The obituary of the impact impact of quantitative easing on the markets was likely written this week with the exception of currencies. Crude oil and the S&P 500 closed essentially unchanged for the week, while the precious metals fell, and copper gained a little on improved prospects for the Chinese economy and the rally in the Shanghai composite index. The September quantitative easing announcement also was met by lackluster markets, and the December announcement is more confirmation of this. The United States is determined to continue to debase the dollar.
Soybeans:
For the week, January soybeans gained 23.75 cents, March +19.50, May +8.25. The COT report showed that managed money added 7,163 contracts to their long positions and liquidated 6,434 contracts of their short positions. Commercial interests liquidated 10,336 contracts of their long positions, but added 5,504 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 5.71:1, which is significantly higher than the previous week of 4.32:1, and the ratio of 2 weeks ago of 4.53:1. Stand aside.
Soybean meal:
For the week, January’s soybean meal gained $14.80, March +15.70, May +14.40. The COT report showed that managed money added 6,713 contracts to their long positions, and liquidated 3,005 contracts of their short positions. Commercial interests added 774 contracts to their long positions, and also added 11,612 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.91:1, which is up substantially from the previous week of 2.85:1 and the ratio of 2 weeks ago of 2.69:1. Stand aside.
Last week, soybean meal significantly outperformed soybeans, and has outperformed soybeans during the 4th quarter, as well as year to date. It is curious why soybeans has a much higher long to short ratio than soybean meal, despite soybean meal consistently outperforming soybeans by a wide margin. Not only that, but export sales of soybean meal have been consistently robust, compared to soybeans. There is a chance that March soybean meal will generate a short-term buy signal next week, perhaps as early as Monday, and it isn’t far away from generating an intermediate term buy signal either.
Performance (last week) October 1-December 14, 2012 Year to Date
March soybean meal +3.59% -3.16% +41.57%
March soybeans +1.32% -4.65% +21.85%
Soybean oil:
For the week, January soybean oil lost 1.14 cents, March -1.20, May -1.19. The COT report showed that managed money added 3,866 contracts to their long positions, but liquidated 8879 contracts of their short positions. Commercial interests liquidated 10,901 contracts of their long positions, but added 3,387 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.52:1 which is down from the previous week of 1.85:1 and the ratio of 2 weeks ago of 2.06:1. Stand aside.
Corn:
For the week, March corn lost 6.50 cents, May -5.50, July -5.25. The COT report showed that managed money liquidated a massive 29,564 contracts of their long positions, and added 12,893 contracts to their short positions. Commercial interests added 8,872 contracts to their long positions, but liquidated 20,939 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 7.48:1, which is down substantially from the previous week of 12.27:1 and the ratio of 2 weeks ago of 12.10:1. Stand aside.
Wheat:
For the week, March wheat lost 47 cents, May -44, July -40.75. The COT report showed that managed money liquidated 7,457 contracts of their long positions, but added 16,448 contracts to their short positions. Commercial interests added 5,688 contracts to their long positions, but liquidated 14,837 contracts of their short positions. Commercials were doing the opposite of managed money. As of the latest report, managed money is long wheat by a ratio of 1.10:1, which is down substantially from the previous week of 1.50:1, and the ratio of 2 weeks ago of 1.63:1. Stand aside.
Crude oil:
For the week, January crude oil gained 80 cents. The COT report showed that managed money liquidated 5,847 contracts of their long positions, and added 22,838 contracts to their short positions. Commercial interests added 7,956 contracts to their long positions, but liquidated 1,347 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 1.86:1, which is down substantially from the previous week of 2.50:1, and the ratio of 2 weeks ago of 2.19:1. Stand aside.
Natural gas:
For the week, January natural gas lost 23.7 cents. The COT report showed that managed money liquidated 2,678 contracts of their long positions, and added 3,225 contracts to their short positions. Commercial interests added 7,339 contracts to their long positions and also added 6,507 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.24:1, which is up slightly from the previous week of 1.21:1, but dramatically higher from the ratio of 2 weeks ago when managed money was long by a ratio of 1.08:1. Stand aside.
Copper:
For the week, March copper gained 2 cents. The COT report showed that managed money added 5,972 contracts to their long positions and liquidated 2,670 contracts of their short positions. Commercial interests increased their long positions by 169 contracts, and also increased their short positions by 5,329. As of the latest report, managed money is long by a ratio of 2.29:1 which is up substantially from the previous week of 1.68:1, and up dramatically from the ratio of 2 weeks ago when managed money was short by a ratio of 1.05:1. Stand aside.
In the past, we have expressed reservations about being long copper, despite it being on a short and intermediate term buy signal. First, the spread action of the front month(s) versus back months has been bearish during the rally. For example, copper bottomed out on November 9 when it made a low of $3.4030. On November 9, the March-December 2013 spread closed at 2.20 cents premium to December. On December 14, after copper futures rallied approximately 30 cents, the spread closed at 3.45 cents premium to December. This is bearish. Also, we examined the time frame when copper began to rally in earnest beginning on November 29. The spread moved from 2.50 premium December contract on November 29 to a premium of 3.45 premium to the December contract on December 14. We examined a shorter duration spread (March-July), and the spread behaved the same,the premium expanded in the July contract. In short, as copper rallied from the lows, the December 2013 contract was gaining on March, which indicates that near-term demand is muted. In a true bull market, where there is solid demand, the spread should be doing just the reverse, with March gaining on July and December.
Another concern is the behavior of open interest when the substantial part of the rally began. For example, open interest increased by only 1,750 contracts during November 29 and November 30, even though copper rallied 11.25 cents during those 2 days and volume was heavy at 83,374 contracts and 72,832 contracts respectively. It is apparent that the relatively minor increase of open interest during the two-day rally was probably the result of liquidation. We know that managed money was substantially short copper during this time.
Although volume was heavy on November 29 and 30, from December 3 through December 14, volume was below some key benchmarks. For example, from December 3 through December 14, average daily volume was 46,586 contracts. This is dramatically below the average daily volume year to date of 65,709 contracts and below November 2012 average daily volume of 69,988. Additionally it was below October 2012 average daily volume of 49,464 contracts. From December 3 to December 13, copper has gained only 2.30 cents while open interest increased by 10,619. We are making the tabulation to December 13 because final open interest will not be released until December 17. In other words, copper advanced only 2.30 cents, yet it took a heavy open interest increase to move it by a little more than 2 cents on low volume. Open interest increased 6 fold during a 2.30 cent move versus the 11.25 cent move. When 10 consecutive days of low volume is combined with open interest increasing dramatically, while price is barely advancing, the bullish picture begins to get cloudy.
Another concern is the low relative strength of copper compared to the Shanghai Composite Index, which has rallied significantly during the past 4 days. Since China is the largest consumer of copper in the world, a bullish move in the Shanghai Index should have had extraordinarily large impact on copper. However, this is not been the case even though the Shanghai Composite Index has rallied approximately 9% since December 4.
Although Shanghai warehouse stocks have dropped during the past month, they still remain above levels of 6 months ago, when prices were considerably lower. Copper stocks in warehouses of the Commodity Exchange of New York and the London Metal Exchange are approximately 10% above levels of 5 to 6 months ago. In short, from a supply perspective, stocks of copper are more than adequate.
Though March copper is on a short and intermediate term buy signal, there does not seem to be a compelling reason to be long at current levels. The long to short ratio is at the highest level in more than a couple of months, and the 50 and 200 day moving averages are $3.60 and 3.58 respectively. These indicate an over bought condition. Unless copper spreads begin to move from contango to inversion, and warehouse stocks begin to draw down, we see copper trading within a range of $3.44-3.84. The 100 week moving average on the continuation chart is $3.81 and the 200 week moving average is 3.42.
Gold:
For the week, February gold lost $8.50. The COT report showed that managed money liquidated 70 contracts of their long positions and also liquidated 980 contracts of their short positions. Commercial interests added 1,914 contracts to their long positions and liquidated 10,439 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 9.20:1, which is up from the previous week of 8.63:1, but down dramatically from the ratio of 2 weeks ago of 20.94:1. Gold is on a short term sell signal, but an intermediate term buy signal. Stand aside.
Silver: On December 14, March silver generated a short-term sell signal.
For the week, March silver lost 83.2 cents. The COT report showed that managed money liquidated 1,829 contracts of their long positions, but added 633 contracts to their short positions. Commercial interests liquidated 54 contracts of their long positions and also liquidated 1,539 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 10.42:1, which is down substantially from the previous week of 13.26:1 and the ratio of 2 weeks ago of 12.06:1.
This week was a very telling one for the precious metals. There was the announcement of more money printing by the Federal Reserve, and the dollar continued to move sharply lower, yet for the week, both gold and silver were in the minus column. With silver on a short-term sell signal, but on an intermediate term buy signal, clients should stand aside. For the current quarter, silver is losing to gold, although it is significantly outperforming gold on a year to date basis.
Performance (last week) October 1-December 14, 2012 Year to Date
March silver -2.52% -6.82% +15.10%
February gold -0.52% -4.60% +7.32%
Canadian dollar:
For the week, the March Canadian dollar gained 36 points. The COT report showed that leveraged funds added 6,645 contracts to their long positions and also added 1,143 contracts to their short positions. As of the latest report, leveraged funds are long the Canadian dollar by a ratio of 2.01:1, which is up from the previous week of 1.87:1, and the ratio of 2 weeks ago of 1.95:1. Stand aside.
British pound:
For the week, the British pound gained 1.33 cents. The COT report showed that leveraged funds liquidated 82 contracts of their long positions and also liquidated 3,865 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.82:1, which is up from the previous week of 2.53:1 and the ratio of 2 weeks ago of 2.12:1. Stand aside.
Euro:
For the week, the March euro gained 2.32 cents. The COT report showed that leveraged funds added 6,613 contracts to their long positions, and liquidated 419 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.82:1 which is down from the previous week of 2.24:1 and dramatically down from the ratio of 2 weeks ago of 4.25:1.
On a year-to-date basis, the performance British pound is soundly beating the euro and has advanced 4.59% versus the euro of +0.99%. During the 2nd quarter the euro gained 1.37% versus the pound +2.95%. Thus far in the 4th quarter, the euro has advanced 2.38% while the British pound has gained only 0.20%. It is apparent that the euro is gaining momentum, and the fact there are fairly large numbers of shorts, will only add fuel to the upside move. When you compare the long to short ratio in the British pound versus the short to long ratio in the euro, and then compare performance since October 1, the most conservative trade is in the euro. The British pound is extended and with the high long to short ratio is vulnerable to a sharp setback. We are bullish the British pound, but more bullish on the euro. A move to 1.3200 in either the December or March contract would be considered a breakout, and would take the euro to the highest level since May 2012. Stay with long positions and keep your stop loss at breakeven at a minimum. Since the euro is approaching the highs of the past couple of months, a minor setback should be expected. It is anything more than this, money management is the key to staying with the position or exiting from it.
S&P 500 E mini:
For the week, the March S&P 500 E mini lost 0.60 points. The COT report showed that leveraged funds added a massive 49,503 contracts to their long positions, and liquidated 22,792 contracts of their short positions. The latest report shows that leveraged funds are short by a ratio of 1.21:1 which is down from the previous week of 1.34:1, and the ratio of 2 weeks ago of 1.46:1. This is one of the lowest ratios in the past several months.
Leveraged funds are getting less bearish and this is confirmed by the excessive bullishness of the American Association of Individual Investors Survey. We went as far back as July 6, and couldn’t find a higher bullish number than was recorded during this past week in the survey. We examined the performance of the S&P 500 cash index during the time the bullish number in the survey hit the 40% mark, which occurred during the week of November 26-November 30. From November 26 through December 14, the S&P 500 cash index has advanced 4.43 points, or +0.31%. In other words, leveraged funds and individual investors are getting increasingly bullish, despite the index barely moving during the past couple of weeks. It appears that complacency has set in, and this is a sign to be of cautious.
During the past week, the S&P 500 E mini made its high on December 12 at 1438.75, after rallying 11.25 points on December 11 in anticipation of more quantitative easing. On December 12, after making its high, the S&P reversed to close at 1427.25 on fairly light volume of 2,077,462 contracts while open interest increased by 40,941 contracts. On December 13 the E mini lost 9.25 points on volume of 2,918,671 contracts while open interest increased by 37,082 contracts.
This is a sharp contrast to mid-September when the Federal Reserve made its announcement of more quantitative easing. On September 13, the day of the announcement, the S&P E mini rallied 17.75 points on extremely heavy volume of 3,959,689 contracts. Open interest increased by a whopping 137,106 contracts. The following day the S&P 500 E mini rallied to its high of 1468 and closed another 8.50 points higher, again on heavy volume of 3,755,516 contracts. Open interest on that day increased by 57,831 contracts. In short, the quantitative easing that has been juicing up the markets is over. The market will have to contend with the much ballyhooed fiscal cliff and debt ceiling issues along with the reality that investors have every incentive to sell equities prior to January 1, 2013.
In the Weekend Wrap of December 2, we provided some research that showed how the S&P 500 performed during the month of December. The average gain for December based upon the years 2000-2011 was 1.00%. From December 1 through December 14 the S&P 500 E mini is up 1.50 or +0.11%, while the S&P 500 cash index is down 2.60 points or -0.18%. Thus far in December, the E mini performance is below the 13 year average. If quantitative easing was only able to move the market fractionally, what event will counteract the wave of selling that is likely to occur during the last 2 weeks of December. If the low short to long ratio of the S&P 500 E mini and the high bullish sentiment in the AAII survey have not been able to move the market, what is going to be the catalyst. The resolution of the fiscal cliff issue has to a great extent been discounted by the market. Therefore when it occurs it is likely to have only a minimal positive effect because the next issue facing Congress is the debt ceiling. This promises to be far more contentious. Maintenance of long puts should be based upon your risk tolerance and analysis of the fiscal issues facing the market.
Performance S&P 500 E mini December 1-December 14 (5 years).
2012 +0.11%
2011 -2.70%
2010 +5.25%
2009 +1.68%
2008 -1.06%
Average Performance December 1-December 14 (2000-2012) = +0.36%
AAII Survey
Recent Week Previous Wk 3 wks ago
Bulls 43.2% 42.2% 40.9%
Bears 30.1% 34.6% 34.4%
Neutral 26.7% 23.2% 24.7%
Japan Nikkei 225 Index:
Since November 15 through December 14, the Japanese Nikkei Index has rallied 1,070 points, or 12.32% versus the S&P 500 cash index rally of 4.29% in the same time frame. Amazingly, the rally in the Nikkei has gone for the most part unnoticed by those in the financial press. This astounding move has occurred in only 21 trading days, which may put it in the history books. The impetus for the rally has been the anticipated election of Prime Minister Shinzo Abe of the Liberal Democratic Party. He ran on the platform of greatly expanding the money supply and lowering interest rates. At this juncture, the Nikkei 225 index is massively overbought and closed at 9755 (December contract), which is several hundred points above its 50 day moving average of 9075.50. Additionally, the 50 day moving average will cross above the 200 day moving average with in the next day or two.
Prior to November 15 on a year to date basis,, the Nikkei was up 3.38% on the continuation chart, versus the S&P 500 cash index +7.78%, and the Dow Jones Industrial Index cash index of +2.89%. From January 1 through December 14, the Nikkei is +16.47%, S&P 500 cash index +12.40% and the Dow Jones Industrial Average is +7.51%. The NASDAQ 100 is +15.38%.
