Weekend Wrap for March 10, 2013

Soybeans:

For the week, March soybeans gained 44 cents, May +27.50, July +20.00. The COT report showed that managed money liquidated 523 contracts of their long positions and added 689 contracts to their short positions. Commercial interests liquidated 3,001 contracts of their long positions and also liquidated 8,894 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 6.47:1, which is down slightly from the previous week of 6.70:1, but up significantly from the ratio of 2 weeks ago of 4.61:1.

On March 8, the May-July bull spread widened to 23.75 cents, which is the highest close for the spread since September 28, 2012 when it closed at 24.75. On Friday, the spread widened 4 cents.

On March 7, soybeans generated an intermediate term buy signal which confirms the short term buy signal generated on January 29. For clients who are not long, we suggest using the March 8 low of $14.50 1/4 as an exit point for long positions. Soybean should only be traded from the long side.

Soybean meal:

For the week, March soybean meal gained $8.80, May +5.90, July +4.80. The COT report showed that managed money added 7,109 contracts to their long positions and liquidated 1,571 contracts of their short positions. Commercial interests liquidated 9,579 contracts of their long positions and also liquidated 883 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 4.42:1, which is up significantly from the previous week of 3.68:1 and the ratio of 2 weeks ago of 2.88:1.

On February 27, May soybean meal generated a short-term buy signal and on February 28 generated an intermediate term buy signal. For clients who are not yet long meal, we suggest using the March 8 low of $428.60 as an exit point for new long positions. Soybean meal should only be traded from the long side.

Soybean oil:

For the week, March soybean oil gained 69 points, May +67, July +60. The COT report showed that managed money liquidated 4,713 contracts of their long positions and added 8,933 contracts to their short positions. Commercial interests added 9,788 contracts to their long positions and liquidated 8,688 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 2.53:1, which is up substantially from the previous week of 2.03:1 and the ratio of 2 weeks ago of 1.30:1.

Many people were surprised by the USDA leaving key the balance sheet items unchanged. There was no revision to carryout, exports or the crush, which is running ahead of last year’s pace. This is surprising considering that the USDA has pegged the crush below the 2011-2012 season. Global carryout was raised to 60.2 million metric tons.

On March 8, the May-July bull spread widened to 23.75 cents, which is the highest close for the spread since September 28, 2012 when it closed at 24.75. On Friday, the spread widened 4 cents.

Corn:

For the week, March corn gained 1 cent, May -5.00, July -6.50. The COT report showed that managed money added 7,828 contracts to their long positions and liquidated 5,199 contracts of their short positions. Commercial interests liquidated a massive 44,474 contracts of their long positions and 22,779 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 1.73:1, each is up slightly from the previous week of 1.61:1 and slightly lower than the ratio of 2 weeks ago of 1.87:1.

The USDA released its global supply and demand report on March 8, and it was a surprise that US carryout was left unchanged from the previous report at 632 million bushels while raising feed usage 100 million bushels. The export number was lowered to 825 million bushels, which is one of the lowest export numbers on a annual basis for the past 40 years. Global carryout was reduced to 117.48 million bushels, down from 118.04 in February. In short, if the US does not produce a blockbuster crop in 2013, global stocks will likely continue to decline.

From time to time, we have discussed the robust bull spreads in nearby corn. On Friday, the May-July corn spread closed at 23 cents premium to May and gained 4.25 cents on March 8. This is a new high for the spread going back to March 14, 2012. As we have said before, demand in the United States has been respectable, and the USDA report confirmed it. Additionally, on March 8, ethanol closed at its highest price ($2.51.2) since September 7, 2012 when it closed at $2.52.2. Undoubtedly, higher ethanol prices will encourage more consumption of corn due to increased profitability. In order to put the profitability of current ethanol prices in perspective, consider that on September 7, 2012 corn closed at $7.97 versus the March 8 close of May corn of 7.031/2

Another factor to consider with respect to future consumption, is the expansion of hog production in China. This is likely to keep demand robust for soybeans, and if corn prices continue to decline will likely facilitate herd expansion in China, which will increase demand for American corn. Although, this will hit the US hog farmer due to reduced exports, it will benefit the grain producers. According to Agrimoney, “Washington estimates for one of the most important numbers in world farming – the size of the Chinese hog herd – may be way too low, US officials in Beijing said, citing improvements in farming practices. The US Department of Agriculture’s Beijing bureau said that the Chinese hog herd entered 2013 more than 8m head larger than suggested by the department’s official numbers, which are viewed by agricultural commodity investors as world industry benchmarks.”

“The herd will end the year 10m animals larger, at 476.0m head, the bureau said, highlighting the development of the Chinese pig-rearing sector from one dependent largely on backyard output to an industry based around large-scale, and vastly more efficient, commercial enterprises. Higher domestic production and beginning stocks will likely dampen import demand,” the bureau said, slashing by 10% to 730,000 tonnes its forecast for Chinese pork imports this year. However, the idea of an even larger Chinese pig herd – which already represents more than half the world total – bodes well for foreign grain producers, with the country seen losing its self-sufficiency in corn, and already the biggest importer of soybeans to keep its livestock fed.”

We have cautioned clients not to short of corn and to stand aside until we have somewhat more clarification on its direction short-term. The corn market has made 3 significant lows and each successive low has been somewhat higher than the previous low. For example, on January 7, 2013, May corn made a low of $6.78 1/2, February 25 6.80 3/4, and the last was made on March 7 at 6.82. The January 7 low, was the lowest price for corn since July 2012. Ethanol margins are expanding and the robust bull spread indicates to us that corn is likely to move higher from here. For prospective longs, who are a bit more adventurous, the March 7 low should be used as an exit point for any new long positions.We think corn has built a base, but we are not advocating long positions because corn has not generated a short or intermediate term buy signal. Rather, we are emphasizing clients should not be short, especially since managed money has the highest net short position in corn for at least several months.

Wheat:

For the week, March wheat lost 23.25 cents, May -23.50, July -23.50. The COT report showed that managed money added 3,011 contracts to their long positions and also added 4,480 contracts to their short positions. Commercial interests liquidated 1,056 of their long positions and added 656 contracts to their short positions. As of the latest report, managed money is short wheat by a ratio of 1.66:1 which is about the same as the previous week of 1.67:1, but down slightly from the ratio of 2 weeks ago of 1.71:1.

Friday’s USDA report showed that exports were 1.025 billion bushels, which was a slight reduction from February’s report and raised the carryout to 716 million bushels. Surprisingly, use of feed wheat was left unchanged, but that could likely change in future reports. Carryout for soft red wheat was lowered to 118 million bushels, which likely reflects increased use of feed wheat. The USDA raised European Union and Indian production. In short, global supplies of wheat are plentiful, and this will continue to weigh on prices.

Below we are listing the performance for the grain complex that covers the COT reporting period of February 27 through March 5 and year to date. Soybeans have definitely gotten stronger against soybean meal. Both are on a short and intermediate term buy signals.

February 27-March 5 Year to Date

Crude oil:

For the week, April crude oil gained $1.27. The COT report showed that managed money added 2,330 contracts to their long positions and also added 9,725 contracts to their short positions. Commercial interests added 17,851 contracts to their long positions and also added 20,083 contracts to their short positions. As of the latest report, managed money is long crude by a ratio of 3.50:1 which is down significantly from the previous week of 4.16:1 and the ratio of 2 weeks ago of 6.38:1.

Heating oil:

For the week, April heating oil gained 4.48 cents. The COT report showed that managed money liquidated 21,847 contracts of their long positions and added 5,094 contracts to their short positions. Commercial interests added 10,939 contracts to their long positions and liquidated 4,924 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 1.71:1, which is down substantially from the previous week of 3.21:1 and the ratio of 2 weeks ago of 3.72:1.

Gasoline:

For the week, April gasoline gained 7.49 cents. The COT report showed that managed money liquidated 7,949 contracts of their long positions and also liquidated 2,050 contracts of their short positions. Commercial interests liquidated 8,124 contracts of their long positions and also liquidated 12,372 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 9.70:1, which is up significantly from the previous week of 8.66:1 and the ratio of 2 weeks ago of 8.83:1.

Natural gas: On March 8, April natural gas generated a an intermediate term buy signal.

For the week, April natural gas gained 17.3 cents. The COT report showed that managed money added 11,598 contracts to their long positions and liquidated a massive 22,911 contracts of their short positions. Commercial interests added 9,562 contracts to their long positions and also added 12,817 contracts to their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.15:1, which is down significantly from the previous week of 1.32:1 and the ratio of 2 weeks ago of 1.39:1.

As of March 8, natural gas is on a short and intermediate term buy signal. However, the market remains overbought relative to the 50 day moving average of $3.41 on the April natural gas chart. Additionally, when a short or intermediate term buy signal occurs, there is usually a setback lasting 1- 2 and sometimes 3 days. On the other hand, managed money remains net short, therefore it is possible the market may rally for another day or 2 before setting back. After the generation of the short term buy signal on March 1, we recommended that clients enter into long positions or long call options. If natural gas pulls back, we would use it as an opportunity to implement bullish positions. From the generation of the short-term buy signal on March 1 through March 7, April natural gas advanced 12.6 cents while open interest has increased 28,411 contracts. This is bullish open interest action relative to the price advance.

Below we are listing the performance for the most recent COT reporting period and year to date. Natural gas was the top performer for the most recent COT reporting period and year to date.

February 27-March 5 Year to Date

Copper:

For the week, May copper gained 80 cents. The COT report showed that managed money liquidated 1,258 contracts of their long positions and added 7,959 contracts to their short positions. Commercial interests liquidated 200 contracts of their long positions and also liquidated 7,715 contracts of their short positions. As of the latest report, managed money is short copper by a ratio of 1.67:1, which is up significantly from the previous week of 1.28:1, and up dramatically from the ratio of 2 weeks ago when managed money was long by a ratio of 1.43:1.

Gold:

For the week, April gold gained $4.60. The COT report showed that managed money liquidated 4,536 contracts of their long positions and added 5,147 contracts to their short positions. Commercial interests added 3,370 contracts to their long positions and liquidated 6,007 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.61:1, which is down from the previous week of 1.82:1 and slightly lower than the ratio of 2 weeks ago of 1.64:1.

Platinum:

For the week, April gold gained $30.40. The COT report showed that managed money liquidated 2,002 contracts of their long positions and added 35 contracts to their short positions. Commercial interests added 565 contracts to their long positions and also added 243 contracts to their short positions. As of the latest report, managed money is long by a ratio of 16.29:1, which is down significantly from the previous week of 21.13:1 and the ratio of 2 weeks ago of 34.58:1.

Palladium:

For the week, June palladium gained $62.35. It also made a new contract high at $788.45. The COT report showed that managed money added 219 contracts to their long positions and also added 102 contracts to their short positions. Commercial interests added 553 contracts to their long positions and also added 161 contracts to their short positions. As of the latest report, managed money is long palladium by a ratio of 16.09:1, which is down from the previous week of 17.13:1, but up substantially from the ratio of 2 weeks ago of 10.18:1.

Previously, we wrote about the relative strength of palladium over platinum, and noted that the liquidity in palladium is such that it is not conducive to futures trading. Instead, we have suggested that Stillwater Mining (SWC) be used as a proxy for palladium and platinum.

Silver:

For the week, May silver gained 45.8 cents. The COT report showed that managed money liquidated 1,371 contracts of their long positions and added 3,762 contracts to their short positions. Commercial interests added 1,074 contracts to their long positions and liquidated 1,139 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 1.44:1, which is down substantially from the previous week of 1.94:1 and the ratio of 2 weeks ago of 2.93:1.

Last week, the 50 day moving average crossed below the 200 day moving average on the silver continuation chart.

Below we are listing the performance for the most recent COT reporting period and year to date.

February 27-March 5 Year to Date

Canadian dollar:

For the week, the March Canadian dollar was unchanged. The COT report showed that leveraged funds added 1,283 contracts to their long positions and added a massive 21,775 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.67:1, which is up substantially from the previous week of 1.28:1 and up dramatically from the ratio of 2 weeks ago when leveraged funds were long by a ratio of 1.64:1.

This past week, the 50 day moving average crossed below the 200 day moving average on the Canadian dollar continuation chart. As of March 8, the 50 day moving average is below the 200 day moving average for the Japanese yen, British pound and Canadian dollar.

Australian dollar:

For the week, the March Australian dollar gained 49 points. The COT report showed that leveraged funds liquidated 10,753 contracts of their long positions and added 2,947 contracts to their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 1.45:1, which is down substantially from the previous week of 1.78:1 and the ratio of 2 weeks ago of 2.25:1.

Swiss franc:

For the week, the March Swiss franc lost 88 points. The COT report showed that leveraged funds added 4,382 contracts to their long positions and added 2,426 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 1.06:1, which is a reversal from the previous week when they were short by a ratio of 1.08:1. Two weeks ago, leveraged funds were long by a ratio of 1.11:1.

British pound:

For the week, the March British pound lost 83 points. The COT report showed that leveraged funds added 5,553 contracts to their long positions and also added 15,281 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.72:1, which was the ratio of the previous week of 2.72:1, but significantly above the ratio of 2 weeks ago of 1.78:1.

Euro:

For the week, the March euro lost 17 points.. The COT report showed that leveraged funds liquidated 17,267 contracts of their long positions and added 6,260 contracts to their short positions. As of the latest report, leveraged funds are short the euro by a ratio of 1.54:1, which is up substantially from the previous week when they were short by a ratio of 1.03:1, and up dramatically from the ratio of 2 weeks ago when leveraged funds were long by a ratio of 1.30:1.

Japanese yen:

For the week, the March Japanese yen lost 247 points. The COT report showed that leveraged funds added 1,612 contracts to their long positions and also added 3,159 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.89:1, which is down slightly from the previous week of 4.00:1 and slightly higher than the ratio of 2 weeks ago of 3.69:1.

US dollar index:

For the week, the March dollar index gained 38 points. The COT report showed that leveraged funds added 6,021 contracts to their long positions and also added 9,979 contracts their short positions. As of the latest report, leveraged funds are short by a ratio of 1.21:1, which is up somewhat from the previous week of 1.14:1, and up substantially from the ratio of 2 weeks ago of 1.05:1.

It continues to astound us that short interest continues to rise, despite the obvious bearish condition of the Japanese yen, British pound, Canadian dollar, and the extended weakness of the euro. The dollar index remains massively overbought, and although it should correct, the relatively high number of fund shorts may indicate the rally has further to go before the dollar index sets back. The 50 day moving average on the continuation chart (80.42) will cross above the 150 day average (80.44) on Monday or Tuesday.

February 27-March 5 Year to Date

S&P 500 E mini:

For the week, the March S&P 500 E mini gained 33.10 points. The COT report showed that leveraged funds added 82,738 contracts to their long positions and also added 3,894 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.50:1, which is down from the previous week of 1.72:1 and the ratio of 2 weeks ago of 1.72:1.

We have suggested that clients write calls that are significantly out of the money because we believe that if the market moves higher, it will be a slow grinding ascent. This benefits option writers because it takes advantage of the decay of time value on the option, while exposing the option writer to small losses in the event the market continues to march higher. We think the market is definitely going to have a problem breaking above its all-time high of 1576.09 made on October 11, 2007. Although, the survey in the table below does not indicate current bullishness, it is well-known the professional money manager is all in, and that retail investors have put money into equities at a rate not seen since before the crash. As a result, margin debt has risen to levels last seen in 2008. This underscores the potential problem for a deep an extended correction once the market begins rolling downhill.

Like the stock market, total margin is close to all-time highs. The piece below, written by the Business Insider reflects data as of January. It is highly likely that margin debt will be even higher in February.

On March 5, The Business Insider wrote:

“BofA Merrill Lynch technical analyst Mary Ann Bartels writes in a note to clients that cash balances in those margin accounts have fallen to such a low level that they are now generating a sell signal not seen in three years. Net Free Credits from the NYSE Margin Debt data shown in the chart below is essentially a measure of cash levels in margin accounts. Current levels have fallen to levels that have generated a tactical sell signal based on a 2-standard deviation Z-Score reading.”

“The last time a sell signal was generated was on April 2010 and the S&P 500 subsequently corrected by 16% in two months. Net free credits for January were at a negative $77.2 million or cash balances are negative and the Z-Score indicates the cash draw down has been excessive. So a contrarian sell signal is given.”

American Association of Individual Investors h
Recent week 2 weeks ago 3 weeks ago
Bulls 31.1 28.4 41.8
Bears 38.5 36.6 32.5
Neutral 30.4 35.0 25.7