Weekend Wrap for December 29, 2013

The COT reporting period: December 18-December 24 and we only use the tabulation for futures contracts, not options

The COT report will be released on Monday due to the Christmas holiday and will be published in the Weekend Wrap when data is available. As a result, this report will be truncated.

In this week’s report, we are discussing the possibility that silver may have bottomed and is headed higher in the coming weeks.

Soybeans:

For the week, January soybeans lost 7.50 cents, March -17.25, May -17.25. The COT report revealed that managed money liquidated 3,792 contracts of their long positions and also liquidated 811 contracts of their short positions. Commercial interests liquidated 18,295 contracts of their long positions and also liquidated 13,047 contracts of their short positions. As of the latest report, managed money is long soybeans by a stratospheric 10.29:1, which is above the previous week’s ratio of 10.05:1 and the ratio of 2 weeks ago of 9.08:1. The current ratio is the highest in over 4 months.

Soybean meal:

For the week, January soybean meal lost 90 cents, March – $6.40, May -6.70. The COT report revealed that managed money liquidated 3,278 contracts of their long positions and also liquidated 565 contracts of their short positions. Commercial interests added 2,121 contracts to their long positions and liquidated 4,974 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.82:1, which is down slightly from the previous week of 3.87:1 and the ratio of 2 weeks ago of 4.21:1.

Soybean oil:

For the week, January soybean oil lost 42 points, March -39, May -39. The COT report revealed that managed money liquidated 108 contracts of their long positions and added 1,835 contracts to their short positions. Commercial interests liquidated 3,207 contracts of their long positions and also liquidated 2,261 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 2.04:1, which is up slightly from the previous week of 1.99:1 and the ratio of 2 weeks ago of 2.01:1.

Corn:

For the week, March corn lost 5.75 cents, May -5.75, July -5.75. The COT report revealed that managed money liquidated 2,103 contracts of their long positions and also liquidated 11,552 contracts of their short positions. Commercial interests liquidated 3,700 contracts of their long positions and also liquidated 5,108 contracts of their short positions. As of the latest report, managed money remains short corn by a ratio of 1.41:1, which is down from the previous week of 1.45:1 and the ratio of 2 weeks ago of 1.40:1.

Chicago wheat:

For the week, March Chicago wheat lost 4.50 cents, May -4.50, July -3.50. The COT report revealed that managed money added 3,634 contracts to their long positions and also added 1,159 contracts to their short positions. Commercial interests added 2,386 contracts to their long positions and liquidated 583 contracts of their short positions. As of the latest report, managed money is short wheat by a ratio of 1.73:1, which is down from the previous week of 1.79:1 and the ratio of 2 weeks ago of 1.77:1.

Kansas City wheat:

For the week, March Kansas City wheat lost 13.00 cents, May -11.25, July -7.25. The COT report revealed that managed money liquidated 2,347 contracts of their long positions and added 3,791 contracts to their short positions. Commercial interests added 3,178 contracts to their long positions and liquidated 2,031 contracts of their short positions. Remarkably, as of the latest report, managed money still remains long by ratio of 1.29:1, which is down from the previous week of 1.60:1 and the ratio of 2 weeks ago of 1.71:1.

Cotton: On December 27, March cotton generated an intermediate term buy signal and had generated a short-term buy signal on December 9.

For the week, March cotton advanced 97 points, May +79, July +53. The COT report revealed that managed money added 988 contracts to their long positions and liquidated 1,816 contracts of their short positions. Commercial interests added 79 contracts to their long positions and added 6,167 contracts to their short positions. During the past 3 COT reporting periods, commercial interests have added a total of 21,327 new net short positions. This continues to keep cotton prices in check and in our view is ultimately bad news for anyone long the market. As of the latest report, managed money is long cotton by a ratio of 4.91:1, which is up significantly from the previous week of 4.04:1 and the ratio of 2 weeks ago of 1.73:1.

On December 27, March cotton made a new high for the move at 85.20, which is the highest price since 85.47 made on October 18. Since generating a short-term buy signal on December 9, certified stocks held in ICE approved warehouses have been steadily declining. For example, 91,141 bales were on hand as of December 9 and this had dropped to 35,315 bales on December 27. On October 18, there were 55,946 bales in approved warehouses and the last time certified stocks were as low as they were on December 27 occurred on October 15 when 35,292 bales were stored. On October 15, March cotton closed at 84.69. The central question now is whether stock levels will continue to decline. Cotton has shown a propensity to have large price advances when certified stocks decline, and then quickly reverse when stocks begin to build again.

At this juncture, we have no recommended positions after suggesting that clients liquidate their bullish cotton positions when we saw cotton stalling out. Additionally, we had suggested writing out of the money calls in conjunction with the bullish positions and recommended that clients liquidate these at their discretion. We remain cautious on a continued move higher and suggest that if clients want to play the bullish side of this market to initiate a bull spread in March-July 2014 cotton. If there is a continued draw down in stocks, the March contract will gain on July, however, if there is a reversal, the position will not be at significant risk. The high for the spread occurred on December 12, 2013 at 99 points premium to March and on December 27 the spread closed at 70 points premium to March.

Keep in mind, the 50 day moving average of 80.42 is considerably below its hundred day moving average of 82.72 and the 200 day moving average of 83.90. Another factor to consider is rising interest rates, which is negative for the commodity complex, and a deflationary cycle for most commodities is already well entrenched.

Sugar:

For the week, March sugar lost 2 points, May +1, July +1. The COT report revealed that managed money added 665 contracts to their long positions and also added 15,409 contracts to their short positions. Commercial interests added 3,130 contracts to their long positions and liquidated 3,389 contracts of their short positions. As of the latest report, managed money is short sugar by a ratio of 1.14:1, which is up from the previous week of 1.05:1, and a complete reversal from 2 weeks ago when managed money was long sugar by a ratio of 1.24:1. Remarkably, managed money has added 110,077 contracts beginning with the December 10 tabulation of the COT report. From December 4 through December 24, which encapsulates 3 COT reports, March sugar is down 47 points, which means that unless short positions were initiated in early December, profits on short positions are de minimis through December 24. This is the hazard of being a trend following black box lemming. As we pointed out in the December 22 Weekend Wrap, we were recommending bearish positions as early as October 29 when managed money was massively long futures.

Coffee:

For the week, March coffee advanced 1.05 cents, May +1.10, July +1.05. The COT report revealed that managed money added 369 contracts to their long positions and liquidated 4,055 contracts of their short positions. Commercial interests liquidated 1,106 contracts of their long positions and added 2,748 contracts to their short positions. As of the latest report, managed money is short coffee by ratio of 1.27:1, which is down from the previous week of 1.40:1 and the ratio of 2 weeks ago of 1.63:1. Early last week, we recommended that clients liquidate bullish positions in coffee, and short coffee calls had been recommended. Continue to hold this position and it has proven to be a winner though not a barn burner.

Cocoa:

For the week, March cocoa lost $34.00, May -26.00, July -20.00. The COT report revealed that managed money added 1,104 contracts to their long positions and liquidated 1,063 contracts of their short positions. Commercial interests liquidated 68 contracts of their long positions and added 993 contracts to their short positions. As of the latest report, managed money is long cocoa by a ratio of 8.31:1, which is up significantly from the previous week of 7.50:1 and the ratio of 2 weeks ago of 6.29:1.

Live cattle: On December 27, February cattle generated a short-term buy signal, which reversed the short-term sell signal generated on December 10. Cattle remains on an intermediate term buy signal.

For the week, December live cattle advanced 1.33 cents, February +1.05, April +1.12. The COT report revealed that managed money added 1,170 contracts to their long positions and also added 5,097 contracts to their short positions. Commercial interests added 869 contracts to their long positions and liquidated 1,478 contracts of their short positions. As of the latest report, managed money is long cattle by ratio of 4.99:1, which is down from the previous week of 5.32:1 and the ratio of 2 weeks ago of 5.69:1.

We think cattle has begun rallying in earnest after trading in a consolidation pattern for the past couple of months. On December 27, the February contract closed at 1.34950, which took out the recent high weekly close of 1.34800 made the week of November 11, and is the highest weekly close since the week of January 28 when February cattle closed at 1.35150. On the weekly continuation chart, the closing high of 1.33850 on December 27, which reflects the December contract made its highest close for 2013.

We think the February contract will gain on the forward contracts, and a more conservative way of trading cattle would be to buy the February 2014 contract and sell June 2014. On Friday, the spread closed at 5.40 cents premium to February, and the high for the spread going back to March 2013 is 5.825 cents premium to February made on October 30 and November 15, 2013 when February cattle made its high at 1.34225 and 1.34800 respectively. The 20 day moving average is 1.33480 and the 50 day moving average,1.33620, therefore we think the downside is limited at this juncture. For option traders we recommend using the April contract, which expires on April 4 because the February option will expire on February 7. During the last 30 days of the option, theta (time decay) begins to increasingly take its toll on the option price.  Aside from purchasing call options, clients should consider bull call spreads, bull put spreads, or writing puts. Cattle is entering its strong seasonal period and it tends to top out in February.

Lean hogs:

For the week, February lean hogs lost 60 points, April -20, June -25. The COT report revealed that managed money liquidated 3,956 contracts of their long positions and added 2,674 contracts to their short positions. Commercial interests liquidated 625 contracts of their long positions and also liquidated 3,515 contracts of their short positions. As of the latest report, managed money is long hogs by ratio of 3.18:1, which is down from the previous week of 3.91:1 and the ratio of 2 weeks ago of 4.61:1.

WTI crude oil:

For the week, February WTI crude oil advanced $1.00, March +1.13, April +1.24. The COT report revealed that managed money added 5,852 contracts to their long positions and liquidated 6,381 contracts of their short positions. Commercial interests liquidated 7,492 contracts of their long positions and also liquidated 3,706 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio 8.30:1, which is up significantly from the previous week of 6.80:1 and the ratio of 2 weeks ago of 7.12:1.

Heating oil:

For the week, February heating oil advanced 4.60 cents, March +2.19, April +1.79. The COT report revealed that managed money liquidated 2,309 contracts of their long positions and also liquidated 2,521 contracts of their short positions. Commercial interests liquidated 1,848 contracts of their long positions and added 3,078 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.22:1, which is up from the previous week of 2.05:1, but down from the ratio of 2 weeks ago of 2.46:1

Gasoline:

For the week, February gasoline advanced 2.47 cents, March +2.23, April +2.49. The COT report revealed that managed money added 5,526 contracts to their long positions and liquidated 537 contracts of their short positions. Commercial interests liquidated 7,507 contracts of their long positions and added 2,852 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 7.68:1, which is up from the previous week of 6.44:1 and the ratio of 2 weeks ago of 7.05:1.

Natural gas:

For the week, February natural gas lost 9.9 cents, March -11.7, April +3 ticks. The COT report revealed that managed money liquidated 5,052 contracts of their long positions and also liquidated 20,125 contracts of their short positions. Commercial interests liquidated 4,410 contracts of their long positions and added 5,285 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.79:1, which is up from the previous week of 1.63:1 and the ratio of 2 weeks ago of 1.24:1. 

Copper:

For the week, March copper advanced 7.70 cents, May +7.35, July +7.20. The COT report revealed that managed money added 6,750 contracts to their long positions and liquidated 2,045 contracts of their short positions. Commercial interests liquidated 1,842 contracts of their long positions and added 498 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 2.40:1, which is up significantly from the previous week of 1.89:1 and a complete reversal from 2 weeks ago when managed money was short by a ratio of 1.04:1.

We are reprinting the report about copper from the December 8, 2013 Weekend Wrap. OIA prides itself on providing early warnings on impending moves. The Friday before (December 6) the publication of the December 8 Weekend Wrap on copper, March copper closed at $3.2485. When OIA announced that March copper had generated a short-term buy signal on December 11, March copper closed at 3.2955. The intermediate term buy signal on March copper was generated December 16 and the closing price for that date was 3.3295. The closing price for copper on December 27 was 3.3850. Additionally, March copper made a high of 3.4475 on December 24, although this was attributed to a “fat finger” issue.

From December 6 through December 26 open interest has increased by 9,904 contracts, which is positive, but not a major increase. The daily high of 3.4475 made on December 24 nearly reached the high made during the week of April 8 when May copper reached 3.4525.

Our recommendation to initiate a bull spread in March-July 2014 copper continues to work although the trade is certainly not a barn burner. We recommended a conservative trade as opposed to going long the futures because of their volatility and the options market for copper is illiquid unfortunately.

From the December 8, 2013 Weekend Wrap:

In this week’s report, we are going to examine copper because this has been one commodity whose trading has baffled clients and other market participants. First, copper generated a short and intermediate term sell signal on November 12, 2013, and since then has lost 25 ticks or -0.077%, or essentially unchanged during a period of approximately 3 weeks. Underscoring the lack of movement is the 50 day moving average of $3.26 for the March contract, which is unchanged from the 150 day moving average of 3.26. Year to date, March copper is trading 12.25% lower.

We examined the spread between March and July copper and as of Friday’s close, March is selling at a 50 point premium to July, which is 15 points shy of the high made on December 4 of 65 points premium to July. Prior to December 4, March 2014 copper sold at a discount to July 2014 copper going as far back as February 22, 2013. In short, copper has within the past two days moved into backwardation and this is underscored by copper stock levels nearing 5 year lows on the London Metal Exchange and the Commodity Exchange of New York. Additionally, Shanghai stocks are at levels last seen in 2012.

Open interest action on advances and declines has been decidedly bearish. For example, during the rally that occurred between November 20 and November 25 when March copper advanced 6.40 cents, open interest declined by 9,554 contracts meaning that longs and shorts were liquidating as the market was moving higher. On the price decline that began on November 26 through December 3, total open interest declined 3,510 while March copper declined 6.25 cents. This kind of market action is not bearish, however, on the subsequent rally, which began on December 4 through December 5 (+6.20 cents) open interest fell 5,598 contracts. Again, this is bearish open interest action relative to the price advance. The preliminary stats for Friday show that open interest increased by 2,545 contracts on volume of 53,312 contracts and March copper advanced 1.90 cents. If the final open interest number is near the preliminary number, it would be the first recent indication of positive price and open interest action. If copper is in the process of generating a short-term buy signal, it would be expected to see open interest declines on price advances because managed money is significantly net short copper.

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.

Palladium:

For the week, March palladium advanced $13.20. The COT report revealed that managed money liquidated 1,576 contracts of their long positions and added 1,517 contracts to their short positions. Commercial interests added 763 contracts to their long positions and liquidated 1,617 contracts of their short positions. As of the latest report, managed money is long palladium by ratio of 5.21:1, which is down dramatically from the previous week of 9.52:1 and the ratio of 2 weeks ago of 16.28:1. The current ratio is the lowest that we’ve seen in at least one year.

Platinum:

For the week, April platinum advanced $45.20. The COT report showed that managed money liquidated 705 contracts of their long positions and added 763 contracts to their short positions. Commercial interests added 1,711 contracts to their long positions and liquidated 1,876 contracts of their short positions. As of the latest report, managed money is long platinum by a ratio of 1.80:1, which is down from the previous week of 1.93:1 and the ratio of 2 weeks ago of 2.16:1.

Gold:

For the week, February gold advanced $10.30. The COT report showed that managed money added 559 contracts to their long positions and also added 3,128 contracts to their short positions. Commercial interests liquidated 2,790 contracts of their long positions and also liquidated 3,644 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.14:1, which is down from the previous week of 1.17:1 and the ratio of 2 weeks ago of 1.20:1.

Silver: Special report on silver

For the week, March silver advanced 59.6 cents. The COT report revealed that managed money liquidated 40 contracts of their long positions and added 344 contracts to their short positions. Commercial interests added 582 contracts to their long positions and also added 325 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.12:1, which is down slightly from the previous week of 1.14:1, but up from the ratio of 2 weeks ago of 1.04:1.

This past week, March silver closed at $20.049, which is the highest weekly close for silver since the week of November 11, 2013. During the week of December 2, 2013 silver on the weekly continuation chart made a low of $18.98, which was slightly below 19.10, the low made during the week of August 5, 2013. After making the December 2 low of 18.98, there was a secondary low of 19.10 made during the week of December 16.

On June 28, 2013 silver made its major low on the weekly continuation chart of 18.185. Since making this low 6 months ago on the 3rd highest volume week of 2013, silver has not gotten close to testing it. We view this as incredibly positive, because during the past 6 months the market has had every opportunity and reason to test the June 28 low. The June 28 low was the lowest price for silver on the continuation chart since August 2010. From August 2010 through April 28, 2011, silver proceeded to rally with occasional corrections from $19.00 to its high of $49.56.

On the spot silver chart, the 200 week moving average is $28.08 and the 500 week moving average is 18.43. In short, silver is trading in its long-term value zone. The reason we are writing about silver instead of gold is that silver tends to lead the precious metals group higher. For example, during the rally of a couple of months ago, which began the week of August 5 through August 23, 2013, silver advanced 20.99% on the continuation chart while gold advanced 6.53% on its continuation chart. Going back further to the rally that occurred during August and September of 2012, silver on the continuation chart advanced 23.60% while gold on the continuation chart advanced 9.55% from August 20, 2012 through September 14, 2012.

From December 2 through December 27, March silver has advanced 0.28% while February gold declined 3.00% and January platinum advanced 0.72%. During this time through December 26, open interest has been essentially unchanged (-271 contracts). We think the speculative excess in silver has been wrung out of it and there may be some interesting opportunities on the horizon.  From December 19 through December 26, open interest declined 3,823 contracts while March silver has advanced 73 cents. This is most definitely bearish open interest action relative to the price advance. Additionally, March silver advanced 13.3 cents on December 27 and total open interest declined by 1,040 contracts in the preliminary report. In short, final and preliminary open interest stats for the past several days, show that longs and shorts have been consistently liquidating as silver prices advance. This is not the kind of action that gets anyone excited about a potential long position. For the past month, silver has been trading in a consolidation pattern, The first signal that silver may be on the move higher is if it can rally to $20.50, which in our view would signify a breakout, although a minor one. The key pivot points to watch are 20.339, 20.500, 20.609. If silver is able to penetrate and close above the 3 pivot points, it will be on its way to generating a short-term buy signal.

For somewhat more adventurous clients, you can consider writing out of the money puts. For example, the March option expires on February 25, and writing a put at the $17.00 strike price would allow you to collect $680.00 of premium and the delta on this strike (December 27) is .098%. Therefore, if silver reverses and has a major decline, the portfolio will not be impacted significantly if position sizing is kept small. We do recommend a small position for this trade, however, once silver generates a short-term buy signal, a more aggressive bullish strategy can be initiated.

One final thought about silver… One of the reasons we saw copper prices advancing in the December 8 Weekend Wrap was that inventories at major exchange warehouses were down near 5 year lows. Since most of silver is a byproduct of copper mining and to a lesser degree gold mining, global stocks of silver may be at levels where supply and demand has been brought into balance.

Canadian dollar:

For the week, the March Canadian dollar declined 42 pips. The COT report revealed that leveraged funds liquidated 4,261 contracts of their long positions and also liquidated 7,026 contracts of their short positions. As of the latest report, leveraged funds are short the Canadian dollar by ratio of 4.74:1, which is up from the previous week of 4.14:1 and the ratio of 2 weeks ago of 3.00:1.

Australian dollar:

For the week, the March Australian dollar lost 47 pips. The COT report revealed that leveraged funds added 1,077 contracts to their long positions and also added 2,009 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 4.22:1, which is down from the previous week of 4.40:1, but up substantially from the ratio of 2 weeks ago of 2.47:1.

Swiss franc:

For the week, the March Swiss franc advanced 40 pips. The COT report revealed that leveraged funds added 1,269 contracts to their long positions and also added 2,646 contracts to their short positions. As of the latest report, leveraged funds are long the franc by a ratio of 2.56:1, which is down significantly from the previous week of 3.31:1 and the ratio of 2 weeks ago of 3.68:1.

British pound:

For the week, the March British pound advanced 1.29 cents. The COT report revealed that leveraged funds added 3,413 contracts to their long positions and also added 5,165 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 3.10:1, which is down from the previous week of 3.52:1, but up from the ratio of 2 weeks ago of 2.86:1.

Euro:

For the week, the March euro advanced 61 pips. The COT report revealed that leveraged funds added 3,747 contracts to their long positions and liquidated 637 contracts of their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 2.30:1, which is up from the previous week of 2.18:1 and the ratio of 2 weeks ago of 1.78:1.

Yen:

For the week, the March yen lost 101 pips. The COT report revealed that leveraged funds liquidated 1,978 contracts of their long positions and added 2,151 contracts to their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 3.08:1, which is up from the previous week of 2.90:1, but down from the ratio of 2 weeks ago of 3.32:1.

Dollar index:

For the week, the March dollar index lost 22 points. The COT report revealed that leveraged funds liquidated 1,546 contracts of their long positions and added 4,018 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 5.51:1, which is up significantly from the previous week of 3.84:1 and has increased by a factor of 3 from the ratio of 2 weeks ago of 1.82:1.

S&P 500 E mini:

For the week, the March S&P 500 E mini gained 22.00 points. The COT report revealed that leveraged funds liquidated 155,936 contracts of their long positions and added 75,875 contracts to their short positions. As of the latest report, leveraged funds are short the S&P 500 E mini by a ratio of 1.54:1, which is up significantly from the previous week of 1.06:1 and the ratio of 2 weeks ago of 1.23:1.