Weekend Wrap for December 8, 2013

The COT reporting period is from Wednesday November 25-Tuesday, December 3.

The World Agriculture Supply Demand Report (WASDE) will be released December 10.

Soybeans:

For the week, January soybeans lost 11.00 cents, March -7.25, May -1.25. The COT report showed that managed money added 10,830 contracts to their long positions and liquidated 76 contracts of their short positions. Commercial interests liquidated 866 contracts of their long positions and also liquidated 2,533 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 7.50:1, which is up from the previous week of 7.03:1 and the ratio of 2 weeks ago of 6.93:1.

Soybean meal:

For the week, December soybean meal lost $9.30, January -9.20, March -5.40. The COT report showed that managed money added 2,083 contracts to their long positions and liquidated 1,438 contracts of their short positions. Commercial interests added 706 contracts to their long positions and also added 4,585 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio 3.96:1, which is up from the previous week of 3.61:1 and the ratio of 2 weeks ago of 2.86:1.

Soybean oil:

For the week, December soybean oil gained 6 points, January +3, March +3. The COT report showed that managed money liquidated 1,157 contracts of their long positions and added 8,385 contracts to their short positions. Commercial interests added 5,627 contracts to their long positions and liquidated 6,623 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.83:1, which is up from the previous week of 1.60:1 and the ratio of 2 weeks ago of 1.66:1.

Corn:

For the week, December corn advanced 8.75 cents, March +9.75, May +10.00. The COT report showed that managed money added 4,707 contracts to their long positions and liquidated 12,444 contracts of their short positions. Commercial interests liquidated 22,985 contracts of their long positions and also liquidated 13,359 contracts of their short positions. As of the latest report, managed money is short corn by a ratio of 1.50:1, which is down slightly from the previous week of 1.60:1, but up significantly from the ratio of 2 weeks ago of 1.19:1.

We think that corn has bottomed temporarily and the impetus for higher prices may simply be the fact that speculative market participants have capital gains on short positions and they have to pay taxes on them whether they liquidate or not. Also the ethanol market has exploded to the upside with prices the highest they have been since May 2013. This also bodes well for corn. The WASDE report may not be negative, and the market has discounted most if not all bad news, which means that the path of least resistance may be higher if for no other reason than to further vanquish speculative shorts.

Chicago wheat:

For the week, December Chicago wheat lost 17.75 cents, March -17.75, May -17.25. The COT report showed that managed money liquidated 2,576 contracts of their long positions and also liquidated 4,260 contracts of their short positions. Commercial interests added 226 contracts to their long positions and liquidated 173 contracts of their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.72:1, which is the same as the previous week of 1.72:1, but slightly above the ratio of 2 weeks ago of 1.66:1.

Kansas City wheat:

For the week, December Kansas City wheat lost 8.00 cents, March -13.75, May -12.00. The COT report showed that managed money added 216 contracts to their long positions and liquidated 1,335 contracts of their short positions. Commercial interests liquidated 1,921 contracts of their long positions and also liquidated 215 contracts of their short positions. As as of the latest report, managed money is long Kansas City wheat by a ratio of 1.91:1, which is up from the previous week of 1.80:1, but below the ratio of 2 weeks ago of 2.28:1.

Interestingly, managed money is as bearish on Chicago wheat as they are bullish on KC wheat, but Kansas City wheat has been the underperformer during the 4th quarter losing 6.05% versus -5.24% for Chicago wheat. Many readers would be surprised that March corn outperformed both Chicago and KC wheat losing 4.46% in the 4th quarter to date.

On December 6, March KC wheat made a low of $6.93 1/4, which is a new low for the move, and the penetration of 6.94, the low made on November 21 is an ominous sign portending lower prices ahead. We have been advocating writing out of the money puts in the Chicago wheat contract versus KC because of the fairly significant long position held by managed money. With the new low move in KC wheat and Chicago wheat taking out the November 18 low of $6.52 and making a new low of 6.49 1/4, we think lower prices are in the cards for the short-term. The fundamentals for wheat are strong, but last week’s very disappointing sales, which was the lowest of the season have put a damper on any rally for the time being. Short put positions in Chicago or KC wheat should be liquidated.

Cotton:

For the week, December cotton advanced 1.24 cents, March +1.06, May +81 points. The COT report showed that managed money liquidated 1,919 contracts of their long positions and also liquidated 1,995 contracts of their short positions. Commercial interests liquidated 21 contracts of their long positions and also liquidated 1,384 contracts of their short positions. As of the latest report, managed money is long cotton by a ratio of 1.29:1, which is up from the previous week of 1.27:1 and the ratio of 2 weeks ago of 1.18:1.

On October 8, December cotton generated a short and intermediate term sell signal and OIA had been warning that cotton was topping out in early October when it was trading in the 87 cent range. Clients that followed our advice to initiate bearish positions once sell signals were generated did very well in the trade. Please see the October 6, 2013 Weekend Wrap. On the continuation chart, cotton plunged to a bit below 74 cents, which is where cotton found support in January 2013. Since then, it has rallied and now appears to be on the verge of generating a short-term buy signal.

Since bottoming on November 22, at 76.65 cents, March cotton has rallied to close at 80.41 on December 6. From November 25 through December 5, March cotton has advanced 1.62 cents while open interest has increased 1,491 contracts. This is bullish price and open interest action. 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.

The action of the May-December 2014 spread is more impressive because it has been in backwardation for almost all of 2013, with the exception of a couple of days during mid January. Since its recent bottom of +1.82 premium to May on November 22, the spread has rallied to close at 4.02 premium to May on December 6, which is the highest close since October 23 when the spread closed at 4.17 cents premium to May.

On Friday, the March contract advanced 1.56 cents on total volume (preliminary estimates) of 23,378 contracts. This is the highest volume since November 20 when 27,316 contracts were traded. If open interest increases significantly above average, cotton is likely to generate a short-term buy signal on December 9. However, in order for this to occur, the low on December 9 must be above 79.47. On December 6, March cotton closed at 80.41, below the 50 day moving average of 81.16, which means on Friday the market was somewhat oversold. Additionally, the long to short ratio of managed money is at the very low-end of its range going back several months. This means the liquidation phase is over for managed money and new longs will be initiated once the trend following black box crowd sees higher prices in the offing.

 Sugar:

For the week, March sugar lost 56 points, May -52, July -43. The COT report showed that managed money liquidated 18,854 contracts of their long positions and added 17,344 contracts to their short positions. Commercial interests liquidated 75 contracts of their long positions and liquidated 42,585 contracts of their short positions. As of the latest report, managed money is long sugar by a ratio of 2.02:1, which is down substantially from the previous week of 2.91:1 and the ratio of 2 weeks ago of 3.54:1.

Live cattle:

For the week, December live cattle lost 2.05 cents, February -1.40, April -1.27. The COT report showed that managed money added 7,017 contracts to their long positions and liquidated 3,242 contracts of their short positions. Commercial interests added 1,653 contracts to their long positions and also added 6,996 contracts to their short positions. As of the latest report, managed money is long live cattle by ratio of 5.45:1, which is up from the previous week of 4.38:1 and the ratio of 2 weeks ago of 4.95:1.

Lean hogs: December 6 , February hogs generated and intermediate term sell signal and had generated a short-term sell signal on November 22. 

For the week, December lean hogs lost 4.00 cents, February -1.57, April -1.85. The COT report showed that managed money liquidated 717 contracts of their long positions and added 2,390 contracts to their short positions. Commercial interests added 630 contracts to their long positions and liquidated 4,033 of their short positions. As of the latest report, managed money is long hogs by ratio 4.95:1, which is down significantly from the previous week of 5.91:1 and the ratio of 2 weeks ago of 7.24:1.

WTI Crude oil: On December 4, January WTI crude generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, January WTI crude oil advanced $4.93, February +4.89, March +4.70. The COT report showed that managed money added 15,172 contracts to their long positions and liquidated 1,205 contracts of their short positions. Commercial interests liquidated 5,151 contracts of their long positions and added 2,810 contracts to their short positions. As of the latest report, managed money is long WTI by a ratio of 5.78:1, which is up from the previous week of 5.29:1, but slightly below the ratio of 2 weeks ago of 5.94:1.

Heating oil:

For the week, January heating oil advanced 2.57 cents, February +2.97, March +3.11. The COT report showed that managed money added 5,282 contracts to their long positions and liquidated 3,534 contracts of their short positions. Commercial interests liquidated 8,896 contracts of their long positions and added 6,675 to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.09:1, which is up significantly from the previous week of 1.49:1 and up dramatically from the ratio of 2 weeks ago when managed money was short by a ratio of 1.20:1.

Gasoline:

For the week, January gasoline advanced 6.41 cents, February +6.78, March +6.47. The COT report showed that managed money added 3,835 contracts to their long positions and added 581 contracts to their short positions. Commercial interests liquidated 7,748 contracts of their long positions and also liquidated 6,267 of their short positions. As of the latest report, managed money is long gasoline by a ratio of 7.46:1, which is down slightly from the previous week of 7.54:1, but up substantially from the ratio of 2 weeks ago of 4.73:1.

Ethanol:

For the week, January ethanol advanced 30.1 cents, February +17.4, March + 12.8.

Natural gas: On December 2, January natural gas generated in intermediate term buy signal, and had generated a short-term buy signal on November 25.

For the week, January natural gas advanced 16.00 cents, February +15.3, March +15.2. The COT report showed that managed money added 7,693 contracts to their long positions and liquidated 34,316 contracts of their short positions. Commercial interests added 9,658 contracts to their long positions and also added 17,969 to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.10:1, which is a dramatic reversal from the previous week when they were short by a ratio of 1.07:1 and the ratio of 2 weeks ago when managed money was short by 1.32:1.

Copper:

For the week, March copper advanced 4.35 cents. The COT report showed that managed money added 1,045 contracts to their long positions and also added 623 contracts to their short positions. Commercial interests liquidated 222 contracts of their long positions and also liquidated 4 contracts of their short positions. As of the latest report, managed money is short copper by a ratio of 1.63:1, which is down slightly from the previous week of 1.67:1 and the ratio of 2 weeks ago of 1.87:1.

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 $16.50. The COT report showed that managed money liquidated 376 contracts of their long positions and added 98 contracts to their short positions. Commercial interests added 296 contracts to their long positions and liquidated 451 of their short positions. As of the latest report, managed money is long palladium by ratio of 12.60:1, which is down from the previous week of 13.57:1 and slightly above the ratio of 2 weeks ago of 12.30:1.

Platinum:

For the week, January platinum lost $12.50. The COT report showed that managed money added 115 contracts to their long positions and added 3,206 contracts to their short positions. Commercial interests added 237 contracts to their long positions and liquidated 2,490 of their short positions. As of the latest report, managed money is long platinum by ratio of 2.23:1, which is down significantly from the previous week of 2.94:1 and the ratio of 2 weeks ago of 6.10:1.

Gold:

For the week, February gold lost $21.40. The COT report showed that managed money added 52 contracts to their long positions and also added 6,072 contracts to their short positions. Commercial interests liquidated 2,259 contracts of their long positions and also liquidated 8,644 contracts of their short positions. As of the latest report, managed money is long gold by ratio of 1.12:1, which is down from the previous week of 1.21:1 and the ratio of 2 weeks ago of 1.55:1.

Silver:

For the week, March silver lost 51 cents. The COT report showed that managed money liquidated 1,080 contracts of their long positions and added 4,524 contracts to their short positions. Commercial interests liquidated 638 contracts of their long positions and also liquidated 3,979 of their short positions. As of the latest report, managed money is short silver by a ratio of 1.13:1, which is a complete reversal from the previous week when they were long by a ratio of 1.07:1 and the ratio of 2 weeks ago of 1.22:1.

This is the first time during the past couple of years that we have seen managed money net short silver. In our view, it means one of two things: silver is about to make another leg down, or is in a bottoming process.

Canadian dollar:

For the week, the December Canadian dollar lost 30 pips. The COT report showed that leveraged funds added 3,994 contracts to their long positions and added 20,210 contracts to their short positions. As of the latest report, leveraged funds are short the Canadian dollar by ratio of 2.57:1, which is up from the previous week of 2.16:1 and the ratio of 2 weeks ago of 1.74:1.

Australian dollar:

For the week, the December Australian dollar advanced 1 pip. The COT report showed that leveraged funds added 3,494 contracts to their long positions and also added 12,372 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 2.33:1, which is up from the previous week of 2.14:1 and the ratio of 2 weeks ago of 2.21:1.

Swiss franc:

For the week, the December Swiss franc advanced 1.78 cents. The COT report showed that leveraged funds added 1,678 contracts to their long positions and also added 186 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio 2.39:1, which is up from the previous week of 2.10:1 and the ratio of 2 weeks ago of 1.68:1.

British pound:

For the week, the December British pound lost 18 pips. The COT report showed that leveraged funds added 17,882 contracts to their long positions and liquidated 321 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.89:1, which is up significantly from the previous week of 2.43:1 and the ratio of 2 weeks ago of 2.40:1.

Euro: On December 5, the December euro generated a short-term buy signal and was already on an intermediate term buy signal.

For the week, the December euro advanced 1.09 cents. The COT report showed that leveraged funds added 7,514 contracts to their long positions and liquidated 3,049 contracts of their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 1.49:1, which is up from the previous week of 1.26:1, but down from the ratio of 2 weeks ago of 1.58:1.

Yen:

For the week, the December yen lost 44 pips. The COT report showed that leveraged funds liquidated 2,181 contracts of their long positions and added 13,240 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.71:1, which is up substantially from the previous week of 3.19:1 and the ratio of 2 weeks ago of 3.23:1.

Dollar index: On December 6, the December dollar index generated a short-term sell signal, and was already on an intermediate term sell signal.

For the week, the dollar index 34 points. The COT report showed that leveraged funds added 1,976 contracts to their long positions and also added 2,247 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 2.58:1, which is down from the previous week of 2.90:1 and the same as the ratio of 2 weeks ago of 2.58:1.

S&P 500 E mini:

For the week, the December S&P 500 E mini advanced 1.00 point. The COT report showed that leveraged funds added 25,612 contracts to their long positions and liquidated 1,247 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.16:1, which is down from the previous week of 1.21:1 and the ratio of 2 weeks ago of 1.23:1. The current ratio is the lowest that we have seen in at least a year.

In last weekend’s report, we wrote the 50 week moving average of interest rates on the 10 year note crossed above the 150 week average. Last week, the interest rate on the 10 year note reached the highest level since early September and we think it is inevitable it will break above 3.00%. This has deflationary implications for equities, commodities and real estate. With some exceptions, the commodity complex as a whole is in a state of declining prices with the Greenhaven Commodity Index at its lowest level since June 2010. While the broad market indices continue to move higher, rotation among sectors has been rapid and many stocks have entered mini bear markets. We continue to advise caution and suggest that long put protection is mandatory for those who hold long equity positions. The market is going to have a correction; the only questions that remain to be answered is when and by how much.