Soybeans:
For the week, January soybeans gained 35.75 cents, March +6.00, May + 5.50. The COT report showed that managed money liquidated 15,199 contracts of their long positions and added 10,402 contracts to their short positions. Commercial interests added 8,282 contracts to their long positions and liquidated a hefty the 32,058 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 3.49:1, which is down substantially from the previous week of 5.67:1 and the ratio of 2 weeks ago of 5.52:1.
There were very few surprises in the USDA report released on January 11. Production was increased by 44 million bushels, but use was increased by 39 million. Carryout was raised 5 million bushels to 135 million. The most fascinating aspect of the report was the market’s reaction to it. When the report was released at 11:00 a.m. central standard time, soybeans made a spike high of $13.81 3/4 during the first 5 min on volume of 11,483 contracts. Between 11:10-11:15, March soybeans made made a spike low of $13 51 1/2 on volume of 9,595 contracts, which took out the previous low for the entire move of 13.56 made on January 4 and November 16. March soybeans closed at $13.73 1/4. Undoubtedly, there were huge numbers of sell stops underneath 13.56.
Now that the final crop is in and we know the approximate size of the final Brazilian and Argentine crop, the soybean market has likely discounted all the negative news thus far. Conceivably, the low made on Friday will be the low, or near the low. The high 5 minute volume (9,595 contracts) on the decline to new lows means it is more than likely that beans have made a bottom, if only temporarily. Between the move higher and lower during two 5 minute periods, volume traded (21,078 contracts) represented 8% of total volume for the day. Total volume on Friday was 253,067 contracts, for 21 hours of trading. This was the highest volume since December 20 when 299,585 contracts were traded and soybeans declined by 26.25 cents and open interest declined by 11,799 contracts. If soybeans break below $13.51 1/2, we may see another leg down, but we don’t think this is likely. Soybeans will begin to enter a period of seasonal strength, and the very low long to short ratio of managed money indicates extreme bearishishness in this group. This is good news for longs.
Soybean meal:
For the week, January soybean meal gained $4.90, March +5.30,, May +6.20. The COT report showed that managed money added 1,370 contracts to their long positions and also added 4,748 contracts to their short positions. Commercial interests added 3,388 contracts to their long positions and also added 10,170 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.18:1, which is down significantly from the previous week of 4.28:1 and the ratio of 2 weeks ago of 4.57:1.
Trading soybean meal followed the same pattern as soybeans with some exceptions. First, soybean meal made a spike high at $405.30 between 11:00-11:05. Between 11:10-11:15, March soybean meal made a spike low at 392.40, which took out the low of 393.20 made on January 4. This was the lowest price since July 24 when March meal made a low of 393.00. The previous low occurred on July 2, when March meal made a low of 391.40. The market proceeded to recover for the rest of the day and unlike soybeans, made a new high for the day of 406.20 between 13:55-14:00 cst, right before the close (14:00 cst). March soybean meal closed at 404.30 down $1.30 for the day. Like soybeans, we think it is highly likely that the low of January 11 will hold, at least temporarily.
Corn:
For the week, March corn gained 28.50 cents,, May 26.25, July +24.00. The COT report showed that managed money added 1,091 contracts to their long positions and also added a hefty 15,879 contracts to their short positions. Commercial interests added 11,423 contracts to their long positions and also added a meager 311 contracts to their short positions. As of the latest report, managed money is long corn by a ratio of 2.83:1 (which is the lowest ratio recorded in several months), which is down significantly from the previous week of 3.49:1 and the ratio of 2 weeks ago of 3.43:1. For more information on the COT ratios in June and July 2012, please see the January 2 report. The current long to short ratio is the lowest since the June 26 tabulation date when the ratio was 2.20:1 and March corn closed at $6.33 1/2.
The USDA report for corn was bullish and carryout for the 2012-2013 season was reduced to 602 million bushels from an average estimate of 667. The big surprise was a 300 million increase in feed usage, however exports were cut by 200 million while production was increased by 55 million due to an increase in yield. World carryout was reduced to 115.99 mmt from the December report of 117.61 mmt. This is a substantial reduction from the final report and from the January 2012 report of 131.79 mmt. The current global carryout is a stocks to usage ratio of 13.4%, which is the lowest in more than 20 years. Is important to keep in mind that the increase of 300 million bushels in feed usage was recorded as of December 1, but reflected increased feed usage prior to December 1 when prices were significantly higher than they are today. It was only after December 1 that corn prices began to fall precipitously. December 1 was a Saturday, but on November 30, (Friday) March corn closed at $7.52 3/4. Corn prices began to fall in earnest on December 6, which brings up the question of how much more corn has been fed to livestock post December 1 as a result of significantly lower prices. This has implications of much higher feed use post December 1 than has been anticipated. Another factor coming into play would be if exports were to pick up, which would be a major shock to the market as projected export sales have been cut to the bone.
Corn trading on Friday was wild with corn making a high of $7.23 3/4 when the report was released, after trading lower for the entire evening and the early-morning session. The low on Friday was $6.86 1/4, which was slightly below the January 9 low of 6.86 1/2, but above the low of 6.83 3/4 made on January 8 and the low for the entire move of 6.78 made on January 7. We think the bottom is in for corn and the move from contango to inversion in the March-May spread is another indication the market has turned. Additionally, we are beginning to enter a period of seasonal strength and managed money is as bearish as they’ve been since last June. This is good news for longs. Corn remains on a short and intermediate term sell signal.
Wheat:
For the week, March wheat gained 7.50 cents, May +5.25, July +3.75. The COT report showed that managed money added 793 contracts to their long positions and liquidated 481 contracts of their short positions. Commercial interests added 6,576 contracts to their long positions and also added 6,043 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.26:1, which is about the same as the previous week of 1.29:1 and the ratio of 2 weeks ago of 1.20:1.
The USDA report on wheat was considered constructive and carryout was cut 38 million bushels while domestic use increased by 37 million and stocks as of December 1 were lowered by 45 million. It is likely that we have seen the lows in wheat, at least temporarily. On January 11 wheat made a low of $7.36 1/4, which broke the low of 7.39 3/4 on January 4. Wheat remains on a short and intermediate term sell signal.
Crude oil:
For the week, February crude oil advanced 47 cents. The COT report showed that managed money added 13,237 contracts to their long positions and liquidated 11,454 contracts of their short positions. Commercial interests added 4,773 contracts to their long positions and also added 2,158 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 4.93:1, which is up substantially from the previous week of 3.59:1 and the ratio of 2 weeks ago of 2.72:1.
Natural gas:
For the week, February natural gas gained 4 cents. The COT report showed that managed money added 7,288 contracts to their long positions and also added 2,228 contracts to their short positions. Commercial interests added 4,015 contracts to their long positions and also added 5,251 contracts to their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.38:1 which is down slightly from the previous week of 1.42:1 and the ratio of 2 weeks ago of 1.43:1.
Performance 4th quarter 2012 Year to Date
February gasoline +1.61% -1.09%
February crude oil -1.85% +2.24%
February heating oil -2.28% -0.84%
February natural gas -10.87% -1.22%
Copper:
For the week, March copper lost 3.95 cents. The COT report showed that managed money added 2,021 contracts to their long positions and liquidated 2,220 contracts of their short positions. Commercial interests added 2,997 contracts to their long positions and also added 6,891 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 2.22:1, which is up from the previous week of 1.85:1 and the ratio of 2 weeks ago of 1.72:1.
Gold:
For the week, February gold gained $11.70. The COT report showed that managed money liquidated 7,364 contracts of their long positions and added 2,466 contracts to their short positions. Commercial interests added 815 contracts to their long positions and also added 831 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 3.89:1, which is down from the previous week of 4.49:1 and the ratio of 2 weeks ago of 4.35:1. The current ratio is one of the lowest of several months.
Performance 4th quarter 2012 Year to Date
March silver -12.32% +0.21%
April platinum -7.54% +5.75%
February gold -5.82% -0.73%
March copper -3.11% +0.27%
Platinum: On January 11, April platinum generated a short and intermediate term buy signal.
For the week, April platinum gained $72.70. The COT report showed that managed money added 1,776 contracts to their long positions and also added 621 contracts to their short positions. Commercial interests liquidated 328 contracts of their long positions and added 427 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 6.20:1, which is down slightly from the previous week of 6.63:1 and down dramatically from the ratio of 2 weeks ago of 8.77:1.
This is the first time we have reported on platinum because we have not seen much of an opportunity on either the long or short side. We think this has changed and are providing the reasons why platinum may be on the verge of a major move higher.
First, platinum has usually sold at a premium to gold. It is 15-20 times rarer than gold and it has the benefit of being an industrial metal, which is used in catalytic converters, manufacturing and electronics. According to Wikipedia, 113 tons are used for vehicle emissions devices, 76 tons for jewelry while 35.5 tons are used in other industrial and business applications.
From MarketWatch October 19, 2012: “For several years the inability of South African platinum producers to control costs has severely limited (capital expenditures) and expansion,” said Johnson Matthey’s Tim Murray. “Labor strife and militant politicians and the threat of nationalization have kept much needed capital and foreign investment on the sidelines.” he said. And the recent strikes and unprecedented violence have only exacerbated the situation.” Approximately 70% of the world’s platinum comes from South Africa with the remaining coming from Russia.
“The strikes this year have caused several hundred thousand ounces of lost platinum production so far,” he said.
David Awram, Executive Vice President of Sandstrom Gold Ltd said, “If production is materially affected by the labor unrest, it will certainly be felt in supply chains. One potential impact is on the production of catalytic converters, he said. It is important to note that palladium, which is used in catalytic converters as well, is currently at the highest price since February 2012.
Since the majority of platinum is used in auto emissions devices, we examined the charts of eight global auto manufacturers and one upstart (Tesla). All exhibit healthy uptrends with some performing better than others. However in every case, the 50 day moving average is above the 200 day moving average. As the table below indicates performance in the 4th quarter was unbelievably strong, and performance year to date has been strong as well. In short, the global automobile market appears to be the healthiest in at least several years. This bodes well for the increasing use of platinum and palladium.
Performance 4th quarter 2012 Performance Year to Date
Ford………………………+31.34% +8.11%
General Motors……. +26.73% +5.31%
Volkswagen………….. +29.76% +1.45%
Honda Motorcars……+19.55% +3.30%
Toyota Motors………..+18.77% +3.07%
Tesla………………………+15.68% -2.83%
Daimler………………… +12.89% +5.11%
Tata Motors………….. +11.84% +6.23%
Volvo………………………. -3.12% +4.24%
S&P 500 Index…….+1.01% +3.22%
As we said earlier, platinum traditionally sells at a premium to gold. However, recently gold is been selling at a premium to platinum. The spread between gold and platinum has been narrowing dramatically since November 8, 2012. On that date gold sold at a $182.80 premium to platinum. This premium has eroded to the extent that on the close of January 11, February gold sold for a $29.40 premium over April platinum. This is the narrowest premium since March 30, 2012 when gold sold at a premium of $29.80. In terms of the market structure itself, platinum remains in contango, (as does palladium) but has moved up from the lows. Clients should keep a very close eye on platinum and palladium spreads, and if spreads invert, this will be more confirmation of the bull market. On a daily basis it is important to follow the contango.
The volume in the futures market for platinum is fairly thin, however there are options on futures, and there is an ETF that is backed by physical bullion, ticker symbol: PPLT. The important point is that this ETF tracks April platinum very closely. For example, during the 4th quarter, the ETF was -7.36% while April platinum was -7.54%. On a year to date basis, PPLT is +5.83% while April platinum is +5.75%.
Platinum is in its seasonally strong period that typically lasts into March. However, April platinum it is considerably(close$1631.20) overbought relative to its 50 day moving average of $1582.20 on the continuation chart. Additionally, the generation of the short and intermediate term buy signal confirms the overstretched condition of the platinum market. Speculators should wait for a pullback before entering new positions.
Silver:
For the week, March silver gained 46.2 cents. The COT report showed that managed money liquidated 1,031 contracts of their long positions and added 615 contracts to their short positions. Commercial interests liquidated 819 contracts of their long positions and also liquidated 2,250 contracts of their short positions. As of the latest report, managed money is long silver by 4.80:1 which is down significantly from the previous week of 5.62:1 and the ratio of 2 weeks ago of 6.06:1. The current long to short ratio is one of the lowest of the last several months.
Canadian dollar:
For the week, the March Canadian dollar gained 33 points. The COT report showed that leveraged funds liquidated 2,667 contracts of their long positions and also liquidated 1,630 contracts of their short positions. As of the latest report, leveraged funds are long the Canadian dollar by a staggering ratio of 11.25:1, which is up substantially from the previous week of 9.00:1 and the ratio of 2 weeks ago of 6.26:1.
Australian dollar:
For the week, the March Australian dollar gained 67 points. The COT report showed that leveraged funds added 4,026 contracts to their long positions and also added 2,505 contracts to their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 3.25:1, which is down slightly from the previous week of 3.37:1, but up slightly from the ratio of 2 weeks ago of 3.16:1.
British pound:
For the week, the March British pound gained 59 points. The COT report showed that leveraged funds liquidated 8,617 contracts of their long positions and added 317 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.94:1 which is down slightly from the previous week of 3.25:1 and the ratio of 2 weeks ago of 2.98:1.
Euro:
For the week, the March euro gained 2.66 cents (266 points). The COT report showed that leveraged funds liquidated 13,689 contracts of their long positions and added 3,613 contracts to their short positions. As of the latest report, leveraged funds are now short by a ratio of 1.16:1 which is a dramatic reversal from the previous week when they were long by a ratio of 1.15:1 and the ratio of 2 weeks ago when they were long by 1.03:1. Three weeks ago, leveraged funds were short by a ratio of 1.08:1.
It appears that speculators in the leveraged funds category cannot make up their minds whether they want to be long or short the euro. Almost on cue during the most recent week, they went short as the market went through a routine pullback due to its overbought condition. It may come as a shock to leveraged funds: The euro is in a bull market.
The most puzzling long to short ratios belong to the Canadian dollar and the British pound. As the table below shows, on a year to date basis, the March pound has lost 0.75%, while the Canadian dollar has advanced only 0.80%. The outstanding performers are the Australian dollar and the euro. Yet the long to short ratio in the Canadian dollar is 11.25:1 and 2.94:1 in the British pound. We tabulated the last 3 COT reporting periods which span December 19 through January 8 and found that the Canadian dollar declined by a fraction: 0.030. However, in this time frame, the long to short ratio moved from 6.30:1 to 11.25:1. The reason for this, as the table below shows is that the number of shorts declined by a much larger percentage than the number of longs.
Canadian dollar: Longs Shorts Tabulation date
61,883 9,886 December 24
62,653 6,961 December 31
59,986 5,331 January 8
Year to Date Performance
March Aussie dollar +1.56%
March Euro +1.14%
March Canadian dollar +0.90%
March British pound -0.75%
S&P 500 E mini:
For the week, the S&P 500 E mini gained 9.50 points. The COT report showed that leveraged funds liquidated 4,554 contracts of their long positions and added a massive 46,949 contracts to their short positions. As of the latest report, leveraged funds are short, the E mini by a ratio of 1.82:1, which is up from the previous week of 1.69:1 and about the same as the ratio of 2 weeks ago of 1.85:1.
American Association of Individual Investors Survey
Recent week 2 weeks ago 3 weeks ago
Bulls 46.5% 38.7% 44.4%
Bears 26.9% 36.2% 30.2%
Neutral 26.6% 25.1% 25.4%
During the past couple of weeks, the AAII survey has been extremely volatile with the bullish and bearish categories making large swings. This underscores the tremendous amount of uncertainty in the markets. As we have said before, we like individual stocks, but not the major indices. One notable top performer has been the transportation sector, which is been moribund for quite some time.
To give our readers an idea of how strong the transportation index has become consider that between November 16, when the index bottomed at 4838.10 through January 11, 2013 the transportation index has advanced 13.93% while the S&P 500 cash index has advanced 8.25% and the DJIA +7.15%. In other words during approximately a 2 month period, the transportation index has outperformed the Dow by almost a factor of 2x. On January 4, 2013, the transportation index broke decisively above the previous high made on March 19, 2012 of 5390.11 and as of the close on January 11 of 5591.41, the index is a scant 36 points from the all-time high made on July 7, 2011 of 5627.85. It would surprise many of our readers to know that the airlines have been the strongest sector within the transportation index. For example, from November 16, 2012 through January 11, 2013, the ETF, FAA has gained 25.58%, which is nearly twice the advance of the transportation index in the identical time frame. The shipping index ETF, SEA has advanced 17.79% during November 16 through January 11, and year to date it has advanced 7.33% versus the transportation index increase of 5.01% and the increase in FAA of 8.28%. It is interesting to note that shipping rates as represented by the Baltic Dry Index are at multiyear lows.
In short, the sectors that have been lagging for the last couple of years such as housing, automobiles, transportation, and especially airlines and shipping are now showing significant strength. We have been skeptical about the rally in the major indices because the transport index has been lagging until recently. We are not jumping on the bullish index bandwagon because we believe this is a market where stock picking, and managing the risk of those positions is where the most money can be made.
