Soybeans:
For the week, March soybeans gained 56 cents, May +52.75, July +52.50. The COT report showed that managed money liquidated 1,771 contracts of their long positions and also liquidated 2,341 contracts of their short positions. Commercial interests added 758 contracts to their long positions and liquidated 18,025 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 3.70:1, which is up slightly from the previous week of 3.49:1, but down significantly from the ratio of 2 weeks ago of 5.67:1.
Soybean meal:
For the week, March soybean meal gained $10.10, May +9.30, July +10.10. The COT report showed that managed money liquidated 924 contracts of their long positions and added a massive 8,245 contracts to their short positions. Commercial interests liquidated 6,890 contracts of their long positions and added 9,166 contracts their short positions. As of the latest report, managed money is long soybean meal by a ratio of 2.18:1, which is down dramatically from the previous week of 3.18:1 and the ratio of 2 weeks ago of 4.28:1. The current long to short ratio is one of the lowest going back to the 2nd quarter 2012.
Soybean oil:
For the week, March soybean oil gained 2.44 cents, May +2.44, July +2.36. The COT report showed that managed money liquidated 1,044 contracts of their long positions and also liquidated 4,924 contracts of their short positions. Commercial interests liquidated 1,326 contracts of their long positions and added 9,888 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.83:1, which is down slightly from the previous week of 1.90:1 and the ratio of 2 weeks ago of 2.02:1.
This past week March soybean oil had a major rally and closed (51.68) one tick above the previous high of 51.67 made on December 6, 2012. Since January 14, March soybean oil has had higher highs on each successive day, while the lows have been higher too. However, soybean oil never had a pullback of any significance when it generated a short-term buy signal on January 15. Additionally, the 50 day moving average for March soybean oil is 48.91. A correction would be healthy. We like this trade because managed money continues to be heavily short, which only adds more fuel to the upside move.
Corn:
For the week, March corn gained 18.75 cents, May +22.25, July +22.75. The COT report showed that managed money added 22,112 contracts to their long positions and also added 7,893 contracts to their short positions. Commercial interests added 1,278 contracts to their long positions and added 18,780 contracts to their short positions. As of the latest report, managed money is long corn by a ratio of 2.82:1, which is equal to the previous week of 2.83:1, but down substantially from the ratio of 2 weeks ago of 3.49:1.
It is interesting to note that as of January 11 when the USDA report was released, through January 15 when they COT report was compiled, March corn advanced 31.75 cents. However, the long to short ratio remained unchanged from the previous week. Although, managed money added a hefty number of longs to their positions in the recent report, this was offset by an even larger percentage increase in the number of short positions. During Wednesday and Thursday, open interest declined by 5,149, therefore it is doubtful that managed money made significant additional commitments to the long side. In short, the rally in corn has few believers, which increases the likelihood the rally will continue. March corn is close to generating a short-term buy signal, but for this to occur, the low of the day must be above $7.25 1/8.
Wheat:
For the week, March wheat gained 36.50 cents, May +37.75, July +37.50. The COT report showed that managed money liquidated 3,281 contracts of their long positions and also liquidated 2,113 contracts of their short positions. Commercial interests added 8,734 contracts to their long positions, but liquidated 5,362 contracts of their short positions. As of the latest report, managed money is short wheat by a ratio of 1.30:1, which is up slightly from the previous week of 1.26:1 and the ratio of 2 weeks ago of 1.29:1.
Performance Jan 14 – Jan 18 Year to Date
March soybean oil +5.08% +3.93%
March wheat +4.84% +1.70%
March soybeans +4.08% +1.40%
March corn +2.65% +4.19%
March bean meal +2.50% -1.19%
Crude oil:
For the week, March crude oil gained $2.00. The COT report showed that managed money added 7,484 contracts to their long positions and liquidated 4,038 contracts of their short positions. Commercial interests added 3,783 contracts to their long positions and liquidated 1,653 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 5.67:1, which is up from the previous week of 4.93:1 and up substantially from the ratio of 2 weeks ago of 3.59:1.
From December 11 when March crude oil made a low of $86.40 and closed at 86.94, through January 17 when March crude oil made a high of 96.50 and closed at 95.94, open interest has declined by 30,730 contracts. This is bearish open interest action relative to the price advance. In short, crude oil has been rising not on net increases of new buying, but of shorts closing out their positions and pushing the market higher. On a positive note, since the December 11 low, the March-June contango has been narrowing from $1.58 premium June on December 11 to 91 cents premium June on January 18. While this is a favorable development, the spread has a long way to go before inversion.
Clients should take note that the movement of crude oil and the S&P 500 cash index have been highly correlated since mid-November and on a year to date basis. For example from November 15 through January 18, the S&P 500 cash index has advanced 9.80% while March crude oil advanced 10.05% and crude oil on the continuation chart advanced 11.58%. Since January 1, the S&P 500 cash index has advanced 4.19% while March crude advanced 3.94% and crude oil on the continuation chart advanced 3.97%. If this correlation holds, we should expect to see crude oil decline when the S&P 500 and other major indices correct their over bought condition.
Crude oil is massively overextended at this juncture, and once shorts have covered a large percentage of positions, crude oil needs new buyers at ever-increasing prices to push the market higher. On January 17 when March crude oil made a high of $96.50, it had reached the highest price since September 19, 2012 when March crude made a high of 97.58. The 50 day moving average for March crude is 90.17, and based upon our calculations, we estimate that crude oil could correct to the 91.00-92.00 level. Crude oil generated a short and intermediate term buy signal on January 2 and January 3 respectively. Do not enter new long positions at this juncture.
Natural gas:
For the week, March natural gas gained 23.9 cents. The COT report showed that managed money liquidated 2,053 contracts of their long positions and also liquidated 4,260 contracts of their short positions. Commercial interests liquidated 8,995 contracts of their long positions and also liquidated 1,453 contracts of their short positions. As of the latest report, managed money is short by a ratio of 1.38:1, which is the same as the previous week of 1.38:1 and slightly below the ratio of 2 weeks ago of 1.42:1.
Performance Jan 14 – Jan 18 Year to Date
March natural gas +6.95% +5.47%
Ethanol +3.67% +8.45%
March gasoline +2.35% +1.90%
March crude oil +1.76% +3.94%
March heating oil +1.24% +0.73%
Copper:
For the week, March copper gained 2.50 cents. The COT report showed that managed money liquidated 926 contracts of their long positions and added 3,071 contracts to their short positions. Commercial interests added 171 contracts to their long positions and also added 239 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 1.82:1, which is down from the previous week of 2.22:1 and about the same as the ratio of 2 weeks ago of 1.85:1.
Gold:
For the week, February gold advanced $26.40. The COT report showed that managed money added 834 contracts to their long positions and liquidated 2,921 contracts of their short positions. Commercial interests added 923 contracts to their long positions and also added 746 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 4.33:1 which is up from the previous week of 3.89:1, but slightly below the ratio of 2 weeks ago of 4.49:1.
Platinum:
For the week, April platinum gained $42.80. The COT report showed that managed money added 2,043 contracts to their long positions and liquidated a massive 3,509 contracts of their short positions. Commercial interests added 310 contracts to their long positions and also added 1,587 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 18.11:1, which is approximately triple the ratio of the previous week of 6.20:1 and the ratio of 2 weeks ago of 6.63:1.
We continue to advise clients to wait for a substantial correction. Platinum is massively overbought relative to its 50 day moving average of $1593.80. Additionally, the staggeringly high long to short ratio of managed money in the most recent week is another warning sign that new money has flowed into platinum at the very top of its trading range. This makes it vulnerable for a sharp pullback, especially if we continue to see dollar strength, which we think is likely.
Silver:
For the week, March silver gained $1.524. The COT report showed that managed money added 1,340 contracts to their long positions and liquidated 79 contracts of their short positions. Commercial interests added 553 contracts to their long positions, and added 1,169 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 5.12:1, which is up slightly from the previous week of 4.80:1, but down from the ratio of 2 weeks ago of 5.62:1.
When the performance of silver is compared to gold for the latest week, or year to date, the long to short ratio of silver is at a fairly low level compared to gold. Silver is close to generating a short-term buy signal, however an intermediate term buy signal is not on the horizon. One possible reason for the relatively low participation by managed money in silver compared to gold is that the decline in silver was much greater than gold’s. This likely makes speculators gun shy, especially if they incurred major losses previously. As we have mentioned before, the open interest increase has been rather muted compared to gold. During the past week, silver closed above its 50 week moving average of $31.26 for the first time since the week of December 10. Additionally, March silver penetrated the 50 day moving average of $32.03 for the first time since December 13.
Performance Jan 14 – Jan 18 Year to Date
March silver +4.68% +4.90%
April platinum +2.36% +8.24%
February gold +1.35% +0.61%
Canadian dollar:
For the week, the March Canadian dollar lost 87 points. The COT report showed that leveraged funds added 2,488 contracts to their long positions and liquidated 1,753 contracts of their short positions. As of the latest report, leveraged funds are now long by a staggering 17.45:1, which is up dramatically from the previous week of 11.25:1 and almost double the ratio of 2 weeks ago of 9.00:1. Three weeks ago the long to short ratio stood at 6.26:1.
One of the great mysteries of the currency market to OIA: Why does the Canadian dollar have such a high percentage of leveraged fund longs? As the table below shows, the Canadian dollar has performed abysmally in the most recent week and year to date. Additionally, during the 4th quarter 2012, the March Canadian dollar declined by 0.71% versus the euro which gained 2.51%, Australian dollar +0.94% and the British pound, which gained 0.68%. The long to short ratio is nearly as large as platinum’s, but platinum is in a major bull market. On January 18, the Canadian dollar made a new low for the move at 1.0040, which is the lowest price for the Canadian dollar since December 31 when it reached 1.0037. Additionally, the March Canadian dollar touched the 150 day moving average of 1.004 for the first time since November 16, 2012. According to latest COT report, there are total of 31 entities that hold 62,434 contracts long and 9 that hold 3578 contracts short. This means there could be a huge amount of selling pressure as the Canadian dollar moves lower, which we think is imminent. The Canadian dollar is on the verge of generating a short and intermediate term sell signal.
Australian dollar:
For the week, the March Australian dollar lost 21 points. The COT report showed that leveraged funds added 12,997 contracts to their long positions and also added 5,595 contracts to their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 3.13:1 which is down slightly from the previous week of 3.25:1 and the ratio of 2 weeks ago of 3.37:1.
British pound: On January 17, the March British pound generated a short and intermediate term sell signal.
For the week, the March British pound lost 2.59 cents. The COT report showed that leveraged funds liquidated 5,458 contracts of their long positions and added 454 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.71:1, which is down from the previous week of 2.94:1 and the ratio of 2 weeks ago of 3.25:1.
Euro:
For the week, the March euro lost 21 points. The COT report showed that leveraged funds added 11,807 contracts to their long positions and liquidated 44 contracts of their short positions. As of the latest report, leveraged funds are now long by a ratio of 1.06:1, which is a dramatic reversal from the previous week when they were short by a ratio of 1.16:1. Two weeks ago they were long by a ratio of 1.15:1.
With weakness in the pound, Canadian dollar and, Swiss franc against the US dollar, clients must keep their sell stops in place to protect profits. Previously, we have recommended that sell stops be placed at 1.3262, or slightly below.
Swiss franc: On January 18, the March Swiss franc generated a short-term sell signal.
Generally, we do not cover the Swiss franc because of its low trading volume and its minor impact on the dollar index. However, as a member of the dollar index, the franc’s weakness (along with the pound and Canadian dollar) may portend further strength in the U.S. dollar. The Swiss franc may generate an intermediate term sell signal early next week. The COT report showed that leveraged funds liquidated 211 contracts of their long positions and liquidated a massive 3,983 contracts of their short positions, which in effect cut the short position of leveraged funds in half. As a result, the long to short ratio of leveraged funds for the most recent reporting week has increased to 4.81:1, which is dramatically higher than the previous week of 2.40:1 and the ratio of 2 weeks ago of 2.04:1. On January 18, the March Swiss franc made a low of 1.0657, which is the lowest since 1.0635 on November 21.
Performance Jan 14 – Jan 18 Year to Date
March euro -0.19% +0.95%
March Aussie$ -0.20% +1.36%
March Canadian$ -0.71% +0.18%
March British pound -1.61% -2.35%
March Swiss franc -2.38% -2.26%
As of January 18, the British pound is on a short and intermediate term sell signal while the Swiss franc is on a short term sell signal and within reach of an intermediate term sell signal. Additionally, the Canadian dollar looks like it will generate a short and intermediate term sell signal next week, and the yen is extremely weak against the US dollar. The only bright spot in the dollar index has been the euro. The question is how much longer will be euro be able to keep the dollar index from rising. The weight of currencies in the dollar index are as follows: Euro 57.6%, yen 13.6%, pound 11.9%, Canadian dollar 9.1%, Swedish krona 4.2%, Swiss franc 3.6%. It appears the dollar index has been forming a base and although we do not use classical bar charting, it looks like the dollar index has formed a bullish reverse head and shoulders pattern.
S&P 500 E mini:
For the week, the S&P 500 gained 11.70 points. The COT report showed that leveraged funds liquidated 6,149 contracts of their long positions and added a massive 49,170 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.96:1, which is up from the previous week of 1.82:1 and the ratio of 2 weeks ago of 1.69:1.
The survey of the American Association of Individual Investors survey showed that bullish sentiment tapered off somewhat in the most recent reporting week.
American Association of Individual Investors
Current 2 wks ago 3 wks ago
Bullish 43.9% 46.5% 38.7%
Bearish 27.3% 26.9% 36.2%
Neutral 28.7% 26.6% 25.1%
In order to provide some perspective about how the S&P 500 may perform in the second half of January, we are providing performance stats for January 1 through January 15 for the years 2010, 2011, 2012 and 2013 and showing the subsequent performance from January 16 through January 31 for 2010, 2011 and 2012.
January 1-January 15 performance of the S&P 500 E mini (March contract)
2010 +1.92%
2011 +2.89%
2012+2.88%
2013 +3.19%
January 16-January 31 performance of the S&P 500 E mini (March contract)
2010 -5.49%
2011 -0.56%
2012 +1.48%
The S&P 500 E mini and major market indices have become massively over extended. Due to this, we advise that clients avoid being long the E mini and the major indices. Additionally, every investor must have sell stops in place for individual stocks, especially if these positions are overbought and have not reported earnings yet. If a stock(s) is over extended on the upside relative to its 50 day moving average, and clients have healthy profits, one intelligent way of participating while lowering risk is to liquidate the long position and replace it with a longer dated option. This is especially important if an earnings report is on the horizon. This allows you to participate in the upside, but limits your downside.
For those contemplating new long positions, it is important the relative strength of these positions at least equal, and preferably exceed the performance of the S&P 500 on a year to date basis. Investors should make sure that selected stocks are in a sector that is outperforming, and that the stock itself is outperforming the favored sector. Also, for new positions, it is important that the current price be relatively close to its 50 day moving average. Again, it would be wise to use options as a way to limit your risk because an investor may calibrate their exposure by analysing in-the-money, and out-of-the-money strikes. One final point: The massive increase in the number of short positions by leveraged funds in the most recent COT report, lead us to believe the E mini and major indices will continue to move higher. Remarkably, leveraged funds are now more short than they were on December 31 (1.69:1), the date the COT report was tabulated and the E mini closed at 1420.00.
