Weekend Wrap for February 24, 2013

Soybeans:

For the week, March soybeans gained 36.75 cents, May +29.00, July +24.25. The COT report showed that managed money liquidated 9,283 contracts of their long positions and added 9,699 contracts to their short positions. Commercial interests added 25,343 contracts to their long positions and also added 9,806 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 4.61:1, which is down significantly from the previous week of 6.98:1, and the ratio of 2 weeks ago of 5.44:1.

Soybean meal:

For the week, March soybean meal gained $17.50, May +17.50, July +16.30. The COT report showed that managed money liquidated 2,342 contracts of their long positions and added 2,313 contracts to their short positions. Commercial interests added 4,065 contracts to their long positions and also added 3,473 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 2.88:1, which is down from the previous week of 3.30:1 and the ratio of 2 weeks ago of 3.72:1.

Soybean oil:

For the week, March soybean oil lost 1.27 cents, May -1.28, July -1.30. The COT report showed that managed money liquidated 1,718 contracts of their long positions and added 1,059 contracts to their short positions. Commercial interests liquidated 5,271 contracts of their long positions and also liquidated 2,695 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.30:1, which is up slightly from the previous week of 1.23:1 and up dramatically from the ratio of 2 weeks ago when managed money was long by a ratio of 1.08:1.

Corn:

For the week, March corn lost 8.50 cents, May -12.75, July -13.50. The COT report showed that managed money liquidated 25,079 contracts of their long positions and added a massive 36,938 contracts to their short positions. Commercial interests added 19,438 contracts to their long positions and liquidated 19,802 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 1.87:1, which is down dramatically from the previous week of 2.93:1 and the ratio of 2 weeks ago of 3.72:1.

Wheat:

For the week, March wheat lost 27.25, May -29.75, July -27.50. The COT report showed that managed money liquidated 9,386 contracts of their long positions and added 8,571 contracts to their short positions. Commercial interests liquidated 1,698 contracts of their long positions and also liquidated 9,287 contracts of their short positions. As of the latest report, managed money is short wheat by a ratio of 1.71:1, which is up from the previous week of 1.41:1 and the ratio of 2 weeks ago of 1.35:1.

Performance Year to Date:

May soybean meal +3.55%
May soybeans         +3.18%
May soybean oil      +1.10%
May corn                 -2.28%
May wheat               -8.76% 

Crude oil: On February 22, crude oil generated a short-term sell signal.

For the week, April crude oil lost $3.28. The COT report showed that managed money liquidated 20,435 contracts of their long positions and added 7,594 contracts to their short positions. Commercial interests added 9,924 contracts to their long positions and liquidated 4,184 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 6.38:1, which is down substantially from the previous week of 9.02:1 and the ratio of 2 weeks ago of 8.84:1.

We have been warning our readers for quite some time about the disproportionately large increase in open interest and the failure of crude oil to move significantly higher with this. Although, we don’t have the final open interest stats for Friday, from January 30 when crude oil made a high of $98.24 and closed at $97.94 through February 21 when it closed at $92.84, open interest increased by 79,627 while crude lost $5.10. In short, since crude made its high on January 30, open interest relative to the price decline has been bearish. To put the open interest build from January 30 through February 21 in perspective, consider this: From December 11 when March crude made its low at $87.04 through January 30 when it made its high at 98.24, open interest advanced only 24,607 contracts on a move of over $11.00. In short, the open interest build on the $5.10 decline has been 3 x more than the open interest increase on the $11.00 advance. This is very bearish.

In the February 17 Weekend Wrap, we said crude oil would move lower its 50 day moving average. Additionally, we said this was conservative because we believe the major equity indices are about to undergo a correction. Additionally, on February 21 and 22, crude oil closed below its 50 day moving average for the first time since December 18, 2012. With a relatively high long to short ratio, there are a large number of longs that will run for the exit once it becomes apparent that crude oil is headed lower than anyone thought.

Some key moving averages to keep an eye on: the 150 day moving average of $91.77 and the 200 day moving average of 90.48 on the continuation chart. On Friday, April crude oil closed at 93.27, which is slightly below the 50 day moving average on the continuation chart of 93.77 and the April chart, 94.39. On the continuation chart, the 50 week moving average is $92.76, 150 week 90.96, 200 week 89.80. Usually, after a sell signal is generated, there is a rally that lasts 1-2 days and sometimes 3. However, this may not be the case with crude because it is trading in the value area of the 50 day and 50 week moving averages. Any rally should be used as an opportunity to implement bearish positions. We recommend the use of put options on futures rather than naked short positions due to the remote, but real possibility of a crisis in the Middle East.

Heating oil:

For the week, April heating oil lost 10.01 cents. The COT report showed that managed money added 5,143 contracts to their long positions and also added 352 contracts to their short positions. Commercial interests liquidated 7,550 contracts of their long positions and also liquidated 3,216 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 3.72:1, which is up slightly from the previous week of 3.52:1, and up substantially from the ratio of 2 weeks ago of 2.74:1.

Gasoline:

For the week, April gasoline lost 5.41 cents. The COT report showed that managed money added 264 contracts to their long positions and liquidated 216 contracts of their short positions. Commercial interests added 4,145 contracts to their long positions and also added 1,723 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 8.83:1 which is up slightly from the previous week of 8.65:1 but down substantially from the ratio of 2 weeks ago of 11.10:1.

Natural gas:

For the week, April natural gas gained 13.1 cents. The COT report showed that managed money liquidated 8,526 contracts of their long positions and added 4,712 contracts to their short positions. Commercial interests liquidated 6,413 contracts of their long positions and also liquidated 11,535 contracts of their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.39:1, which is up slightly from the previous week of 1.31:1 and the ratio of 2 weeks ago of 1.25:1.

Copper:

For the week, May copper lost 20.30 cents. The COT report showed that managed money liquidated 6,785 contracts of their long positions and added 4,900 contracts to their short positions. Commercial interests added 1,395 contracts to their long positions and liquidated 2,489 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 1.43:1, which is down significantly from the previous week of 2.06:1 and the ratio of 2 weeks ago of 2.02:1.

Gold:

For the week, April gold lost $36.70. The COT report showed that managed money liquidated 4,432 contracts of their long positions and added 19,340 contracts to their short positions. Commercial interests added 1,913 contracts to their long positions and liquidated 18,494 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.64:1, which is down substantially from the previous week of 2.41:1 and the ratio of 2 weeks ago of 3.28:1.

Platinum: On February 22, platinum generated a short-term sell signal

For the week, April platinum lost $70.30. The COT report showed that managed money liquidated 2,116 contracts of their long positions and liquidated 696 contracts of their short positions. Commercial interests added 227 contracts to their long positions and liquidated 302 contracts of their short positions. As of the latest report, managed money is long platinum by a ratio of 34.58:1, which is up dramatically from the previous week of number 22.84:1 and the ratio of 2 weeks ago of 14.75:1. The reason for the large increase in the long to short ratio is because managed money liquidated an unusually large number of shorts. This represented a huge percentage of outstanding shorts hels by managed money.

Palladium:

For the week, June palladium lost $17.70. The COT report showed that managed money liquidated 199 contracts of their long positions and added 276 contracts to their short positions. Commercial interests liquidated 65 contracts of their long positions and added 508 contracts to their short positions. As of the latest report, managed money is long palladium by a ratio of 10.18:1, which is down from the previous week of 11.54:1, but up slightly from the ratio of 2 weeks ago of 9.99:1.

Silver:

For the week, May silver lost $1.389. The COT report showed that managed money liquidated 3,775 contracts of their long positions and added 4,587 contracts to their short positions. Commercial interests liquidated 584 contracts of their long positions and also liquidated 4,616 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 2.93:1, which is down dramatically from the previous week of 6.56:1 and the ratio of 2 weeks ago of 10.34:1.

Performance Feb 1-Feb 22     Year to Date
May silver               -8.64%           -5.46%
May copper            -5.18%            -2.93%
April gold               -5.09%            -5.74%
April platinum       -4.13%           +4.44%
March palladium  -0.63%           +4.88%

Canadian dollar:

For the week, the March Canadian dollar lost 1.52 cents. The COT report showed that leveraged funds added 7,343 contracts to their long positions and also added 13,090 contracts to their short positions. As of the latest report, leveraged funds are long by a ratio of 1.64:1, which is down dramatically from the previous week of 2.84:1 and the ratio of 2 weeks ago of 2.44:1.

Australian dollar:

For the week, the Australian dollar gained 35 points. The COT report showed that leveraged funds liquidated 12,306 contracts of their long positions and liquidated 336 contracts of their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 2.25:1, which is down somewhat from the previous week of 2.46:1 and down significantly from the ratio of 2 weeks ago of 3.11:1.

British pound:

For the week, the March British pound lost 2.73 cents. The COT report showed that leveraged funds liquidated 1,614 contracts of their long positions and added 13,740 contracts to their short positions. As of the latest report, leveraged funds are short the British pound by a ratio of 1.78:1, which is up from the previous week of 1.33:1 and is up dramatically from the ratio of 2 weeks ago when leveraged funds were long the British pound by a ratio of 1.20:1.

Swiss franc:

For the week, the March Swiss franc lost 96 points. The COT report showed that leveraged funds liquidated 329 contracts of their long positions and added 4,375 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 1.11:1, which is down dramatically from the previous week of 1.94:1 and the ratio of 2 weeks ago of 1.71:1.

Euro:

For the week, the March euro lost 1.77 cents. The COT report showed that leveraged funds liquidated 5,676 contracts of their long positions and added 52 contracts to their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 1.30:1 which is down somewhat from the previous week of 1.42:1, and down substantially from the ratio of 2 weeks ago of 1.66:1.

Japanese yen:

For the week, the March Japanese yen was unchanged. The COT report showed that leveraged funds liquidated 608 contracts of their long positions and added 2,076 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.69:1, which is up slightly from the previous week of 3.54:1, but down substantially from the ratio of 2 weeks ago of 4.17:1.

US dollar index:

For the week, the March dollar index gained 1.01 points. The COT report showed that leveraged funds added 1880 contracts their long positions and also added a massive 7081 contracts to their short positions. As of the latest report leveraged funds are short the dollar index by a ratio of 1.05:1 which is a dramatic turnaround from the previous week when they were long by a ratio of 1.18:1 and the ratio of 2 weeks ago of 1.19:1.

It is interesting that leveraged funds are currently net short when the March dollar index reached its highest level since mid-November 2012. We are bullish the dollar index, however it is overbought relative to its 50 day moving average of 80.00. The bullish dollar index has negative implications for commodities and equities.

Performance COT reporting period of Feb 13-Feb 19     Year to Date
March British pound        -1.46%                                                   -6.16%            
March Canadian dollar    -0.87%                                                   -2.67%
March  Swiss franc          – 0.59%                                                    -1.81%
March euro                      – 0.48%                                                   -0.09%
Japanese yen                     -0.14%                                                    -7.14%
US dollar index                +0.56%                                                  +2.06%
March Australian dollar +0.63%                                                    -0.19%  

GreenHaven Continuous Commodity Index:

This week the 50 day moving average crossed below the 200 day moving average on the GreenHaven Continuous Commodity Index (GCC). We consider this to be a significant development because the index has 2 characteristics that make it unlike any other commodity index. First, it is equal weighted and second is publicly traded. This makes the index a true barometer of commodity prices because neither one commodity or group of commodities has a disproportionate impact on the index. Each component in the index is weighted 5.88%. In our view, the index is revealing that commodities are in a cycle of deflation. The recent low of 28.21 is the lowest price for the index since June 29, 2012 when it reached 27.94.

The components of the index are as follows: corn, silver, sugar#11, soybeans, platinum, orange juice, natural gas, live cattle, lean hogs, coffee, heating oil, crude oil, copper, gold, cotton, cocoa, wheat.

Live cattle is a perfect example of commodity deflation at work. Although there are fewer cattle available for slaughter today than one year ago, prices this week reached the lowest level since the week of June 25, 2012. The problem is that demand is tepid and that high prices  have had their effect on consumption. We think this principle is at work in the grain markets as well and the bias is to the downside. Clients should approach the markets from this frame of reference. The one exception may be the cotton market, although China has surplus stocks of cotton, and world consumption has been lackluster.

S&P 500 E mini:

For the week, the March S&P 500 E mini lost 2.50 points. The COT report showed that leveraged funds added 65,100 contracts to their long positions and also added 18,352 contracts to their short positions. As of the latest report, leveraged funds are short the E mini by a ratio of 1.72:1 which is down from the previous week of 1.91:1 and the ratio of 2 weeks ago of 1.87:1.

American Association of Individual Investors survey
       Recent week   2 weeks ago   3 weeks ago
Bullish   41.8%       42.3%            42.8% 
Bearish  32.5%       28.7%            29.6%
Neutral  25.7%      29.0%             27.7%

From Bloomberg News February 21:

“Corporate executives are taking advantage of near-record U.S. stock prices by selling shares in their companies at the fastest pace in two years.”

“There were about 12 stock-sale announcements over the past three months for every purchase by insiders at Standard & Poor’s 500 Index (SPX) companies, the highest ratio since January 2011, according to data compiled by Bloomberg and Pavilion Global Markets. Whenever the ratio exceeded 11 in the past, the benchmark index declined 5.9 percent on average in the next six months, according to Pavilion, a Montreal-based trading firm.”

“Executives at 153 companies in the S&P 500 unloaded shares between Feb. 11 and Feb. 15, with announcements of sales outnumbering buys by 17 to 1.”

“Insiders are not buying the current rally,” Pavilion’s Lapointe wrote in a Feb. 11 research note. “The recent gains have given them reason to sell their own stock. History tells us that high insider selling is usually followed by disappointing S&P 500 returns in the following months.”

Performance Year to Date:                           February 1-February 22

Dow Jones Transportation index  +12.01%          +2.41%       
S&P 400 mid-cap Index                 +8.16%          +0.94%
Russell 2000 small cap index         +7.86%          +1.56%
Dow Jones Industrial Average        +6.84%          +1.01%
SPX 500 cash                                   +6.27%         +1.173%
NASDAQ 100                                    +2.87%         +0.21%  

The above table shows that momentum in the major equity indices have slowed dramatically in February. The NASDAQ 100 was essentially unchanged during the first 3 weeks of February. The reason this is important is that technology represents a 15.89% weight in the  the S&P 500, which is only surpassed by the financial sector which represents a weight of 16.84%. XLK, which is the technology sector ETF has been the weakest of all sectors comprising the S&P 500. For example, it’s 50 day moving average of 29.40 is below the 150 day moving average of 29.65, and will soon be below the 200 day moving average of 29.30. Undoubtedly, the poor performance of Apple has a lot to do with the under performance of the technology sector as a whole.

Below, the table shows the performance of cap weighted and equal weighted sectors that comprise the S&P 500. Using the S&P 500 Equal Weighted Index as a benchmark, we can see which sectors are performing well or underperforming on an equal weight basis. For example, any equal weight sector that is below the performance of the S&P 500 equal weight index is underperforming this index, while if above is outperforming. This can be applied to the cap weighted sectors against the S&P 500 as well.

If a cap weighted sector is out performing the corresponding equal weighted sector, this indicates greater relative strength strength in larger cap stocks. The reverse is true if the equal weight sector is outperforming the cap weighted sector. The table below covers the period of February 1 through February 22 in descending order. The next table shows year to date performance in descending order.

Excel Spreadsheet

Performance Year to Date: 

In last week’s Weekend Wrap we discussed our concern about the massive open interest increase relative to the minor price advance during February. For example, from February 1 through February 21 open interest has increased by 183,383 contracts , but the S&P 500 has advanced only 6.50 points. The very large disproportionate increase of open interest relative to the price advance is clearly giving the signal that new buyers are not moving the market higher. This is a very negative sign along with the number of stocks below their 50 day moving averages on the NYSE since they topped out on January 22 at 2115 ( March E mini closed 1489.50). On February 22 ( March E mini closed 1514.50), the number of stocks above their 50 day moving average fell to 1649. The country is on the eve of the sequester, which brings with it the potential for an economic setback resulting from enforced cuts to the federal budget beginning on March 1. As we have said before, the correction has already begun, and a conservative way to play it is to write calls on out of the money call options for either, or a combination of March, April or May.