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Soybeans:
For the week, September soybeans gained 66.50 cents and the new crop November contract gained 85.75. The Commitment of Traders Report showed that managed money added 12,550 contracts to their long positions and liquidated 643 contracts of their short positions. Commercial interests liquidated 9,282 contracts of their long positions and added 14,017 contracts to their short positions. The latest COT report shows that managed money is long by a ratio of 28.29:1, which is up from the previous week of 24.91:1, and is higher than the reading of two weeks ago of 20.45:1.
The USDA crop report will be released on September 12. The main question is how to play the grain markets between now and the report. Looking back at the history of trading during this period in 1988, the market rallied from the August low that occurred on August 24, 1988. By September 8, soybeans had topped out. During August 24-September 8, soybeans went from a low of $8.12 and rallied to $9.06 or a rally of approximately 11.5%. During the month of August 2012, the low for November soybeans of $15.55 1/4 occurred on August 8. An 11.5% increase from the August 8, 2012 low gives us $17.33 7/8. On Friday November beans closed at $17.31 1/4. In other words, the rally that occurred from the August 8, 1988 low through September 8, 1988 has already occurred in the current August 2012 timeframe. The real test is whether the July 20 high for August soybeans of $17.77 3/4 can be taken out by September or November beans. One way of playing the potential rally in soybeans is to buy a November call at a $19.00 strike, which has a delta 24.5 and costs $1,500.00 based upon Friday’s close. The November $20.00 call strike has a delta of 14.7 and costs $825.00 based upon Friday’s close. This allows the speculator to participate on the upside, but limits the amount they can lose if the market temporarily heads south. Low volatility is good when purchasing options and as of Friday, soybean volatility is significantly below its 50 day moving average. In our opinion, a position in soybeans is preferable to any other in the grain complex.
Soybean meal:
For the week, October soybean meal gained $17.20 and the new crop December contract gained $22.90. The Commitment of Traders Report showed that managed money added 4,002 contracts to their long positions and liquidated 132 contracts of their short positions. Commercial interests added 3,716 contracts to their long positions and also added 10,831 contracts to their short positions. The latest COT report shows that managed money is long by a ratio of 37.45:1, which is up from last week’s 33.37:1 and the reading of two weeks ago of 24.14:1.
Soybean oil:
Since August 6, soybean oil has been outperforming both soybeans and soybean meal. For example, since making a bottom at 51.84 cents, on August 6, soybean oil has rallied strongly. From August 6-August 24, soybean oil has gained 9.25%, soybean meal advanced 2.93% while soybeans increased by 8.09%. When soybean oil made its bottom on August 6, the COT report of August 7 showed that managed money was short by a ratio of 1.04:1. As of the latest report, which was tabulated on August 21, managed money is now long by a ratio of 1.55: 1.The strength in soybean oil only adds to the underlying strength of soybeans. On August 24, soybean oil closed at 56.90, which is about 1.00 cent from its April 9, 2012 high and more than 3.00 cents from its June 2, 2011 high of 60.09 cents.
Corn:
For the week, December corn gained 1.25 cents. The Commitment of Traders Report showed that managed money added 26,482 contracts to their long positions and liquidated 851 contracts of their short positions. Commercial interests added 55 contracts to their long positions and also added 25,150 contracts to their short positions. The latest COT report shows that managed money is long corn by a ratio of 23.63:1, which is up from last week’s reading of 20.54:1, and is only slightly above the reading of two weeks ago of 23.48:1.
During August and September of 1988 (a drought year), corn made its high on August 4 and then sold off to make a low of $2.79 3/4 on August 29. From August 29, it rallied to a high of $3.06 on September 6, 1988 and then sold off for the rest of the month. In other words, even when the market rallied from the low on August 29, 1988 to $3.06, it was unable to surpass the high of $3.16 made in early August. So far in August of 2012, the high of $8.49 was made on August 10. From August 10 through August 24, the low price for corn occurred on August 17 at $8.03. At some point during the next week corn may be a short-term buy, but it appears unlikely it will take out the August 10 high of $8.49 anytime soon. On the orther hand, there is a great deal of concern that the extreme poor quality of the crop will necessitate higher usage, but this may not become a factor for another month or two. If export sales and domestic consumption do not decline considerably, there could be a significant rally.
Wheat:
For the week, December Chicago wheat gained 6.00 cents. The Commitment of Traders Report showed that managed money added 2,342 contracts to their long positions and also added 2,769 contracts to their short positions. Commercial interests added 1,860 contracts to their long positions and also added 8,426 contracts to their short positions. As of the latest COT report, managed money is long wheat by a ratio of 2.14:1, which is somewhat lower from last week’s ratio of 2.20:1, and lower than the reading of two weeks ago of 2.27:1.
The table below shows how the grain complex performed after making their highs on August 10, the day the August USDA report was released.
Performance: August 10-August 24
Dec soybean oil +6.95%
Nov soybeans +6.15%
Dec soybean meal +5.70%
Dec corn -1.85%
Dec wheat -4.15%
Crude oil:
For the week, October crude oil lost 17.00 cents. The Commitment of Traders Report showed that managed money added 15,481 contracts to their long positions and liquidated 7,332 contracts of their short positions. Commercial interests liquidated 10,270 contracts of their long positions and added 7,116 contracts to their short positions. As of the latest COT report, managed money is long crude oil by a ratio of 4.56:1, which is up from last week’s 3.64:1, and also higher than the reading of two weeks ago of 3.94:1.
Heating oil:
For the week, October heating oil gained 1.82 cents. The Commitment of Traders Report showed that managed money added 2,233 contracts to their long positions and liquidated 1,404 contracts of their short positions. Commercial interests added 4,889 contracts to their long positions and also added 9,040 contracts to their short positions. As of the latest COT report, managed money is long heating oil by a ratio of 2.36:1, which is up from last week’s 1.99:1 and the reading of two weeks ago of 1.49:1.
Gasoline:
For the week, October gasoline gained 4.21 cents. The Commitment of Traders Report showed that managed money added 2,546 contracts to their long positions and also added 2,121 contracts to their short positions. Commercial interests added 13,906 contracts to their long positions and also added 12,684 contracts to their short positions. As of the latest COT report, managed money is long gasoline by a ratio of 9.32:1, which is significantly lower than last week’s 12.25:1, and lower than the reading of two weeks ago of 10.96:1. The reason for this week’s lower reading is due to the disproportionate increase in the number of new shorts, compared to the increase in the number of new longs.
Copper:
For the week, September copper gained 6.40 cents. The Commitment of Traders Report showed that managed money added 3,047 contracts to their long positions and liquidated 4,497 contracts of their short positions. Commercial interests liquidated 5,518 contracts of their long positions and also liquidated 893 contracts of their short positions. As of the latest COT report, managed money is short copper by a ratio of 1.10:1, which is down from last week’s 1.37:1 and the reading of two weeks ago of 1.26:1.
Gold:
For the week, December gold gained $53.50. The Commitment of Traders Report showed that managed money added 15,585 contracts to their long positions and liquidated 9,344 contracts of their short positions. Commercial interests liquidated 2,114 contracts of their long positions and added 8,750 contracts to their short positions. As of the latest COT report, managed money is long by a ratio of 5.70:1, which is up significantly from last week’s 3.31:1 and the reading of two weeks ago of 3.57:1.
In order to to put the current long to short ratio in perspective, it is important to remember that when gold closed at its 2012 high on February 28, ($1798.90), the long to short ratio stood at 24:1, or over four times greater than the current ratio. By March 27, 2012 the COT long to short ratio for gold was 10.96:1 and June gold closed at $1684.80, or a scant $11.90 from Friday’s close. On May 1, June gold closed $1662.40, which is only $10.50 from Friday’s close, and the long to short ratio on the COT May 1 report was 12.21:1. In other words, the current long to short ratio is half of what it was when gold was priced at the same approximate level in March and May 2012. This shows the degree to which speculators are not participating in the current gold rally. As we have said before, this is a bullish development because it signifies there is a tremendous amount of buying power on the sidelines that will eventually enter the market.
Silver:
For the week, September silver gained $2.62. The Commitment of Traders Report showed that managed money added 2,614 contracts to their long positions and liquidated 3,487 contracts of their short positions. Commercial interests liquidated 2,597 contracts of their long positions and added 2,567 contracts to their short positions. As of the latest COT report, managed money is long by a ratio of 2.77:1, which is up significantly from last week’s 1.81:1 and the reading of two weeks ago of 1.67:1.
Please note that the long to short ratio in gold is more than double the ratio in silver despite silver’s outstanding performance during the past week (see table below). July Silver topped out on April 25, 2011 at $49.845 and made its final bottom at $26.105 on June 28, 2012. This was 2 1/2 cents below the low made on December 29, 2011. From the high to the low, silver fell 47.5%, which did a severe amount of damage to commodity portfolios. From the lows made on June 28, 2012 through August 24, 2012, September silver has gained 16.27% versus December gold + 7.56%.
When silver made its high on April 25, 2011, June gold closed at $1577.40. It wasn’t until September 6, 2011 that October gold made its high of $1920.80. On September 6, December silver closed at $41.868, which was approximately $8.00 lower than the April 25 high. From the September 6 high to the December 29, 2011 low, gold declined approximately 20.5%. This compares to silver’s is high to low decline of 47.5%. It is important for clients to understand that although the moves in precious metals are highly correlated, there can be major divergences in their performance.
Undoubtedly, many readers have seen the phenomena in equities when the stocks that fall the farthest have the biggest rebound. Sir Isaac Newton observed this more than 300 years ago: “For every action, there’s an equal and opposite reaction.” In our view, considering the magnitude of the decline in silver, we may see it rebound far more strongly than gold.
Performance: August 20-August 24 Year to Date
September Silver +9.40% + 9.41%
October Platinum +5.28% +9.73%
December Gold +3.34% +5.96%
Euro:
For the week, the September Euro gained 1.97 cents. The Commitment of Traders Report showed that leveraged funds added 2,110 contracts to their long positions and liquidated 8,005 contracts of their short positions. As of the latest COT report, leveraged funds are short by a ratio of 2.03:1, which is down from last week’s 2.20:1 and only slightly lower than the reading of two weeks ago of 2.05:1.
10 Year Treasury Notes:
For the week, the September 10 year treasury note gained 1-02.4 points. The Commitment of Traders Report showed that leveraged funds added 17,519 contracts to their long positions and liquidated a massive 89,314 contracts of their short positions. As of the latest COT report, leveraged funds are long by a ratio of 2.12:1 which is up significantly from last week’s 1.24:1 and the reading of two weeks ago of 1.08:1.
There is an opportunity to implement bearish positions this week in treasury notes. Treasury notes are a reasonable hedge against a disappointing announcement by the Federal Reserve or the European Central Bank. If the Federal Reserve announces a quantitative easing program , treasury notes will likely rally, but the rally may be muted because markets have been anticipating the program. If the Federal Reserve disappoints, a sharp drop in treasury notes is highly likely. In any event, implementing bearish positions is a reasonable way to offset risk in positions that may be hurt from a lack of quantitative easing. On August 14 and 16 treasury notes generated a short and intermediate term sell signal respectively.
S&P 500 E mini:
For the week, the September S&P 500 E mini lost 5.40 points. The Commitment of Traders Report showed that leveraged funds added 29,080 contracts to their long positions and also added 26,490 contracts to their short positions. As of the latest COT report, leveraged funds are short by a ratio of 2.14:1, which is down slightly from last week’s 2.23:1, but higher than the reading of two weeks ago of 2.06:1.
Despite making new highs on the S&P 500 E mini on August 21, the number of stocks making new highs on the New York Stock Exchange has never exceeded the 449 stock high made on February 3, 2012 when the E mini closed at 1339.10. The closest to that high occurred on July 2 when 396 stocks made new 52-week highs on the New York Stock Exchange and the S&P 500 E mini closed at 1357.60. It is important to note that the 50 day moving average of new highs has been moving steadily higher beginning on June 15 when the average was slightly under 100 stocks and now registers a reading of 197.
We believe the market will continue to move higher at least during the upcoming week, but all eyes will be on the meeting of central bankers at Jackson Hole. Federal Reserve Chairman Ben Bernanke will give a speech on August 31 and Mario Draghi, the president of the European Central Bank, will give a speech on September 1. The speech that Mr. Draghi gives will most likely have the greatest impact on the markets. We continue to like Apple Computer, rather than the stock indices. Below, is the table showing the most recent reading from the American Association of Individual Investors. Apparently, the subjects of the survey have gotten considerably more bullish.
AAII Index (Sentiment)
Recent Wk 2 Wks Ago 3 Wks Ago
Bullish 42.0% 36.8% 36.5%
Bearish 25.9% 28.1% 27.4%
Neutral 32.2% 35.1% 36.2%
