E-mail comments and questions to: garry@openinterestanalyst.com
Grains:
Obviously, the performance of grains during the coming week will depend upon weather conditions and the willingness of speculators to enter into new positions at increasingly higher levels. If the Euro continues to rally thereby putting pressure on the dollar, this should give a lift to the grains. Based upon the research contained in the June 22 Weekend Wrap on soybeans and corn, the market can definitely take another leg higher. Based upon last week’s export sales report for corn, demand is being severely impacted by the $8.00+ prices. It difficult to tell when the market will start focusing on the demand side of the equation, but when this occurs, the willingness of speculators to pay increasingly higher prices may dissipate.
The bull spreads have continued to work during the corrective phase of soybeans and soybean meal. For example, on July 20 when soybeans topped out, the long August-short November spread closed at 71.25 cents. On Friday, the same spread closed at 82.50 cents or an increase of 11.25 cents during the time that soybeans pulled back. For soybean meal, the long August- short December spread closed at $38.70 on July 20, but on July 27 closed at $50.70 or an increase of $12.00. This kind of spread action is bullish. On the other hand, the September-December corn bull spread contracted sharply during the corrective phase as did the September-December wheat spread.
Soybeans:
For the week, August soybeans lost 73.25 cents and the new crop November contract lost 84.50 cents. The Commitment of Traders Report showed that managed money added 3,097 contracts to their long positions and also added 2,797 contracts to their short positions. Commercial interests added 3,611 contracts to their long positions and liquidated 12,881 contracts of their short positions. As of the latest report, managed money is long by a ratio of 23.77: 1. Last week, the ratio was 32.4: 1. The significant reduction of the long to short ratio is due to the increase in short positions, which was a significant addition to the percentage of total short open interest.
Soybean meal:
For the week, August soybean meal lost $15.30 and the new crop December contract lost $27.50. The Commitment of Traders Report showed that managed money liquidated 7,025 contracts of their long positions and added 941 contracts to their short positions. Commercial interests liquidated 5,239 contracts of their long positions and also liquidated 9,013 contracts of their short positions. As of the latest report, managed money was long soybean meal by a ratio of 28.69: 1. Last week, the ratio was for 49.9: 1. Again, the decrease in the long to short ratio is due to the increase in short positions as a percentage of total short positions.
Corn:
For the week, September corn lost 26.00 cents and new crop December corn lost 2.50 cents. The Commitment of Traders Report showed that managed money added a massive 34,252 contracts to their long positions and liquidated a massive 14,095 contracts of their short positions. Commercial interests added 1,121 contracts to their long positions and added a massive 26,054 contracts to their short positions. As of the latest report, managed money is long corn by a record of 29.16: 1. To put this number in perspective, last week the ratio was 10.2: 1 and two weeks ago it was 7.15: 1. The record high ratio going back to the bull market of 2011 was 13.54: 1 in the COT report of April 26, 2011. In other words, in one week, the ratio nearly tripled and broke last year’s ratio by more than double. This is a sign of danger when longs pile into the market near tops.
Wheat:
For the week, September wheat lost 45.25 cents. The Commitment of Traders Report showed that managed money added 8,484 contracts to their long positions and liquidated 2,586 contracts of their short positions. Commercial interests added 2,469 contracts to their long positions and also added 7,004 contracts to their short positions. As of the latest report, managed money is long by a ratio of 2.30: 1 which is up from last week’s 2.06: 1.
Performance for July 23-July 27 (September contract)
Corn -3.15%
Wheat -4.80%
Soybean meal -4.96%
Soybeans -4.99%
Crude oil:
For the week, September crude oil lost $1.70. the Commitment of Traders Report showed that managed money added 4,337 contracts to their long positions and liquidated 4,567 contracts of their short positions. Commercial interests added 614 contracts to their long positions and also added 2,663 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 2.99: 1, which is up slightly from the previous week’s ratio of 2.72: 1.
As crude oil has moved into the high end of its recent trading range, the most telling metric has been the low volume on the advance to the higher end of the trading range. For example, on July 24, volume was 496,638, July 25, 488,048, and on July 26, 378,604 contracts. To put this volume in perspective, consider that during June of 2012 the average daily volume was 599,674 contracts and during May of 2012 the average daily volume was 563,716 contracts. On a year-to-date basis, average daily volume has been 604,466 contracts. Additionally, the crude oil volatility index, ticker symbol OVX closed on Friday at 32.99, which is the lowest close since June 19, 2012. My view on the current market is it may continue to work higher, but the lack of participation as evidenced by low volume will keep rallies fairly muted. Of course this could change if there is a showdown between the West and Iran.
Gasoline:
For the week, September gasoline lost 4.78 cents. The Commitment of Traders Report showed that managed money added 5,234 contracts to their long positions and liquidated 6,450 contracts of their short positions. Commercial interests added 4,539 contracts to their long positions and also added 17,122 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 16.10: 1. This ratio is nearly 3 times last week’s of 5.60: 1. Oddly, during the COT reporting period of July 18-July 24, gasoline lost 1.13 cents. However, during the 18th and 19th of the reporting period, gasoline gained 10.43 cents and open interest increased by a total of 12,530 contracts during this two day period. This explains the rapid change in the long to short ratio, and it is clear by the results of the report on July 24 that these new longs had not liquidated for the most part. However, on July 25 and July 26 gasoline open interest declined by a total of 11,112 contracts.
Performance for July 23-July 27 2012 (September contract)
Heating Oil -1.05%
Crude Oil -1.48%
Natural Gas -1.56%
Gasoline -1.71%
We are providing providing the following history for the petroleum complex which covers the period of July 28-September 7 for crude oil, heating oil, gasoline and natural gas. First, I will present the average performance for the 11 year period and then provide the last three years performance for July 28-September 7. Although, in the second set of data, we listed the previous three years performance, the performance of natural gas in the three years prior to that was just as bad: 2006 -22.44%, 2007-14.64%, 2008-19.39%. This should give anyone pause if they are long natural gas at current levels.
Natural Gas:
Although we have been following natural gas, it does not appear that a major move is imminent. I see the current rally as basically a dead cat bounce after a protracted slide. Even though the spreads of front months versus back months have tightened since the rally began in the middle of June, the market remains deep in contango and during the past week, the contango widened. Ideally, the pattern one wants to see is a consistent narrowing of contango until backwardation occurs through the very distant months. It appears the process has started, however, the real test is how the natural gas spreads will perform when a larger correction takes place. If the front months perform better than the back months during the corrective phase, then the market may be in the process of turning from bear to bull. The Commitment of Traders Report show that natural gas has gone from net short to net long among money managers: managed money short by a ratio of 1.35: 1 on June 12 to managed money being long by a ratio of 1.23: 1 in the latest report.
Average of 11 years (2000-2011) July 28-September 7
Gasoline +3.40%
Heating Oil +3.26%
Crude Oil + 1.07%
Natural Gas -6.49%
Performance for 2009, 2010, 2011 (July 28-September 7) October contract
Commodity 2009 2010 2011
Crude Oil -3.07% -4.97% -8.75%
Heating Oil -6.40% -0.70% -1.16%
Gasoline -0.79% -1.88% -1.20%
Natural Gas -37.60% -17.82% -9.23%
The above data makes it clear that the probability of a large move for petroleum products between now and the end of Labor Day is small.
Copper:
For the week, September copper lost 2.20 cents. The Commitment of Traders Report showed that managed money liquidated 449 contracts of their long positions and added 5,424 contracts to their short positions. Commercial interests added 2,677 contracts to their long positions and also added 2,034 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.24: 1. If the risk on mindset continues, perhaps copper will rally up to the $3.55-$3.60 level, which would be a place to implement bearish positions.
Gold: August gold generated a short-term buy signal on July 27
For the week, August gold gained $35.20. The Commitment of Traders Report showed that managed money liquidated 16,837 contracts of their long positions and added 4710 contracts to their short positions. Commercial interests added 2516 contracts their long positions and liquidated 18,014 contracts of their short positions. While managed money was massively liquidating their long positions and increasing short positions, commercial interests were massively liquidating their short positions. As of the latest report, managed money is long gold by a ratio of 2.80: 1. This ratio is among the lowest recorded going back to December 22, 2009 (see June 3 Weekend Wrap). The lowest ratio occurred in the COT report of May 29, 2012 when it reached a low of 2.76:1. The ratio has been skidding along the bottom of the historical range for a number of months. I believe the market has finally turned, however, it has more backing and filling to do.
On June 22 in the Weekend Wrap, I mentioned that gold was entering a period of seasonal strength and that the possibility of QE3 could be the spark that would light a fire under gold. This occurred in a major way on July 25, and gold hit a new high for the move at $1628.60 on Friday, which is the highest price for gold since June 19 when August gold reached $1634.30. For the market to generate an intermediate term buy signal, the low of the day will have to be above the $1638.00 level.
Silver:
For the week, September silver gained 19.6 cents. The Commitment of Traders Report showed that managed money added 239 contracts to their long positions and also added 1,682 contracts to their short positions. Commercial interests liquidated 1,699 contracts of their long positions and also liquidated 793 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 1.17: 1. This is among the lowest ratios (if not the lowest) I have seen going back a couple of years. Unfortunately, based upon silver’s dismal performance, I completely understand why the ratio is this low.
However, September silver closed at 27.498, which is a scant 25 cents from its 50 day moving average. The last time silver closed above its 50 day moving average was on March 13, 2012. On a seasonal basis, silver should begin to show strength as we move through the second half of the year. On June 28, September silver made its low at $26.105, which was a break of only 2.5 cents below the December 29 low of $26.13. The fact that the market was unable to move significantly lower after making a fractional lower low, indicates that in all likelihood the bottom has been made. Based upon my experience, if the market was going to break beneath beneath the June 28 low, this would have occurred by now.
The market has been trading in a very tight range since July 11, and with the low number of bulls in the market, silver could surprise to the upside. Additionally, I believe silver has discounted the global economic slow down. The Indian wedding season moves into high gear starting in late September and continues through January. Although the Indian wedding season is characterized mainly by gold purchases, silver is purchased in significant quantities, especially among less well-off Indians. The market remains on a short and intermediate term sell signal, and the strength in gold has not manifested itself in silver as of yet. One less risky approach to trading the silver market is to write puts (short puts) on the September $25.00 strike. As of Friday’s close, the put was selling for 20 cents and it expires on August 28. The delta on the $25.00 strike is approximately 14% meaning that in the event that silver declines 30-40 cents, the option will lose about 14% of this instead of the full amount. As alternative, an option could be written on a December $22.00 put, which closed on Friday at 40.4 cents and has a delta of 12.34%.
Performance July 23-July 27 Year to Date
Gold +2.58% +3.20%
Silver +1.80% -0.97%
Euro:
For the week, the September Euro gained 1.49 cents. The Commitment of Traders Report show that leveraged funds added 6,311 contracts to their long positions and liquidated 3,701 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.49: 1. If the market continues to rally and there is evidence a hefty number of shorts are being blown out, bearish positions could be implemented, but at this juncture it is premature.
S&P 500 E mini:
For the week, the September S&P 500 E mini gained 24.30 points. The Commitment of Traders Report showed that leveraged funds added 21,490 contracts to their long positions and also added 25,939 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.36: 1.
This week, the S&P 500 E mini rocketed to a new high for the move and not only broke above the two previous double tops of 1375 and 1376 made in July, but closed above them. Last week, in the June 22 Weekend Wrap I mentioned that I was not thrilled about long positions the S&P 500 index, despite being on a short and intermediate term buy signal, but felt the market could rally because of the extreme low reading of bullish sentiment numbers and possible QE3. Low bullish investor sentiment continued in the most recent week and below are the results published by the American Association of Individual Investors. Though the market rallied last week, the number of bears has actually increased in the most recent week and the neutral reading is still above the bullish reading.
Last Week Two Weeks Ago Three Weeks Ago
Bullish 28.1% 22.2% 30.2%
Bearish 43.1% 41.8% 34.7%
Neutral 28.8% 36.0% 35.1%
The current rally is a product of predictions of QE3 and pep talks from the technocrats of Europe. Consider that the transportation index’s 50 day moving average is now under the 200 day moving average and three components of the S&P 500 have 50 day moving averages under the 200 day averages: (XLE (energy), XLI (industrials), XLB (materials). Additionally, the major global indices have 50 day moving averages under the 200 day moving averages. The Russell 2000 50 day moving average will cross below the 200 day average during the coming week. Essentially, I see any rally in the S&P 500 as short-term in nature. After the effect of money printing has waned and Europe resumes its slide into despair, the market will again head south.
