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Soybeans:
For the week, September soybeans lost 2.25 cents and the new crop November gained 2.00 cents. The Commitment of Traders Report showed that managed money added 3,196 contracts to their long positions and liquidated 327 contracts of their short positions. Commercial interests liquidated 3,677 contracts of their long positions and also liquidated 8,536 contracts of their short positions. As of the latest COT report, managed money is long soybeans by a ratio of 24.94:1 which is up from the previous week’s reading of 20.45:1
Soybean Meal:
For the week, October soybean meal gained $6.30 and the new crop December contract gained $5.00. The Commitment of Traders Report showed that managed money added 6,284 contracts to their long positions and liquidated 579 contracts of their short positions. Commercial interests liquidated 2,889 contracts of their long positions and added 7,934 contracts to their short positions. As of the latest COT report, managed money is long by a ratio of 33.37:1, which is up substantially from the previous week of 24.14:1.
Corn:
For the week, the new crop December contract lost 2.00 cents. The Commitment of Traders Report showed that managed money added 16,498 contracts to their long positions and also added 2,593 contracts to their short positions. The COT category labeled “other reportables” (small traders), showed this category added 1,014 contracts to their long positions and liquidated 9,865 contracts of their short positions. The latest COT report shows that “other reportables” are long by a ratio of 1.27:1, which is up from the previous week of 1.19:1. Last week was the first time in numerous months that small traders moved to a net long position. In our view, the continued move to a larger net long position by small traders is negative for corn prices. This category of speculators is notoriously wrong and it appears that they’ve gotten bullish at precisely the wrong time. Commercial interests liquidated 15,510 contracts of their long positions and added 9,306 contracts to their short positions. As as of the latest COT report, managed money is long corn by a ratio of 20.54:1, which is down from the previous week’s reading of 23.48:1. Even though managed money added a considerably greater number of long contracts than short positions, the percentage increase of short positions was considerably greater than the percentage increase in long positions.
Wheat:
For the week, December Chicago wheat lost 6.75 cents. The Commitment of Traders Report showed that managed money liquidated 1,377 contracts of their long positions and added 1,319 contracts to their short positions. Commercial interests liquidated 2,785 contracts of their long positions and also liquidated 7,661 contracts of their short positions. As of the latest COT, report managed money is long wheat by a ratio of 2.20:1, which is down slightly from the previous week’s reading of 2.27:1
Crude Oil:
For the week, September crude oil added $3.14. The Commitment of Traders Report showed that managed money liquidated 10,244 contracts of their long positions and added 1,459 contracts to their short positions. Commercial interests added 6,584 contracts to their long positions and liquidated 2,165 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 3.64:1 which is down slightly from the previous week’s reading of 3.94:1.
Although the petroleum complex has been acting in a bullish fashion apparently the supply and demand for these products has been falling. According to a report from ZEROHEDGE dated August 17, which was from Dow Jones, demand appears to be falling rapidly.
“U.S. petroleum deliveries, a measure of demand, fell by 2.7% in July from a year earlier to the lowest in any month since September 2008, the American Petroleum Institute , an industry group said Friday. “Demand in the world’s biggest oil consumer at 18.062 million barrels a day, was the weakest for the month of July since 1995, the API said. Year to date demand is down 2.3% from the same period in 2011.”
“Demand for gasoline, the most widely used petroleum product, dropped 3.8% from the year earlier to 8.624 million barrels a day, the lowest July level since 1997. Gasoline used in the heart of the peak summer driving season was 2.2% lower than in June.”
“Production of all four major products-gasoline, distillate, jet fuel and residual fuel was greater than the demand for those products. As a result, petroleum imports decreased and exports increased. Total imports of crude and refined products fell by 9.6% to average 10.4 million barrels a day in July. Exports of refined products increased by 11.1 percent to a record high for July of 3.244 million barrels a day, and year to date exports were up 14% compared with the same period in 2011.”
In other words, the petroleum complex is levitating higher despite lower demand and increasing supply. Our view is that this can be attributed to the belief that money printing by the European Central Bank and the Federal Reserve will begin in earnest within the next 30-45 days. Additionally, increasing tension with Iran, and especially the threat of military action by Israel, is acting to ratchet prices higher.
Heating oil:
For the week, heating oil gained 7.21 cents. The Commitment of Traders Report showed that managed money added 1,341 contracts to their long positions and liquidated 4,755 contracts of their short positions. Commercial interests liquidated 1,421 contracts of their long positions and added 7,208 contracts to their short positions. As of the latest COT report, managed money is long heating oil by a ratio of 1.99:1, which is up from the previous week’s reading of 1.49:1.
Gasoline:
For the week, gasoline gained 2.36 cents. The Commitment of Traders Report showed that managed money added 4,093 contracts to their long positions and liquidated 323 contracts of their short positions. Commercial interests added 7,119 contracts to their long positions and also added 9,098 contracts to their short positions. As of the latest COT report, managed money is long gasoline by a ratio of 12.25:1 which is up from the previous week reading of 10.96:1.The current ratio is the highest since the COT report of June 5.
Natural Gas: On August 17, September natural gas generated a short-term sell signal.
Copper:
For the week, September copper gained 2.70 cents. The Commitment of Traders Report showed that managed money liquidated 2,629 contracts of their long positions and also liquidated 65 contracts of their short positions. Commercial interests added 7,825 contracts to their long positions and also added 7,756 contracts to their short positions. As of the latest COT report, managed money is short copper by a ratio of 1.37:1, which is up from the previous week’s reading of 1.26:1.
Gold:
For the week, December gold lost $3.40. The Commitment of Traders Report showed that managed money liquidated 1,409 contracts of their long positions and added 1,645 contracts to their short positions. Commercial interests liquidated 2,636 contracts of their long positions and also liquidated 5,101 contracts of their short positions. As of the latest COT report, managed money is long gold by a ratio of 3.31:1 which is down slightly from the previous week’s reading of 3.57:1.
Silver:
For the week, September silver lost 6.00 cents. The Commitment of Traders Report showed that managed money added 869 contracts to their long positions and liquidated 620 contracts of their short positions. Commercial interests added 665 contracts to their long positions and also added 1,858 contracts o their short positions. As of the latest COT report, managed money is long silver by a ratio of 1.81:1, which is up slightly from the previous week’s reading of 1.67:1.
Euro:
For the week, the September Euro gained .0027, which is essentially an unchanged number. The Commitment of Traders Report showed that in the leveraged funds category, they liquidated 3,851 contracts of their long positions and added 3,274 contracts to their short positions. As of the latest COT report, leveraged funds are short by a ratio of 2.20:1, which is up from the previous week’s reading of 2.05:1.
10 Year Treasury Note:
For the week, the 10 year Treasury Note lost 1-07.4 points. The Commitment of Traders Report showed that in the leveraged funds category, they added 3,698 contracts to their long positions and liquidated 30,366 contracts of their short positions. As of the latest COT report, leveraged funds are long by a ratio of 1.24:1 which is up from the previous week reading of 1.08:1. This week, the 10 year Treasury Note generated a short-term sell signal (August 14) and an intermediate term sell signal ( August 16). Bearish positions should be implemented on a rally to the 134-00 area.
S&P 500 E mini:
For the week, the S&P 500 E mini gained 12.80 points. The Commitment of Traders Report showed that leveraged funds added 9,133 contracts to their long positions and also added a massive 89,796 contracts to their short positions. As of the latest COT report, leveraged funds are short by a ratio of 2.23:1, which is up from the previous week’s reading of 2.06:1.
In the July 15 Weekend Wrap, we analyzed performance of the E mini for July 13-August 13 during 2000-2011 to gain some perspective on what might be in store for this period. If readers want more information, please review the July 15 Weekend Wrap. We are revisiting this because we have the stats for 2012. In short, the July 13-August 13 during 2012 was the second best performance going back to 2000. The number one year occurred during July 13-August 13, 2009 when the S&P 500 E mini gained 15.89%. The second best performance occurred in 2012 when the S&P E mini advanced 5.50%. The third occurred during 2008 when the E mini gained 3.59%. For the period of 2000-2011 the average performance was -0.77%. Based upon the previous 12 years, the performance of the S&P 500 E mini during 2012 is somewhat unusual considering that July and August historically have under performed.
We’ve taken the best performing years of 2008 and 2009 and tested their performance during the period of August 14- September 14. In this time frame during the presidential year of 2008, the S&P E mini declined by 2.15% and in 2009 it gained 3.37%. If we extrapolate a 3.37% gain from August 14, 2012, we arrive at an E mini gain of 47.25 points by September 14, 2012. On the other hand, if the S&P 500 E mini were to lose 2.15% from August 14 to September 14, 2012 the E mini would lose 30.14 points.
One very important index that is seems to be ignored by the financial press and investors alike is the Dow Jones Transportation Index. The transportation index is most associated with the Dow theory in which both indices are used to confirm a trend, or to spot a divergence. Our view is that Dow Theory has become distorted, and therefore not useful because the original concept was based upon companies engaged in industrial production and distribution. The Dow Industrials measured industrial production and the transports, which used to be called the Dow Jones Rail Index, measured the health of distribution. For some time, the Dow Jones Industrial Average has been a misnomer because it is not an industrial average at all. When the Dow Theory was conceived by Charles Dow at the turn-of-the-century and refined by Robert Rhea and William Hamilton, there were no financial institutions or drug companies in the index as there are today. Put simply, the current Dow companies: American Express, Merck, Pfizer, J.P. Morgan, Travelers Insurance and Bank of America, are not industrial companies, nor were banks insurance, and drug companies part of the Dow Jones Industrial Average when the Dow theory was formulated and refined. Today, there are few true industrial companies in the “industrial average.”
However, the concept behind the Dow Jones Rail Index now called the Dow Jones Transportation Index is as relevant today as it was 100 years ago. The index is composed of 20 companies ranging from airlines to freight forwarders, railroads, trucking and shipping companies. These provide a picture of an important segment of the economy and the distribution of goods. We believe the transportation index is even more relevant today due to the price of crude oil, which is integral to distribution and the financial health of transportation companies. Additionally, the United States has become a society based upon consumption as never before. This means that transportation (in part due to the internet) has a greater impact on the economy than it did when Dow theory was formulated and refined in the first half of the twentieth century.
Therefore, the lagging performance of the Dow Jones Transportation Index when compared to the other major indices is of considerable concern. For example, the transports topped out on July 7, 2011 at 5627.85, which was 91.28 points above the May 19, 2008 high of 5536.57. To put in perspective the degree to which the transportation index is lagging the major indices since July 7, 2011 consider the following table:
Performance for July 7, 2011-August 17, 2012
Dow Jones Trans Index -7.54%
Russell 2000 Index -4.45%
Dow Industrials +4.37%
S&P 500 Cash Index +4.80%
NASDAQ 100 +15.23%
On a year-to-date basis, the transportation average is lagging the other indices by a considerable margin. Our view is that the transportation index reflects the true shape of the economy. As a result, its performance can provide clues about where the major indices may reach points of resistance. On August 17, the transports closed at 5194.38, which is approximately 200 points from the high made on March 19 2012 at 5390.11. This area provided resistance on two previous occasions during 2012: 5384.15 on February 3 and 5361.06 on May 3. If the transports were to rally to the March 19, 2012 high of 5390, this would comprise a move of approximately 4%. If the 4% increase is applied to the S&P 500, a high of at least 1471.60 can be projected for the S&P 500 E mini.
On a year to date basis, the transportation index has been under performing the major indices by a considerable margin. If this continues during the next month or two, conceivably the S&P 500 could advance by much more than 4%, which could put the index above 1500. Investors should follow the transportation index closely, because if it is unable to break above the aforementioned three points of resistance, a top may be signaled in the major indices.
Performance Year-to-Date:
Dow Jones Trans Index +3.48%
Dow Industrials +8.66%
Russell 2000 Index +10.66%
S&P 500 Cash Index +12.77%
NASDAQ 100 +22.06%
Apple Computer:
On April 29, in the Weekend Wrap, we stated it was likely that Apple had made a short-term top: “Although I believe Apple will eventually take out the high of $644.00 made on April 10, there is a good possibility the stock may have made a temporary top.” Keep in mind, this was not a sell signal, but a warning that the market looked tired in the $600.00 area. Please review the April 29 Weekend Wrap for the reasons behind the call. After making that call, Apple proceeded to fall to $522.18 on May 18. On July 3, Apple generated a short-term buy signal. In the July 3 report about the S&P 500 E mini, Open Interest Analyst stated the following: “On July 3, Apple generated a short-term buy signal, which confirms the intermediate term buy signal and in my view indicates that Apple will make a run at the April 10 high of $644.00.” Since July when we suggested that investors purchase shares of Apple Computer rather than the S&P 500 E mini, Apple has advanced 9.38% while the S&P 500 E mini has advanced 3.86%.
American Association of Individual Investors Survey
Last week 2 Weeks Ago 3 Weeks Ago
Bullish 36.8% 36.5% 30.5%
Bearish 28.1% 27.4% 34.9%
Neutral 35.1% 27.4% 34.6%
The above stats show that investors are not buying into the rally and the degree of skepticism is evidenced by the high percentage of neutrality. The degree of bullish enthusiasm crept up only by a fraction and the number of bears actually increased. In our view, this confirms that the rally will continue despite all the problems facing the economy and world. Our view has been that the market is rallying due to the anticipation of quantitative easing Act III and possible action from the ECB. With markets as elevated as they are, it is hard to believe the Federal Reserve will not propose another money printing program. If no program is forthcoming, the Fed risks a market crash in advance of the presidential election. The market indices are facing an age old question: How much of QE3 is being discounted by the market already. Another question: If interest rates continue to rise, as we expect, how will investors react? Will they take their money out of the fixed income market and put it into equities?
Recently, many of the global indices have moved positively and many of their 50 day moving averages are now above 200 day moving averages. Below are our comments on the global indices.
Bombay Sensex: Currently the 50 day moving average is over the 200 day average.
Brazilian Bovespa: The Bovespa has moved to its highest level since mid May, however the 50 day moving average is still below the 200 day average.
Japanese Nikkei: The Nikkei closed at its highest level since early July and is above its 50 and 200 day moving averages, however, the 50 day moving average is still below the 200 day.
Singapore Straits Times Index: This indexes hit its highest level since late July or early August 2011 and the 50 day moving average is above the 200 day.
Spain Ibex: This market has rallied approximately 1500 points, however it is still below its 50 and 200 day moving averages.
German DAX: The DAX is at its highest level since the March-April period, and the 50 day moving average is above the 200 day average.
French CAC 40: The 50 day moving average is below the 200 day average and as of Friday, the CAC closed just below the 200 day moving average.
FTSE 100: The 50 day moving average is above the 200 day average and the index is above the 50 day moving average.
Hong Kong Hang Seng: This index closed above its 200 day moving average, however the 200 day is still above the 50 day moving average, but looks like it could turn shortly.
The Shanghai Composite Index is at multi year lows, which leads us to believe the Chinese economy is in much rougher shape than their official statistics indicate. This has negative implications for Chinese consumption of crude oil and industrial metals. On the other hand, China has been a big buyer of soybeans in order to keep food prices low.
