Weekend Wrap for August 18, 2013

COT reporting period for this week’s analysis is Wednesday August 7-Tuesday August 13

Soybeans:

For the week, September soybeans advanced 64.75 cents, November +77.00. The COT report showed that managed money liquidated 883 contracts of their long positions and added 5,204 contracts to their short positions. Commercial interests added 14,993 contracts to their long positions and also added 23,666 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 1.85:1, which is down from the previous week of 2.02:1 and the ratio of 2 weeks ago of 2.78:1.

 Soybean meal:

For the week, September soybean meal advanced $18.20, October +30.20, December +30.20. The COT report showed that managed money added 1,848 contracts to their long positions and liquidated 566 contracts of their short positions. Commercial interests added 2,010 contracts to their long positions and also added 8,801 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 1.62:1, which is up from the previous week of 1.58:1, but down from the ratio of 2 weeks ago of 1.84:1.

Soybean oil:

For the week, September soybean oil gained 1.31 cents, October +1.32, December +1.28. The COT report showed that managed money added 371 contracts to their long positions and liquidated 5,973 contracts of their short positions. Commercial interests liquidated 3,474 contracts of their long positions and added 5,071 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.91:1, which is down from the previous week of 2.04:1, but slightly above the ratio of 2 weeks ago of 1.84:1.

 Corn:

For the week, September corn gained 8.00 cents, December +10.25. The COT report showed that managed money liquidated 2,669 contracts of their long positions and added 6,079 contracts to their short positions. Commercial interests added 5,023 contracts to their long positions and also added 15,999 contracts to their short positions. As of the latest report, managed money is short corn by a ratio of 1.21:1, which is up from the previous week of 1.17:1 and identical to the ratio of 2 weeks ago of 1.21:1.

Chicago wheat:

For the week, September Chicago wheat lost 2.50 cents, December -3.75. The COT report showed that managed money added 3,431 contracts to their long positions and also added 2,659 contracts to their short positions. Commercial interests added 4,035 contracts to their long positions and liquidated 308 contracts of their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.47:1, which is down slightly from the previous week of 1.50:1, but slightly above the ratio of 2 weeks ago of 1.43:1.

Kansas City wheat:

For the week, September Kansas City wheat advanced 1.00 cents, December -1.25. The COT report showed that managed money added a massive 3,684 contracts to their long positions and liquidated a hefty 3,868 contracts of their short positions. Commercial interests liquidated 5,607 contracts of their long positions and added 1,050 contracts to their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 1.35:1, which is significantly higher than the previous week of 1.06:1 and dramatically higher than the ratio of 2 weeks ago when managed money was short by a ratio of 1.15:1.

Cotton:

For the week, December cotton advanced 4.39 cents, March +3.16. The COT report showed that managed money added a massive 16,300 contracts to their long positions and added a mere 61 contracts to their short positions. Commercial interests added 3,105 contracts to their long positions and added a massive 22,349 contracts to their short positions. Note the opposite behavior of managed money and commercials in the number of  new long and short positions. As of the latest report, managed money is long cotton by a ratio of 7.45:1, which is up significantly from the previous week of 6.07:1 and the ratio of 2 weeks ago of 5.64:1. The December 2013-March 2014 spread closed at 3.28 premium December, and is the highest close for the spread going back over one year. The spread has been widening ever since the rally began in earnest during the past 2 weeks and this is bullish.

Live cattle:

October live cattle gained 1.05 cents. The COT report showed that managed money added 7,374 contracts to their long positions and liquidated 9,317 contracts of their short positions. Commercial interests liquidated 1,344 contracts of their long positions and added 11,691 contracts of their short positions. As of the latest report, managed money is long live cattle by a ratio of 1.97:1, which is up significantly from the previous week of 1.44:1 and the ratio of 2 weeks ago of 1.64:1.

Crude oil:

September crude oil gained $1.49, October +2.13, November +2.67. The COT report showed that managed money liquidated 8,244 contracts of their long positions and added 2,988 contracts to their short positions. Commercial interests added 30,809 contracts to their long positions and also added 33,593 contracts to their short positions. As of the latest report, managed money is long by a ratio of 7.42:1, which is down from the previous week of 8.19:1 and the ratio of 2 weeks ago of 10.61:1. Three weeks ago, the ratio stood at 11.16:1.

To put the current ratio in perspective consider the following table.
COT Report COT Close  Long to Short Ratio
July 23             $107.23       11.16:1
July 30               103.08       10.61:1
August 6             105.30        8.19:1
August 13           106.83        7.42:1 

In short, managed money has gotten considerably less bullish even though the closing price on August 13 nearly matched the closing price on July 23. However, there is another indication that the rally in WTI may be about to end. Since topping out on July 19 at $3.52 premium to September, the September 2013-November 2013 spread has been narrowing steadily and on August 16 closed at 97 cents premium September. This is the lowest close for the spread since June 21, 2013 when it reached 89 cents premium September. The September contract closed at $93.63 on that date.

The price and open interest action has been dismal for both WTI and Brent. For example, from August 9 through August 15 WTI advanced $4.32 and open interest increased only 1,285 contracts. Additionally, the Brent contract advanced $4.24 in the same time frame, but in this case, open interest actually declined by 10,984 contracts. At this juncture, it appears that the chaos in Egypt and the implicit danger to the flow of petroleum out of the Suez Canal is the only levitating factor for crude. We are skeptical of this scenario because the Egyptian Army is clearly in control the country, and they have no interest in permitting any interruption of traffic in the Canal zone.

Heating oil:

For the week, September heating oil gained 8.96 cents. The COT report showed that managed money liquidated 6,019 contracts of their long positions and also liquidated 332 contracts of their short positions. Commercial interests added 13,310 contracts to their long positions and also added 3,230 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.48:1, which is slightly down from the previous week of 2.71:1 and slightly above the ratio of 2 weeks ago of 2.40:1.

Gasoline:

For the week, September gasoline advanced 5.93 cents. The COT report showed that managed money liquidated 11,734 contracts of their long positions and added 37 contracts to their short positions. Commercial interests added 12,966 contracts to their long positions and also added 2,302 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 6.64:1, which is down from the previous week of 7.80:1 and slightly above the ratio of 2 weeks ago of 6.13:1.

Natural gas:

For the week, September natural gas advanced 13.8 cents. The COT report showed that managed money liquidated 2,550 contracts of their long positions and added 7,572 contracts to their short positions. Commercial interests liquidated 6,589 contracts of their long positions and also liquidated 12,397 contracts of their short positions. As of the latest report, managed money is short natural gas by a ratio of or 1.12:1, which is slightly higher than the previous week of 1.08:1 and the ratio of 2 weeks ago of 1.02:1.

Copper:

For the week, September copper advanced 5.65 cents. The COT report showed that managed money added 3,681 contracts to their long positions and liquidated a massive 17,879 contracts of their short positions. Commercial interests added 1,840 contracts to their long positions and also added 17,106 contracts to their short positions. Note that commercial interests and managed money did the exact opposite with respect to their short positions. As of the latest report, managed money is long copper by a ratio of 1.29:1, which is a major reversal from the previous week when they were short by a ratio of 1.55:1 and the ratio of 2 weeks ago when they were short 2.05:1.

From July 31 through August 15, September copper advanced 29.55 cents, however, the open interest action was anything but bullish. During this time, open interest declined 4781 contracts, and this has bee the story with the metals complex in general. Although copper has generated a short and intermediate term buy signal, there remains a great deal of skepticism about the ability of copper to move significantly higher. The action in the September 2013-March 2014 spread has been positive and closed on Friday at 1.20 cents premium to March. On August 1, the spread closed at 2.80  cents premium March. In short, the spread is moving in the right direction if copper is in a new bull market. However, the market needs new buyers in order to move prices higher, and since this has not occurred, copper remains vulnerable to a major setback. This is especially the case since we think the major indices are on the precipice of a significant decline. As we stated in last week’s report, copper stocks at the 3 major warehouses are at more than 6 month lows, which indicates healthy consumption. Unfortunately, the options market in copper is illiquid, which makes trading copper a very volatile affair

 Palladium:

For the week, September palladium advanced $22.05. The COT report showed that managed money added 458 contracts to their long positions and also added 160 contracts to their short positions. Commercial interests liquidated 80 contracts of their long positions and added 185 contracts to their short positions. As of the latest report, managed money is long palladium by a ratio of 22.22:1, which is down from the previous week of 25.33:1 and the ratio of 2 weeks ago of 24.18:1.

Platinum: On August 16, October platinum generated an intermediate term buy signal and generated a short-term buy signal on August 9.

For the week, October platinum advanced $27.00. The COT report showed that managed money liquidated 918 contracts of their long positions and also liquidated 3,182 contracts of their short positions. Commercial interests added 292 contracts to their long positions and also added 2,157 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 5.45:1, which is up significantly from the previous week of 3.70:1 and the ratio of 2 weeks ago of 3.27:1. The current ratio is the highest ratio in many months.

From August 7 through August 15, October platinum advanced $104.50 while open interest increased by 229 contracts during this period. Apparently, there is considerable skepticism with respect to the move in the metals, and though they are over bought on a price standpoint, not by open interest, nor participation by managed money.

Gold:

For the week, December gold advanced $58.80. The COT report showed that managed money liquidated 4,779 contracts of their long positions and also liquidated 8,023 contracts of their short positions. Commercial interests liquidated 2,951 contracts of their long positions and also liquidated 113 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.61:1, which is up from the previous week of 1.49:1, but significantly below the ratio of 2 weeks ago when managed money was long by a ratio of 1.92:1.

From August 7 through August 15, December gold advanced $78.40, and during this time open interest declined by 4,343 contracts. Like copper, this indicates a skepticism among market participants for gold to move higher. One interesting aspect of gold trading has been the inversion in the August through December contracts. Additionally, the cash market sells at a premium to August. This is a rare event and likely signifies a fairly tight cash market. There have been numerous reports about solid buying in the cash market, and the current backwardation supports this thesis.

We think gold made a major low on June 28, and the longer gold trades at elevated levels, confidence will grow among market participants that the worst of the bear market is over. Interest rates on the long dated treasuries have been rising dramatically, and during the past week increased 9.65% in the 10 year note. Year to date, the yield on the 10 year note has risen 61.10%. While rising interest rates may have negative implications for holders of cash gold, if  increasing rates is the result of higher inflation, gold is likely to thrive. As noted in last week’s report, numerous participants in the gold market have liquidated significant portions of their gold holdings, and have done so near the bottom of the market. In short, the cash gold market has seen as much liquidation as is likely, and the perception that gold has turned around will only add to the increasing numbers of potential buyers.

Silver:

For the week, September silver advanced $2.915. The COT report showed that managed money added 2,288 contracts to their long positions and liquidated 4,979 contracts of their short positions. Commercial interests added 787 contracts to their long positions and also added 6,701 contracts to their short positions. Note that commercial interests and managed money did the exact opposite with respect to their short positions. As of the latest report, managed money is long silver by a ratio of 1.62:1, which is up substantially from the previous week of 1.18:1 and the ratio of 2 weeks ago of 1.29:1.

The move in silver has been nothing short of spectacular. From August 7 through August 15, silver has advanced $3.412 while open interest has increased by 1,674 contracts. While the open interest increase is not a barnburner by any stretch of the imagination, it is positive, which is in contrast to gold and copper. Silver is massively overbought from a price standpoint, but certainly not based upon open interest or the recent COT report. The danger to silver and the rest of the metals is a market meltdown in equities. We are concerned that a major downside move across the board is on the horizon. If one is looking to trade silver in the options market, it is important that volatility begins to decline along with a correction before contemplating long silver options.

08/09/2013 – 08/16/2013
Excel Spreadsheet

Canadian dollar:

For the week, the September Canadian dollar lost 43 points. The COT report showed that leveraged funds added 96 contracts to their long positions and liquidated 2,679 contracts of their short positions. According to the latest COT report, leveraged funds are short Canadian dollar by a ratio of 1.60:1, which is down from the previous week of 1.76:1 and the ratio of 2 weeks ago of 1.91:1.

Australian dollar:

For the week, the September Canadian dollar lost 11 points. The COT report showed that leveraged funds liquidated 4,718 contracts of their long positions and also liquidated 16,459 contracts of their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 1.91:1, which is down from the previous week of 2.09:1 and the ratio of 2 weeks ago of 2.01:1.

Swiss franc:

For the week, the September Swiss franc lost 44 points. The COT report showed that leveraged funds added 1,692 contracts to their long positions and also added 68 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 2.14:1, which is up from the previous week of 1.90:1 and the ratio of 2 weeks ago of 1.52:1.

British pound:

For the week, the September British pound advanced 1.29 cents. The COT report showed that leveraged funds liquidated 66 contracts of their long positions and 266 contracts of their short positions. As of the latest report, leveraged funds are short the British pound by a ratio of 2.89:1, which is about the same as the previous week of 2.90:1, but down from the ratio of 2 weeks ago of 3.41:1.

Euro:

For the week, the September euro lost 5 points. The COT report showed that leveraged funds added 5,897 contracts to their long positions and liquidated 6,787 contracts of their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 1.43:1, which is up significantly from the previous week of 1.15:1 and dramatically higher than the ratio of 2 weeks ago when leveraged funds were short by a ratio of 1.10:1.

Japanese yen:

For the week, the September yen lost 134 points. The COT report showed that leveraged funds liquidated 1,993 contracts of their long positions and also liquidated 9,312 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 3.39:1, which is down slightly from the previous week of 3.50:1 and the ratio of 2 weeks ago of 3.73:1.

Dollar index:

For the week, the September dollar index gained 12 points. The COT report showed that leveraged funds added 6,941 contracts to their long positions and also added 2,695 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.30:1, which is down from the previous week of 1.61:1 and the ratio of 2 weeks ago of 1.86:1.

S&P 500 E mini:

For the week, the September S&P 500 E mini lost 35.10 points. The COT report showed that leveraged funds added 1,859 contracts to their long positions and also added 11,981 contracts to their short positions. As of the latest report, leveraged funds are short the E mini by a ratio of 1.70:1, which is up slightly from the previous week of 1.68:1 and the ratio of 2 weeks ago of 1.56:1.

From August 2 when the S&P 500 E mini topped out at 1705.00, the Dow Jones Industrial Average has been underperforming the NASDAQ composite, NASDAQ 100, Russell 2000, S&P 500 and S&P 500 equal weight index. The only index that has done worse since August 2 has been the S&P 400 index. However, the DJIA has been underperforming the S&P 500 since July 11 and we are presenting the table below to illustrate performance problems with many of the Dow 30 companies. It would probably surprise most people to know that the best performing companies in the Dow 30 since August 2 have been Alcoa, and Caterpillar.

07/11/2013 – 08/17/2013
Excel Spreadsheet

Alcoa is not the company that it used to be, and the leader in this space is Kaiser Aluminum. The stock currently trades at its highest level since June of 2008. Although it is somewhat overbought, with the revival of metals prices in general, Kaiser Aluminum may be a terrific candidate for long positions once it has corrected its overbought condition.

To further put the lagging Dow Jones index in greater focus, we are providing a table of all stocks in the average that are underperforming the index itself since August 2 when the Emini topped. Many of these are high-priced stocks, which explains the underperformance of the DJIA because the index is weighted according to each stock’s price.

                                                                                                                               August 2-August 16           Year to Date

 It is remarkable there is a surplus of bulls over bears, and this bodes ill for the bulls. On August 16, the Shanghai Composite Index had a 130 point range and the market spiked slightly above the 200 day moving average, but closed sharply lower on the day. In our view, the market remains in a bear market and its 50 day moving average continues to trade below the 200 day moving average. There is now talk of Europe coming out of its recession based upon the recent GDP report which showed a minor increase in gross domestic production. This is only one quarter and one quarter does not make a year.