Corn:
For the week, May Chicago corn closed down 26 1/2 cents. The Commitment of Traders Report that is tabulated on Tuesday and released on Friday, showed that in the money managed category, speculators added 7,007 contracts to their long positions and liquidated 15,067 contracts of their short positions. Commercial interests liquidated 9,686 contracts of their long positions and added 20,263 contracts of their short positions. The May-July spread closed the week at 2 cents premium of May over July. I mentioned in last week’s weekend wrap that it would be a positive development for corn if the May contract was able to hold its premium to July on a price decline. Keep in mind that on March 30, the USDA will release its stocks and prospective plantings reports. The projections for prospective plantings for the 2012-2013 are expected to be at record highs. The stocks report could likely show a reduction in current inventory. It would be wise to be out of the market unless there are substantial profits in the position.
Soybeans:
For the week, May Chicago soybeans closed 8 1/4 cents lower. The Commitment of Traders Report showed that in the money managed category, speculators added 19,334 contracts to their long positions and liquidated 2,500 contracts of their short positions. Commercial interests added 4,232 contracts to their long positions and added 30,993 contracts of their short positions. The USDA will release its stocks and prospective plantings reports on March 30. Unless speculators have significant profits on a position, it would be wise to be out of the market.
Sugar:
For the week, May sugar gained 22 points. The Commitment of Traders Report showed that in the money managed category, speculators added 24,066 contracts to their long positions and added 661 contracts of their short positions. Commercial interests liquidated 2,619 contracts of their long positions and added 20,658 contracts of their short positions.
Crude oil:
For the week, May New York crude oil lost $.71 per barrel. The Commitment of Traders Report showed that in the money managed category, speculators liquidated 12,035 contracts of their long positions and liquidated 3,794 contracts of their short positions. Commercial interests added 3,799 contracts to their long positions and added 1,372 contracts to their short positions.
Last week, I mentioned I would do an open interest analysis for the crude oil market. My analysis today covers the time frame of February 24 through March 22, which encompasses the period of crude oil’s consolidation. On February 24 the crude oil market (May) made a major new high at $110.34 per barrel. From there, the market traded lower until a new high was made on March 1 of $110.95. On March 1, the market pulled back from the high and closed at $109.27. This is the highest close since March 1. On March 15 and 22, crude oil made a low of $104.43 and $104.50 respectively. On March 23, May crude oil closed at $106.87 per barrel. From March 1 through March 22 and May crude oil has declined $2.00, or 1.86% and open interest has declined by 10,494 contracts. I am unable to draw any firm conclusions one way, or the other from the price and open interest action. My recommendation is to stand aside, even though the market may continue to move higher.
Gasoline:
For the week, May New York gasoline closed 1.54 cents per gallon higher. On Friday gasoline made a new high at $3.4118 per gallon. The Commitment of Traders Report showed that in the money managed category, speculators liquidated 6,863 contracts and liquidated 1,465 contracts of their short positions. Commercial interests added 1,185 contracts to their long positions and liquidated 3,955 contracts of their short positions. Stand aside.
Gold:
For the week, April New York gold gained $6.60 per ounce. The Commitment of Traders Report, which is tabulated on Tuesday and released Friday showed that in the money managed category, speculators liquidated 16,348 contracts of their long positions and added 4,172 contracts to their short positions. Commercial interests added 4,078 contracts to their long positions and liquidated 10,951 contracts of their short positions.
During the past three weeks, April gold has declined from a high of $1792.30 on February 29 to a low of $1627.50 on March 22. During this time, open interest declined by a total of 47,080 contracts. This is positive open interest action when open interest declines with price. From a rally perspective, the market is going to run into a considerable amount of resistance at the 50 and 150 day moving averages, which are $1706.31 and $1709.50 respectively. My upside pivot point for gold is at $1707.50, which means for gold to go on a buy signal, the low for the day has to be above the pivot point. With the 50 and 150 day moving averages, in the low 1700’s, it is going to be difficult for gold to break above the pivot point and the moving averages. Another barrier, is going to be the 200 day moving average, which is at $1682.98.
Silver:
For the week, May New York silver lost $.33 per ounce. The Commitment of Traders Report showed that in the money managed category speculators liquidated 861 contracts of their long positions and added 1,116 contracts to their short positions. Commercial interests added 1,213 contracts to their long positions and liquidated 1,313 contracts of their short positions.
Euro:
For the week, the June Euro close 91 points higher. The Commitment of Traders Report showed that in the leveraged funds category, speculators liquidated 13,038 contracts of their long positions and liquidated 5,876 contracts of their short positions. Speculators should be out of bearish positions because the market hit 1.3300. If not out by Friday, speculators should most definitely liquidate bearish positions if the Euro hits 1.3350.
S&P 500 E mini:
For the week, the June S&P 500 E mini lost 4.40 points. The Commitment of Traders Report showed that in the leveraged funds category speculators liquidated 142,812 contracts of their long positions and liquidated 156,548 contracts of their short positions. The large number of liquidation was due to the March contract going off the board.
Below, I have constructed a table to provide some perspective on the performance of major indices during the fourth quarter of 2011 and the first quarter of 2012 through March 23.
First Quarter Performance 2012 (January 1-March 23)
NASDAQ 100 +19.90%
Russell 2000 +12.03%
S&P 500 +11.09%
DJIA +7.07%
DJ Transports +4.16%
Fourth Quarter Performance 2011
DJ Transports +18.91%
Russell 2000 + 15.02%
DJIA +11.95%
S&P 500 +11.15%
NASDAQ 100 +6.48%
The top performers during the fourth quarter of 2011 changed during the first quarter of 2012. The DJIA has significantly underperformed the S&P 500 so far during the first quarter of 2012. The cash DJIA closed on March 23 at 13,080.73, which is approximately 206 points above its 50 day moving average of 12,874.55. The last time the Dow Jones Industrial Average had a meaningful break under its 50 day moving average was on November 23, 2011. Speculators should keep their eye on the 50 day moving average in relation to the DJIA.
Dow Jones Transportation Index
The reason I have decided to write about the transportation index is that it is a major component of the Dow Theory, which was formulated by Charles Dow, the founder the Wall Street Journal. The transportation index consists of 20 stocks covering airlines, trucking, marine transport, and air delivery-freight services. There are two people I know of who are considered experts in Dow theory. Tim Woods of cyclesman.net is very knowledgeable. I am not a subscriber to his service, but I have read much of his published work over the years, and it is impressive. Richard Russell is another proponent of Dow Theory and his newsletter is published at dowtheoryletters.com. I do not subscribe to his letter either.
The transportation index has been diverging From the Dow Jones Industrial Average ever since the transports reached its high on July 7, 2011. From July 7, 2011 through March 23, 2012 the transportation index has lost 6.26%, while the S&P 500 has gained 4.32%, and the DJIA. has gained 3.60%. Many in the financial press have attributed the stagnating performance of the transportation index to the rise in petroleum prices. However, as my work below shows, the inverse relationship between the transportation index and petroleum prices is tenuous at best. The exception to this are the airlines, who have 5 members in the transport index. The 5 airlines are weighted a total of 12.68% of the index.
On March 23, the Dow Jones transportation Index broke under its 50 day moving average of 5238 to close at 5217.82 after making a new high on March 19, 2012 of 5390.11. The high was only slightly above the February 3, 2012 high of 5384.15. The high for the Dow Jones Transportation Index during the bull market of the past three years occurred on July 7, 2011 when the transportation index reached a high of 5627.85. Many people have attributed the current weakness in the Dow Jones Transportation Index to elevated petroleum prices. However, on July 7, 2011 the August contract of crude oil closed at $98.67 and was $2.02 higher on the day, which is not far off from where crude closed on March 23 at $106.87 per barrel. On July 7, 2011, the August contract of gasoline closed 12.94 cents higher at $3.1270 per gallon, which is expensive gasoline. The May contract closed at $3.3689 on March 23.
To further dispel the assumed the inverse correlation between petroleum prices and the transportation index, I am providing more detail about the April-July 2011 period. For example, on April 19, 2011 the transportation index made a low of 5212.71. From that date, the index rallied approximately 8% from the low to 5627.85 on May 2, 2011, the high of the last three years. On a close only basis, the rally was 5.68%. In the identical time frame, the S&P 500 rallied 4.30% and the Dow Jones Industrial Average rallied 4.96%. During the identical time frame, crude oil went from a low of $106.74 on April 19 to a high of $115.52 (+5.29%) on May 2, 2011. This was the high for the year. Gasoline went from a low on April 19 of $3.1050 per gallon to $3.3188 per gallon (+ 3.65%) on May 2, which was the high for the year. As crude oil and gasoline were rallying to their highs of the year, the transportation index also was making its high of the year. The transportation index was outperforming the S&P 500 , DJIA, as well as crude oil and gasoline during a time of skyrocketing petroleum prices.
On May 2, 2011 equity and commodity prices topped out and moved sharply lower. From May 2 through June 27, 2011, the S&P 500 declined 6.12%, DJIA declined by 5.99% and the transportation index declined 4.64%. However, there was the massive decline in petroleum prices in the same timeframe with crude oil falling 20.30% and gasoline losing 20.92%. Despite the crash in petroleum prices, the transportation index was down only slightly less than the other two indices.
Interest Rates:
For the week, the June 10 year treasury note gained 14 points. The Commitment of Traders Report showed that in the leveraged funds category speculators added 29,397 contracts of their long positions and added 3,969 contracts to their short positions.
Some weeks ago, I posted a comment about inflation saying that inflation is benign if one does not consume food, use petroleum products, have health insurance, or pay for college tuition. To put the inflation picture in perspective, I am going to quote in pertinent part from a third-quarter earnings release issued by General Mills on March 21, 2012. General Mills manufactures such products as Betty Crocker, Bisquick, Cheerios, Gold Medal Flour, Haagen Daz, Green Giant Vegetables, Pillsbury products, Wheaties, Progresso Soups and Yoplait products.
“Gross margin as a percent of net sales was below year ago levels due to the higher input costs.” “Chairman and Chief Executive Officer Ken Powell said, that third-quarter results reflect strong worldwide sales growth for business, but the 10-11% input cost inflation we’re experiencing this year pressured our margins.”
If General Mills, the third largest food company in the United States is experiencing double digit inflation, we are looking at the proverbial canary in the coal mine. General Mills has professional buyers all over the world who negotiate prices with suppliers to keep their costs down. Despite this, the corporation experienced a high rate of inflation. This is an ominous development for smaller food manufacturing companies who face rising input costs and do not have the purchasing power and market clout of General Mills. The prospect of further food inflation for the American consumer is already on the table.
Odds and Ends:
The Japanese yen went through a severe price decline. I am monitoring it to determine when bearish positions can be recommended. The currency ETF symbol is FXY.
The Australian dollar looks like it is in the process of breaking down. I am monitoring it in order to see whether bearish positions can be recommended. The market is approximately 2 cents above my downside pivot point.
Email a comment or question to: garry@openinterestanalyst.com
