Weekend Wrap for February 9, 2014

The February 10 World Agriculture Supply Demand Estimate (WASDE) report will be released at 12 noon EST. Do not enter new positions prior to the report, and if long from lower levels make sure sell stop protection is in place. Under no circumstances should clients short the grain markets.

The COT reporting period is from January 29-February 4.

Commodity price inflation: A New Reality

In yesterday’s report we said OIA would be writing about a major shift in the markets. Over the past couple of weeks, we have noticed, that more and more commodities are generating short and intermediate term buy signals. The remarkable aspect of it is most commodities generating the signals are in plentiful supply. The exceptions to this are live cattle, cattle, hogs, heating oil, cocoa, all of whom are on short and intermediate term buy signals.

Currently, the following commodities are on short and intermediate term buy signals:
soybeans, soybean meal, corn, cotton, coffee, cocoa, live cattle, lean hogs, heating oil, natural gas.

Commodities on short-term buy signals, but not intermediate term buy signals:
Chicago wheat, Kansas City wheat, soybean oil, WTI crude oil and gold.

Commodities on short and intermediate term sell signals as of February 7:
Brent crude oil, soybean oil, sugar #11, gasoline, copper, palladium, platinum, and silver.

Commodities likely to generate short and intermediate term buy signals on February 10:
Brent crude oil and gasoline.

WTI crude oil is likely to generate an intermediate term buy signal on February 10.

Commodities on short and intermediate term sell signals after February 10:
sugar #11, copper, palladium, platinum and silver.

Silver will generate a short term buy signal if it makes a daily low above $20.12, which would leave only 3 commodities that are on short and intermediate term sell signals.

As we pointed out in the first paragraph, most commodities we follow are on buy signals and in plentiful supply, yet they have been showing consistent strength despite less than stellar fundamentals. For example, cotton fits into this category as does corn, soybeans (global supply), soybean oil, soybean meal, wheat WTI crude oil, gasoline and coffee. What makes the strength of commodities unusual is commodities as an investment class have dramatically fallen out of favor. In short, markets are not being powered higher by new money.

In fact, when we average the long to short ratios of commodities trading on short and intermediate term buy signals (10), we find the average is 4.59:1. This is a reasonable number for commodities on short and intermediate term buy signals. The outliers are cocoa at 7.90:1 and live cattle at 11.78:1. In short, based upon the ratios, the 10 markets on short and intermediate term buy signals are not overbought. The relatively low ratios confirm the amount of money being directed into commodities is at a low ebb.

In the past, we have referenced our use of the Greenhaven Continuous Commodity Index (GCC). This is a tradable index that is equally weighted and covers 17 commodities. The commodities comprising the index are as follows: corn, silver, sugar, soybeans, platinum, orange juice, natural gas, hogs, cattle, coffee, WTI crude oil, heating oil, copper, gold, cotton, cocoa, and wheat. The weight of each component in the index is 5.88%. Although we do not follow orange juice due to its illiquidity, we have calculated that orange juice is in fact on a short and intermediate term buy signal.

The Greenhaven index bottomed at 25.09 on November 19 and made a subsequent attempt to test that low on January 9, but failed having reached a low of 25.32. From January 10 through January 30 the index moved sideways to higher and really began to take off on February 3. From January 10 through February 7, GCC rallied 3.72% and on a year-to-date basis has rallied 3.07% while the S&P 500 cash index declined 2.78% DJIA – 4.72% and the NASDAQ 100 – 0.84%. On February 6, GCC made a high of 26.58, which is the index’s highest print since October 25, 2013 when it reached 26.63.

The performance of the dollar can have a major impact on commodities and year to date the March dollar index has advanced 0.58%. In other words, commodities as a group have advanced in the face of declining equity prices, a firm dollar index, and low investor enthusiasm for commodities.  One other factor to keep in mind is that commodities tend to have a seasonal decline in February, and this has been described in books on commodities published decades ago as the infamous “February break.” Also, February is one of the weak months for equity prices going back years. In short, the markets may continue to rally, but have a hefty correction sometime in February.

Milk:

Although, we do not report on milk prices regularly, we wanted to point out that milk prices have skyrocketed 22.50% year to date and on January 31 made a high of $23.43 per cwt. This takes out the previous high of $22.50 made on June 25, 2007. Based upon the charts available it appears that the January 31 high may be the all-time high for milk on the continuation chart. If the price of milk stays elevated, this has enormous implications for food-based inflation. On the other hand, if this is no more than a short-lived rally, demand destruction to milk based products should be limited. We will continue to monitor milk prices and report when there is a newsworthy event. The high price of milk is a major event in the commodity price inflation picture.

Finally, during the 2+ years of writing daily reports, OIA has never seen 10 commodities on short and intermediate term buy signals simultaneously and others that are on short-term buy signals only.

 Soybeans: On February 5, March soybeans generated a short and intermediate term buy signal.

For the week, March soybeans advanced 48.75 cents, May +49.00, July +46.00. The COT report revealed that managed money added 14,348 contracts to their long positions and liquidated 6,004 contracts of their short positions. Commercial interests added 13,468 contracts to their long positions and also added 22,481 contracts to their short positions. As of the latest report, managed money is long soybeans by ratio 7.67:1, which is up significantly from the previous week of 5.59:1 and the ratio of 2 weeks ago of 5.93:1. The current ratio is the highest since the COT tabulation date of December 24, 2013 when managed money was long soybeans by ratio of 10.29:1.

Soybean meal:

For the week, March soybean meal advanced $20.30, May +18.80, July +17.20. The COT report revealed that managed money added 7,959 contracts to their long positions and also added 892 contracts to their short positions. Commercial interests added 3,084 contracts to their long positions and also added 12,322 contracts to their short positions. As of the latest report, managed money is long soybean meal by ratio of 3.64:1, which is up slightly from the previous week of 3.47:1 and the ratio of 2 weeks ago of 3.31:1.

It never ceases to amaze OIA that the long to short ratio of managed money in soybeans is twice that of soybean meal even though March soybean meal has advanced 7.05% year to date, versus March soybeans gaining 3.02%. We have seen this many times before.

Soybean oil: On February 7, March soybean oil generated a short-term buy signal, but remains on an intermediate term sell signal. This is the first buy signal in soybean oil in over one year.

For the week, March soybean oil advanced 92 points, May +95, July +93. The COT report revealed that managed money liquidated 2,833 contracts of their long positions and also liquidated 7,038 contracts of their short positions. Commercial interests liquidated 5,209 contracts of their long positions and added 3,029 contracts to their short positions. As of the latest report, managed money is short soybean oil by ratio 2.29:1, which is the same as the previous week of 2.30:1 and slightly above the ratio of 2 weeks ago of 2.26:1.

Corn: On February 6, March corn generated an intermediate term buy signal after generating a short-term buy signal on January 13.

For the week, March corn advanced 10.25 cents, May + 10.50, July +11.50. The COT report revealed that managed money added 20,592 contracts to their long positions and liquidated 31,138 contracts of their short positions. Commercial interests liquidated 18,382 contracts of their long positions and added 29,635 contracts to their short positions. As of the latest report, managed money is long corn by a ratio of 1.05:1, which is a complete reversal from the previous week when managed money was short by ratio of 1.20:1 and the previous week of 1.22:1. The current net long position of manage money is the first since the COT tabulation date of September 10, 2013 when managed money was long corn by ratio of 1.04:1.

Chicago wheat: On February 5, March Chicago wheat generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, March Chicago wheat advanced 21.75 cents, May +21.00, July +22.25. The COT report revealed that managed money added 4,157 contracts to their long positions and liquidated 4,122 contracts of their short positions. Commercial interests liquidated 6,897 contracts of their long positions and added 10,217 contracts to their short positions. As of the latest report, managed money is short Chicago wheat by ratio 1.56:1, which is down from the previous week of 1.68:1 and the ratio of 2 weeks ago of 1.60:1.

Kansas City wheat: On February 5, March Kansas City wheat generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, March Kansas City wheat advanced 33.75 cents, May +27.50, July +24.00. The COT report revealed that managed money added 1,220 contracts to their long positions and liquidated 2,154 contracts of their short positions. Commercial interests added 2,730 contracts to their long positions and also added 2,774 contracts to their short positions. As of the latest report, managed money is long Kansas City wheat by ratio of 1.26:1, which is up from the previous week of 1.14:1 and the ratio of 2 weeks ago of 1.19:1.

Year to date, March soybean meal has been the leader having gained +7.05%, March corn +5.27 percent, March soybeans +3.02%, March Kansas City wheat +1.37%, March soybean oil -1.46%, March Chicago wheat – 4.58%.

Cotton:

For the week, March cotton advanced 1.64 cents, May +1.52, July +1.17. The COT report revealed that managed money added 492 contracts to their long positions and liquidated 469 contracts of their short positions. Commercial interests liquidated 8,066 contracts of their long positions and also liquidated 9,687 contracts of their short positions. As of the latest report, managed money is long cotton by ratio of 4.48:1, which is up slightly from the previous week of 4.28:1 but down significantly from the ratio of 2 weeks ago of 6.28:1.

For the past couple of the past couple of weeks, we have been writing about our concerns regarding the buildup of stocks as cotton prices have been trading sideways. Last week, we advised clients to liquidate long positions based upon rising stocks. On Friday January 31, total certified stocks held in ICE approved warehouses stood at 158,211 bales. By February 7, stocks continued to grow and now total 216,810 bales. On January 2, total certified stocks numbered 34,087 bales, which is a sixfold increase by February 7. Exports have been fairly healthy and with price action continuing to be robust without breaking significantly lower, perhaps there is a surprise waiting in the February 10 WASDE report. The recent high of 88.43 occurred on January 21 and the high for 2013 occurred on August 16, 2013 at 90.61. The March contract’s 50 day moving average is 83.50, 150 day 83.33, 200 day 83.73. In short, it seems inevitable that the 50 day moving average will cross above the 150 and 200 day moving averages. Although we would not recommend bullish positions, despite March cotton being on short and intermediate term buy signals, it does appear the market wants to go higher. Part of our revised opinion on cotton is based upon our view there is a general inflationary trend in most agricultural commodities.

Sugar #11

For the week, March sugar advanced 18 points, May +26, July +29. The COT report revealed that managed money added 4,687 contracts to their long positions and liquidated 19,835 contracts of their short positions. Commercial interests added 6,251 contracts to their long positions and added 26,025 contracts to their short positions. As of the latest report, managed money is short sugar by ratio of 1.19:1, which is down from the previous week of 1.33:1 and the ratio of 2 weeks ago of 1.34:1. 

Coffee:

For the week, March coffee advanced 10.50 cents, May +10.65, July +10.80. This COT report revealed that managed money added 5,003 contracts to their long positions and liquidated 10,510 contracts of their short positions. Commercial interests liquidated 1,934 contracts of their long positions and added 14,893 contracts to their short positions. As of the latest report, managed money is long coffee by ratio of 1.25:1, which is a complete reversal from the previous week when managed money was short by a ratio of 1.19:1 and the ratio of 2 weeks ago of 1.12:1.

Cocoa:

For the week, March cocoa advanced $11.00, May +18.00, July +21.00. The COT report revealed that managed money added 3,693 contracts to their long positions and also added 534 contracts to their short positions. Commercial interests added 3,742 contracts to their long positions and also added 4,834 contracts to their short positions. As of the latest report, managed money is long cocoa by a ratio of 7.90:1, which is slightly below last week’s ratio of 7.94:1, but above the ratio of 2 weeks ago of 6.27:1.

OIA wanted to call your attention to the increasing contango of the March-May and March-July 2014 spreads. For example the March-July 2014 spread closed at $23.00 premium to July 2014 on February 7, which is the widest spread going back to February 11, 2013. March cocoa remains on a short and intermediate term buy signal, but we are leery when contango is widening in the front month and inventory is supposed to be tight.

Year to date, March coffee is by far the leader having gained 22.58%, March Cocoa +7.86%, March cotton +3.34%, March sugar – 4.14%.

Live cattle:

For the week, April live cattle advanced 2 points, June +60, August +75. The COT report revealed that managed money added 5,805 contracts to their long positions and liquidated 2,577 contracts of their short positions. Commercial interests added 5,649 contracts to their long positions and also added 9,142 contracts to their short positions. As of the latest report, managed money is long live cattle by ratio 11.78:1, which is up dramatically from the previous week of 9.28:1 and the ratio of 2 weeks ago of 8.88:1. The current ratio is the highest we have seen during the bull market.

Lean hogs:

For the week, April lean hogs lost 8 points, June +53, August +2.00 cents. The COT report revealed that managed money liquidated 135 contracts of their long positions and added 1,644 contracts to their short positions. Commercial interests added 668 contracts to their long positions and also added 1,902 contracts to their short positions. As of the latest report, managed money is long hogs by ratio of 3.60:1, which is down from the previous week of 4.00:1, but up somewhat from the ratio of 2 weeks ago of 3.15:1.

Year to date, April lean hogs is the leader having gained 4.47% while April live cattle has advanced 3.37%.

WTI crude oil:

For the week, March WTI crude oil advanced $2.39, April +2.64, May +2.82. The COT report revealed that managed money added 7,906 contracts to their long positions and liquidated 11,503 contracts of their short positions. Commercial interests liquidated 3,828 contracts of their long positions and also liquidated 1,563 contracts of their short positions. As of the latest report, managed money is long WTI crude oil by ratio 7.69:1, which is up significantly from the previous week of 5.83:1 and the ratio of 2 weeks ago of 4.21:1. The current ratio is the highest since the COT tabulation date of December 31, 2013 when managed money was long WTI crude oil by ratio 8.59:1. During the reporting period of December 25 through December 31, the March contract traded from a high of $100.79 on December 27 to a low of 98.29 on December 31.

Heating oil:

For the week, March heating oil advanced 5.32 cents, April +6.58, May +7.00. The COT report revealed that managed money added 4,917 contracts to their long positions and liquidated 884 contracts of their short positions. Commercial interests added 1,536 contracts to their long positions and also added 11,697 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.39:1, which is up from the previous week of 2.12:1 and the ratio of 2 weeks ago of 1.34:1. On January 30, March heating oil generated a short and intermediate term buy signal.

Gasoline:

For the week, March gasoline advanced 11.75 cents, April +11.04, May +10.80. The COT report revealed that managed money added 978 contracts to their long positions and also added 2,021 contracts to their short positions. Commercial interests liquidated 330 contracts of their long positions and also liquidated 4,392 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 1.99:1, which is down from the previous week of 2.12:1 and the ratio of 2 weeks ago of 2.54:1.

We checked our records going back to the COT report of September 3, 2013 and could only find one week in which the long to short ratio was close to the current ratio. This occurred on the COT tabulation date of November 5 when the ratio was 2.88:1. In short, managed money is extremely bearish on gasoline. Also, it is very rare to see the heating oil ratio above gasoline’s.

Natural gas:

For the week, March natural gas lost 16.8 cents, April +6.2, May +11.1. The COT report revealed that managed money liquidated 6,133 contracts of their long positions and added 13,394 contracts to their short positions. The action by commercial interests was at a very low ebb only adding 1,688 contracts to their long positions and liquidating 1,192 contracts of their short positions. As of the latest report, managed money is long natural gas by ratio of 2.12:1, which is down from the previous week of 2.40:1 and the ratio of 2 weeks ago of 2.16:1.

Year to date, March natural gas is the leader having gained 13.17%, March ethanol, +12.41%, March WTI crude oil +1.56%, March heating oil – 0.33%, March Brent crude – 1.07%, March gasoline – 1.69%.

Copper:

For the week, March copper advanced 3.90 cents. The COT report revealed that managed money liquidated 7,994 contracts of their long positions and added 10,562 contracts to their short positions. Commercial interests added 7,431 contracts to their long positions and liquidated 2,932 contracts of their short positions. As of the latest report, managed money is short copper by ratio of 1.20:1, which is a complete reversal from the previous week when they were long by a ratio of 1.39:1 and 2 weeks ago when managed money was long by ratio 2.51:1.

Palladium:

For the week, March palladium gained $5.60. The COT report revealed that managed money liquidated 1,183 contracts of their long positions and added 1,535 contracts to their short positions. Commercial interests added 620 contracts to their long positions and liquidated 971 contracts of their short positions. As of the latest report, managed money is long palladium by a ratio 4.21:1, which is down significantly from the previous week of 6.47:1 and the ratio of 2 weeks ago of 7.99:1.

Platinum:

For the week, April platinum advanced $3.50. The COT report revealed that managed money liquidated 1,251 contracts of their long positions and added 2,147 contracts to their short positions. Commercial interests added 480 contracts to their long positions and liquidated 1,874 contracts of their short positions. As of the latest report, managed money is long platinum by ratio 4.29:1, which is down significantly from the previous week of 6.44:1 and the ratio of 2 weeks ago of 5.73:1. This is the first time in memory that the long to short ratio in platinum was above palladium.

Gold:

For the week, April gold advanced $23.10. The COT report revealed that managed money liquidated 2,375 contracts of their long positions and added 1,211 contracts to their short positions. Commercial interests added 570 contracts to their long positions and liquidated 3,406 contracts of their short positions. As of the latest report, managed money is long by a ratio of 1.68:1, which is down from the previous week of 1.76:1, but up from the ratio of 2 weeks ago of 1.41:1.

Silver:

For the week, March silver advanced 81.6 cents. The COT report reveals that managed money added 1,423 contracts to their long positions and also added 3,041 contracts to their short positions. Commercial interests added 1,637 contracts to their long positions and liquidated 4,571 contracts of their short positions. As of the latest report, managed money is long silver by ratio 1.08:1, which is down from the previous week of 1.16:1 and the ratio of 2 weeks ago of 1.44:1.

Last week, the 20 day moving average of $19.823 for March silver traded above the 50 day moving average of 19.774 for the first time since early October 2013. Last week, we recommended long straddles or strangles depending upon your risk tolerance. We think silver is headed much higher, but like an airplane that doesn’t have enough lift to gain altitude, silver has been hampered by a lack of speculative interest. However, silver has the fundamentals to move higher, especially given the commodity inflation scenario that we think is in place. Another factor likely to drive silver higher is the huge short interest of managed money. We recommended that long straddles or strangles be initiated last week because silver volatility was at the very low-end of its trading range going back to April 2013. When silver does begin to move, it can make huge gains in a very short period of time and volatility skyrockets, which makes options very expensive overnight.

Year to date, the leader has been April gold with a gain of 5.11%, March silver + 2.67%, April platinum +0.85%, March palladium, -0.89%, March copper – 4.45%.

Canadian dollar:

For the week, the March Canadian dollar advanced 78 pips. The COT report revealed that leveraged funds added 900 contracts to their long positions and also added 968 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 6.82:1, which is down from the previous week of 7.26:1 but up from the ratio of 2 weeks ago of 5.25:1.

Australian dollar: On February 7, the March Australian dollar generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, the March Australian dollar advanced 2.17 cents. The COT report revealed that leveraged funds liquidated 2,257 contracts of their long positions and also liquidated 11,818 contracts of their short positions. As of the latest report, leveraged funds are short the Australian dollar by ratio 6.65:1, which is up from the previous week of 6.39:1 and the ratio of 2 weeks ago of 6.43:1.

The March Australian dollar bottomed at 86.32 on January 24 and rallied to a high of 89.59 on February 6. From January 27 through February 6, total open interest declined by 20,638 contracts, which is very bearish open interest action relative to the price advance. Because the March Australian dollar is now on a short-term buy signal, we discourage short positions. The March Aussie has already rallied to its 50 day moving average of 88.86, which means at this point it is neither overbought nor oversold. Conceivably, the March Aussie could rally to 90.65 before resuming its downtrend.

Swiss franc:

For the week, the March Swiss franc advanced 1.20 cents. The COT report revealed that leveraged funds added 1,847 contracts to their long positions and liquidated 469 contracts of their short positions. As of the latest report, leveraged funds are long the Swiss franc by ratio of 1.84:1, which is up from the previous week of 1.56:1 and the ratio of 2 weeks ago of 1.72:1.

British pound: On February 4, the March British pound generated a short-term sell signal, but remains on an intermediate term buy signal.

For the week, the March British pound lost 21 pips. The COT report revealed that leveraged funds liquidated 8,009 contracts of their long positions and also liquidated 3,208 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by ratio 3.75:1, which is up from the previous week of 3.64:1 and the ratio of 2 weeks ago of 2.93:1.

Euro:

For the week, the March euro advanced 1.44 cents. The COT report revealed that managed money liquidated a massive 20,182 contracts of their long positions and added 7,126 contracts of their short positions. As of the latest report, leveraged funds are long the euro by ratio of 1.21:1, which is down from the previous week of 1.93:1 and the ratio of 2 weeks ago of 1.45:1. The current ratio is lower than the COT report of November 26, 2013 when leveraged funds were long by a ratio of 1.26:1. Keep in mind, the current ratio was compiled on February 4.

Yen:

For the week, the March yen gained 2 pips. The COT report revealed that leveraged funds liquidated 3,704 contracts of their long positions and also liquidated 8,599 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.00:1, which is down from the previous week of 2.03:1 and the ratio of 2 weeks ago of 2.67:1. The current ratio is the lowest during the past 6 months.

Dollar index:

For the week, the March dollar index lost 65 points. The COT report revealed that leveraged funds liquidated 1,270 contracts of their long positions and added 580 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 4.70:1, which is up significantly from the previous week of 3.96:1 and the ratio of 2 weeks ago of 3.49:1.

Year to date, the March yen has been the leader having gained 2.88%, March Australian dollar +0.63%, March dollar index +0.58%, March British pound -0.91%, March Swiss franc – 1.00%, March euro -1.16%, March Canadian dollar – 3.58%.

S&P 500 E mini:

For the week, the March S&P 500 E mini advanced 16.90 points. The COT report revealed that leveraged funds added 41,658 contracts to their long positions and also added 41,328 contracts to their short positions. As of the latest report, leveraged funds are short the E mini by ratio of 1.53:1, which is down from the previous week of 1.57:1 and the ratio of 2 weeks ago of 1.67:1.