4,830 contracts of their long positions and added 1,155 contracts to their short positions. Commercial interests added 2,590 contracts to their long positions and liquidated 10,784 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.05:1, which is down from the previous week of 2.46:1 and about the same as the ratio of 2 weeks ago of 2.09:1.

Gasoline:

For the week, January gasoline advanced 15.38 cents, February +14.10, March +13.05. The COT report showed that managed money liquidated 3,302 contracts of their long positions and added 201 contracts to their short positions. Commercial interests added 3,701 contracts to their long positions and added 57 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 6.44:1, which is down from the previous week of 7.05:1 and the ratio of 2 weeks ago of 7.46:1.

Natural gas:

For the week, January natural gas advanced 6.7 cents, February +11.7, March +13.3. The COT report showed that managed money added 29,266 contracts to their long positions and liquidated 37,115 contracts of their short positions. Commercial interests liquidated 9,112 contracts of their long positions and also liquidated 4,400 contracts of their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.63:1, which is up dramatically from the previous week of 1.24:1 and the ratio of 2 weeks ago of 1.10:1.

For the past 7 consecutive weeks beginning the week of November 4, January natural gas has advanced. Although this is an impressive performance, it is 2 weeks shy of the 9 week consecutive advance that occurred beginning the week of February 18 and ended the week of April 15. However, the current long to short ratio in natural gas is considerably higher than it was when natural gas prices traded at approximately the same level back in April 2013. For example, natural gas topped out at $4.429 during the week of April 15 and the COT report, which was tabulated on April 16 showed a long to short ratio of 1.26:1. The highest long to short ratio during the rally occurred in the COT report of April 9 at 1.34:1 when May natural gas traded in a range from 4.004-4.264.

Conceivably, natural gas could continue its rise for another 2 weeks, but we don’t think this is in the cards for one very important reason: The spread between January and March 2014 natural gas collapsed last week with January selling at a 3.5 cent discount to March. To put this in perspective consider that the lowest close for the spread going back to March 22, 2013 prior to this week occurred on November 5, 2013 when January sold at a 7 tick discount to the March contract and January natural gas closed at $3.551. The high for the spread occurred on April 18 when January sold at a 15.9 cent premium to March and natural gas had been trading steadily higher for approximately 9 weeks.

In our view, the collapse of the spread to major new lows is a potential sign of weakness in the spot market. The extremely high long to short ratio is indicative of a market that is massively overbought by managed money and it is apparent that the black box trend following crowd is getting long at what may prove to be a top, or temporary top. Trading natural gas today is trading the weather, and anyone with this experience knows conditions change rapidly to the benefit or detriment of traders. Conceivably, we may see a blow off top before the market turns lower. We would exercise extreme caution, and tighten sell stops on long positions. 

Copper:

For the week, March copper lost 80 points, July -5 September +5 December -15. The COT report showed that managed money added 9,146 contracts to their long positions and liquidated 12,755 contracts of their short positions. Commercial interests liquidated 6,134 contracts of their long positions and added 4,346 contracts to their short positions. As of the latest report, managed money is long by a ratio of 1.89:1, which is a dramatic increase from the previous week when they were short by a ratio of 1.04:1 and even more dramatic than the ratio of 2 weeks ago when managed money was short by 1.63:1.

Palladium:

For the week, March palladium lost $17.45. The COT report revealed that managed money liquidated 560 contracts of their long positions and added 880 contracts to their short positions. Commercial interests added 702 contracts to their long positions and liquidated 279 contracts of their short positions. As of the latest report, managed money is long palladium by ratio of 9.52:1, which is a dramatic decline from the previous week of 16.28:1 and the ratio of 2 weeks ago of 12.60:1.

Platinum:

For the week, April platinum lost $33.10. The COT report showed that managed money liquidated 663 contracts of their long positions and added 1,256 contracts to their short positions. Commercial interests added 856 contracts to their long positions and also added 1,892 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 1.93:1, which is down from the previous week of 2.16:1 and the ratio of 2 weeks ago of 2.23:1.

Gold:

For the week, February gold lost $30.90. The COT report revealed that managed money liquidated 931 contracts of their long positions and added 1,110 contracts to their short positions. Commercial interests added 5,090 contracts to their long positions and also added 4,253 contracts to their short positions. As of the latest report, managed money is long gold by ratio of 1.17:1, which is down from the previous week of 1.20:1 and up slightly from the ratio of 2 weeks ago of 1.12:1.

Silver:

For the week, March silver lost 15.1 cents. The COT report showed that managed money added 631 contracts to their long positions and liquidated 1,929 contracts of their short positions. Commercial interests liquidated 379 contracts of their long positions and added 766 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 1.14:1, which is up from the previous week of 1.04:1, and a dramatic reversal from 2 weeks ago when managed money was short by a ratio of 1.31:1.

Canadian dollar:

For the week, the March Canadian dollar lost 58 pips. The COT report showed that leveraged funds liquidated 7,104 contracts of their long positions and added 3,735 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 4.14:1, which is up substantially from the previous week of 3.00:1 and the ratio of 2 weeks ago of 2.57:1.

Australian dollar:

For the week, the Australian dollar lost 41 pips. The COT report revealed that leveraged funds liquidated 10,722 contracts of their long positions and added 579 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 4.40:1, which is up significantly from the previous week of 2.47:1 and the ratio of 2 weeks ago of 2.33:1.

Swiss franc:

For the week, the March Swiss franc lost 75 pips. The COT report revealed that leveraged funds added 3,340 contracts to their long positions and also added 1,898 contracts to their short positions. As of the latest report, leveraged funds are long by a ratio of 3.31:1, which is down slightly from the previous week of 3.68:1, but up substantially from the ratio of 2 weeks ago of 2.39:1.

British pound:

For the week, the March British pound advanced 43 pips. The COT report showed revealed that leveraged funds liquidated 7,775 contracts of their long positions and also liquidated 9,688 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 3.52:1, which is up substantially from the previous week of 2.86:1 and the ratio of 2 weeks ago of 2.89:1.

Euro:

For the week, the March euro lost 61 pips. The COT report revealed that leveraged funds added 8,086 contracts to their long positions and liquidated 4,976 contracts of their short positions. As of the latest report, leveraged funds are long the euro by ratio of 2.18:1, which is up substantially from the previous week of 1.78:1 and the ratio of 2 weeks ago of 1.49:1.

Yen:

For the week, the March yen lost 80 pips. The COT report showed that leveraged funds added 5,174 contracts to their long positions and liquidated 2,401 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.90:1, which is down from the previous week of 3.32:1 and the ratio of 2 weeks ago of 3.71:1.

Dollar index:

For the week, the March dollar index advanced 38 points. The COT report revealed that leveraged funds liquidated 8,977 contracts of their long positions and also liquidated 1,223 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 3.84:1, which is up dramatically from the previous week of 1.82:1 and the ratio of 2 weeks ago of 2.58:1.

S&P 500 E mini:

For the week, the March S&P 500 E mini gained 38.19 points. The COT report showed that leveraged funds added 52,825 contracts to their long positions and liquidated 50,192 contracts of their short positions. As of the latest report, leveraged funds are short the E mini by a ratio of 1.06:1, which is down substantially from the previous week of 1.23:1 and the ratio of 2 weeks ago of 1.16:1. The current ratio is the lowest that we have seen in at least a year.