In this report we are going to point out some examples of computerized blackbox trading, and the tendency of these programs to buy in concert at tops and sell at bottoms. Typically, these programs tend to overstay positions when the trend has changed. Based upon our research, most hedge funds and commodity trading advisors do not trade in a discretionary fashion. They tend to rely on computer programs that generate buy and sell signals. The ability to generate outsized returns using a computer program is based upon the quality of the programs and the parameters used to determine buy and sell signals. Obviously, some are better than others. Our approach to markets is discretionary, but with decisive rules. The documentation and results of our methodology is provided in our daily reports. The weekly ratios we compile from the COT report is important gauge of sentiment, and we use them to monitor extreme optimism or pessimism.
Soybeans:
For the week, January soybeans lost 65.25 cents, March -62.25, May -52.75. The COT report showed that managed money added 10,701 contracts to their long positions and liquidated 866 contracts of their short positions. Commercial interests added 5,257 contracts to their long positions and also added 18,837 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 6.36:1, which is up from the previous week of 5.71:1, and up substantially from the ratio of 2 weeks ago of 4.32:1. This is the highest long to short ratio since the November 13 tabulation date.
We think soybeans is a prime example of how managed money was faked out by the recent rally in soybeans. For example, the long to short ratio of 4.32:1, two weeks ago was based upon the COT tabulation time frame of November 28 through December 4. On December 4, March soybeans closed at $14.50 1/4. The long to short ratio of 5.71:1 of the previous week was based upon the COT tabulation time frame of December 5-December 11. On December 11, March soybeans closed at $14.71 1/4, or 21 cents above the December 4th close. The most recent report is based upon the COT tabulation period of December 12-December 18, was represented by the long to short ratio of 6.36:1. On December 18, March soybeans closed at 14.60 1/2.
To sum this up, the long to short ratio increased by approximately 50% during three COT reporting periods, and yet soybeans advanced only 10 1/4 cents from the closing price on December 4. In our view, this represents the computerized blackbox trading programs kicking in buy orders while reducing short positions. As readers of our reports know, soybeans have been on a short and intermediate term sell signal, which means they should only be traded from the short side. The abysmal performance of open interest from November 28 through December 18 was a warning that long position should not be taken.
Interestingly, the current long to short ratio of 6.36:1 is the highest since the COT tabulation date on November 13 when the long to short ratio reached 7.48:1. On this date, March soybeans made a low of $13.69 1/2 and closed at 13.85 3/4. In other words, managed money was heavily long near the bottom of the market. When soybeans rallied they lightened up on their long positions and increased short positions. This brought ratios to their lowest levels in several months. Longs with losses were most likely attempting to recoup part of these on the rally. As the rally continued, fresh longs entered the market while reducing their short positions, which served to increase the long to short ratio. On Friday, March soybeans closed at $14.30 3/4, which is the lowest close since 14.24 3/4 on November 26.Stand aside.
In the next Weekend Wrap, we will discuss the impending logistical problems with respect soybeans in Brazil. This is likely to cause major problems for the world soybean market because the Brazilian infrastructure is primitive. Even though Brazil may harvest a record crop, if it is unable to move it to market in a timely manner, the world may have to look to the United States for the dwindling supply of the US crop.
Soybean meal:
For the week, January soybean meal lost $23.90, March -22.70, May -17.90. The COT report showed that managed money added 6,053 contracts to their long positions and liquidated 1,662 contracts of their short positions. Commercial interests added 2,314 contracts to their long positions and also added 9,378 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 4.89:1, which is up from the previous week of 3.91:1, and up substantially from the ratio of 2 weeks ago of 2.85:1. The pattern of increasing long to short ratios is evident in soybean meal as the market was topping out. Soybean meal is on a short and intermediate term sell signal. Stand aside.
Corn:
For the week, March corn lost 28.75 cents, May -29.00, July -28.25. The COT report showed that managed money liquidated a massive 22,200 contracts of their long positions and added a massive 22,411 contracts to their short positions. Commercial interests liquidated 16,952 contracts of their long positions and also liquidated a massive 40,226 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 4.40:1, which is down substantially from the previous week of 7.48:1, and the ratio of 2 weeks ago of 12.27:1.This is the lowest ratio in several months, and is reminiscent of the soybean ratio of 4.32:1 two weeks ago. Stand aside.
Wheat:
For the week, March wheat lost 22.00 cents, May -24.25, July -24.25. The COT report showed that managed money liquidated 3,361 contracts of their long positions and added 13,156 contracts to their short positions. Commercial interests added 18,374 contracts to their long positions and liquidated 3,615 contracts of their short positions. As of the latest report, managed money is now short by a ratio of 1.10:1, which is a reversal from the previous week when managed money was long by a ratio of 1.10:1, and a major reversal from 2 weeks ago when managed money was long by a ratio of 1.50:1.
The potential problem for new shorts is they are adding new positions at the lowest price levels since June. However, there is some seasonal weakness ahead that tends to last through January. As prices decline, feed wheat consumption will increase, and there may be potential problems with the crop that is harvested next spring. Stand aside.
Crude oil:
For the week, February crude oil gained $1.41. The COT report showed that managed money added 3,457 contracts to their long positions and liquidated 16,054 contracts of their short positions. Commercial interests liquidated 25,232 contracts of their long positions and also liquidated 31,285 contracts of their short positions. As of the latest report, managed money is long by a ratio of 2.26:1, which is up from the previous week of 1.86:1 and a bit lower than the ratio of 2 weeks ago of 2.50:1. Stand aside.
We want to call your attention to a terrific article published by Bloomberg News on December 18 regarding the ever-increasing glut of oil caused by the rapid expansion of drilling in the United States. The title of the piece is: “American Oil Growing Most Since First Well Signals Independence.” Some key facts: This year oil output will average 766,000 barrels a day higher than the previous year, which is the highest in 15 years and is putting the US on track to surpass Saudi Arabia as the largest oil producer by the year 2020. Net petroleum imports have fallen by 38% since 2005, and now account for 41% of demand down from 60% 7 years ago. The US will produce an average of 6.41 million barrels per day, a 14% increase from 2011. This is the largest annual increase in production according to records that go back to 1859. We encourage readers to perform a Google search to read the article in its entirety.
In the next Weekend Wrap, we will discuss this piece in the context of positioning clients to profit from a longer-term decline in oil prices.
Natural gas:
For the week, February natural gas gained 13.7 cents. The COT report showed that managed money added 1,407 contracts to their long positions and also added 17,251 contracts to their short positions. Commercial interests added 19,410 contracts to their long positions and also added 13,462 contracts to their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.31:1, which is up somewhat from the previous week of 1.24:1, and the ratio of 2 weeks ago of 1.21:1. Stan aside.
Copper:
For the week, March copper lost 11.60 cents. The COT report showed that managed money added 2,949 contracts to their long positions and also added 541 contracts to their short positions. Commercial interests added 788 contracts to their long positions and also added 2,338 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 2.39:1, which is up from the previous week of 2.29:1 and up substantially from the ratio of 2 weeks ago of 1.68:1.
Copper is another good example of how computerized driven programs trigger false buy signals. On December 4, (the COT tabulation date), the long to short ratio was 1.68:1, and March copper closed at $3.6335. On December 18 (the COT tabulation date), the long to short ratio was 2.39:1, but copper closed at 3.6365, just a fraction above the December 4 close. On December 19 and 20 copper plunged 11.75 cents and made a low of 3.5230, which nearly matched the November 29 low of 3.5240. In short, speculators who entered new long positions during the past two weeks have lost money for the most part. Although copper was on a short and intermediate term buy signal at the time, we cautioned clients about entering new long positions, and wrote about our reasons for it the December 16 Weekend Wrap. Stand aside.
Gold: On December 21, February gold generated an intermediate term sell signal.
For the week, February gold lost $36.90. The COT report showed that managed money liquidated 3,448 contracts of their long positions and added 8,176 contracts to their short positions. Commercial interests added 43 contracts to their long positions and liquidated 12,763 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 5.75:1, which is down substantially from the previous week of 9.20:1, and the ratio of 2 weeks ago of 8.63:1. This is the lowest ratio in many months. With gold on a short and intermediate term sell signal, it should be traded from the short side. Stand aside.
In the next Weekend Wrap, we will discuss the trading behavior of gold in the current time frame and how it compares to previous years, and what may occur in the coming month(s).
Silver: On December 21, March silver generated an intermediate term sell signal.
For the week, March silver lost $2.096. The COT report showed that managed money liquidated 4,357 contracts of their long positions and added 50 contracts to their short positions. Commercial interests added 464 contracts to their long positions and liquidated 744 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 9.08:1, which is down from the previous week of 10.42:1 and down substantially from the ratio of 2 weeks ago of 13.26:1.
Silver is example of a discrepancy between the COT ratios of gold versus silver and the higher relative strength of gold. We examined the last 2 weeks of the COT reporting period (December 5-December 11 and December 12-December 18) for the performance of gold and silver. From December 5 through December 18, gold lost $28.50 ($2,850) or -1.68%. During the same period, silver lost $1.32 ($6,600) or -4.00%. Even though speculators would have lost more than twice as much in silver as in gold, the ratio of longs to shorts is dramatically higher in silver than gold. Unfortunately, many speculators take positions in commodities based upon a backward looking view of performance. During silver’s rise, it was dramatically outperforming gold, but as these markets have declined, gold is outperforming silver. With the high long to short ratio in silver combined with the massive recent decline, we think there is much more liquidation ahead for silver. With silver on a short and intermediate sell signal, it should only be traded from the short side. Stand aside.
In the next Weekend Wrap, we will discuss the trading behavior of silver in the current time frame, and how it compares to previous years and what may occur in the coming month(s).
Canadian dollar:
For the week, the March Canadian dollar lost 78 points. The COT report showed that leveraged funds added 7,275 contracts to their long positions and liquidated 11,146 contracts of their short positions. As of the latest report, leveraged funds are long the Canadian dollar by a ratio of 3.46:1, which is up substantially from the previous week of 2.01:1 and the ratio of 2 weeks ago of 1.87:1.
Australian dollar:
For the week, the Australian dollar lost 1.51 cents. The COT report showed that leveraged funds added 6,958 contracts to their long positions and liquidated 14,433 contracts of their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 3.27:1, which is up substantially from the previous week of 2.34:1 and the ratio of 2 weeks ago of 1.97:1.
British pound:
For the week, the March British pound lost 7 points. The COT report showed that leveraged funds added 15,036 contracts to their long positions and also added 11,223 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.46:1, which is down somewhat from the previous week of 2.82:1 and the ratio of 2 weeks ago of 2.53:1.
Euro:
For the week, the March euro gained 16 points. The COT report showed that leveraged funds added 18,789 contracts to their long positions and liquidated 6,754 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.08:1. which is down dramatically from the previous week of 1.82:1 and the ratio of 2 weeks ago of 2.24:1.
The tables below show the performance of the euro versus the dollar, pound, Canadian dollar and Australian dollar during the most recent two-week period covered by the Commitment of Traders Report. The euro is outperforming against the major currencies: eur/usd eur/aud, eur/cad, eur/gbp. Yet, the COT report shows that the highest long to short ratio is in the Canadian dollar, not the euro. Again, we think this reflects sentiment that is backward looking, and does not take into account the performance of the euro.
Take a look at the 3rd and 4th quarter performance to date of the euro against the three other currencies. The euro was weakest against the Canadian dollar and the British pound in the 3rd quarter. It might surprise many to know that the euro has been stronger against the Australian dollar since the 3rd quarter through December 22. However, one would never know this by looking at the long to short ratio of the Australian dollar, (3.27:1) which is a fractionally less than the Canadian dollar ratio of 3.46:1 versus the short to long ratio in the euro of 1.08:1.
Performance December 4-December 18 versus the US dollar (2 COT tabulated weeks Wednesday – Tuesday)
Mar euro +0.969%
Mar pound +0.882%
Mar Cad dollar +0.787%
Mar Aussie dollar +0.664%
Performance December 4-December 18 Euro Currency Crosses
Eur/Aud +0.4797%
Eur/Cad +0.2460%
Eur/Gbp +0.0860%
Performance October 1-December 21 (4th quarter to date)
Eur/Cad +3.565%
Eur/Gbp +2.514%
Eur/Aud +2.439%
Performance July 1-September 30 (3rd quarter)
Eur/Aud +0.1213%
Eur/Gbp -1.352%
Eur/Cad -1.755%
We think it is important to examine the current behavior of the euro and compare it to previous years. This should help prepare clients for possible unexpected moves. We are examining just the months of December and January, which is in keeping with our tactical and micro tactical approach to analysis. We know clients need this in order to navigate the ups and downs of the market.
During December 2011 the March euro topped out at 1.3559 on December 2 and made its low on December 29 of 1.2869. During January 2012, the euro made its contract low of 1.2627 on January 13 and made its high of 1.3231 on January 27. We do not think the market of December 2011 and January 2012 is analogous to the current market because as of December 31 2011, the 50 day moving average (approximately 1.3600) was considerably below the 200 day moving average (approximately 1.4100) and currently the 50 day is above the 200 day moving average.
We do think the December 2010 and January 2011 analog is much more appropriate for the current market. During December 2010, the March euro made a low of 1.2965 on December 1, and made its high of 1.3493 on December 14. On December 31, the euro closed at 1.3364. On December 31, 2010 the 50 day moving average was approximately 1.3500, and the 200 day moving average was approximately 1.3100. During January 2011, the March euro made its low on January 10 at 1.2870, and made its high on January 27 at 1.3753.
Please note in both January 2011 and January 2012, the euro bottomed on approximately the same date and made its high on exactly the same date.
S&P 500 E mini:
For the week, the March S&P 500 E mini gained 18.49 points. The COT report showed that leveraged funds added 7,489 contracts to their long positions and also added 2,298 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.20:1, which is about the same as the previous week of 1.21:1, but down from the ratio of 2 weeks ago of 1.34:1.
American Association of Individual Investors Survey
Recent wk 2 wks ago 3 wks ago
Bullish 46.4% 43.2% 42.2%
Bearish 24.8% 30.1% 34.6%
Neutral 28.8% 26.7% 23.2%
It is remarkable that the number of people bullish is at stratospheric highs, and yet from December 1 through December 21 the S&P 500 cash index has advanced only 13.97 points or +0.99%. This matches the performance for December 2011 when the S&P 500 cash index advanced 0.99%. The performance of the S&P 500 in December for years 2000-2011, is an average advance of 1.00%. Thus far, the performance of the S&P 500 index is average, and yet bullish investor sentiment is running surprisingly high. For more information on the performance of the S&P 500 in December, please see the December 2 Weekend Wrap.
We were caught by surprise by the severity of the downside move when the bill to avoid the fiscal cliff did not come up for a vote on Thursday. After all, there was a great degree of skepticism whether the bill would pass even if they had voted on it. We continue to recommend a stand aside position in the S&P 500 E mini.
