Weekend Wrap for March 3, 2013

Soybeans:

For the week, March soybeans lost 3.25 cents, May -0.25, July -1.75. The COT report showed that managed money liquidated 6,810 contracts of their long positions and also liquidated 11,164 contracts of their short positions. Commercial interests liquidated 21,733 contracts of their long positions and added 8,210 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 6.70:1, which is up substantially from the previous week of 4.61:1, but slightly lower than the ratio of 2 weeks ago of 6.98:1.

The May-July soybean spread has been widening ever since making its low on January 3 at 1.75 cents premium to May (close $13.78 1/4). On February 28, the spread had widened to 17 cents premium to May (close 14.52 1/4). This is bullish spread action and  reinforces our view that soybeans have seen their lows. We think soybeans will continue to move higher. Soybeans remain on a short-term buy signal, but as yet has not generated an intermediate term buy signal.

One bullish factor that we have brought up from time to time is the terrible logistics situation to move grain shipments out of Brazilian ports. The article below sums up some obstacles facing customers wanting to purchase soybeans. If Brazil’s customers are unable to receive timely shipments, they will have to buy from the United States. As the article points out, it is going to cost more than $2.48 per bushel, just to get soybeans to port.

From The Progressive Farmer January 30, 2013 by Alastair Stewart:

“Brazil’s soybean harvest has barely started and the ships are already lining up to ship at ports. As many as 126 vessels were scheduled to load 6.2 million metric tons (mmt) of soybeans and corn, according to Unimar Agenciamentos Maritimos Ltda, Bloomberg reported. That’s well up from 72 ships carrying 2.8 mmt at the same time last year.”

“Brazil is set to produce a record soybean crop of as high as 85 mmt this season, up 27% on the year before. This jump is expected to put enormous pressure on Brazil’s overstretched ports. As a result, delays of 45 days and more are expected at the principal exit points of Santos and Paranagua.”

“In an attempt to get ahead of the crowd, global buyers are sending ships to port early, according to local trading desks. But this strategy has been partially blunted by big line-ups for corn shipments in February, as exporters try to ship new crop corn before the bulk of the soy arrives. It’s a very tight situation, and one that could deteriorate if rain comes to delay loading.”

The port issue is only one part of the logistical challenge facing Brazil’s grain industry this year. The explosion of soybean production in the Cerrado, far from port, combined with a lack of river and rail transport options and a scarcity of trucks come harvest time, has caused Brazilian transport rates to jump over the last 120 years (sic). Haulage rates to port have jump from $1.20 per bushel of soy in 2003-04 to $2.48 per bushel in 2011-12, according to Andre Pessoa, director of Agroconsult, a local farm consultancy.”

“And a radical leap in rates is forecast for this season. Road freight rates will rise by 34% this season, predicted the Sao Paulo Shore Cargo Haulage Union. The principal culprit is new legislation that limits truckers to 11-hour days and demands that they break for one half hour in every 4 hours, but a 5.4% increase in the price of diesel will also play a part. Last year, Abiove estimated that Brazil is short of approximately 50,000 truck drivers.

“Freight prices in Mato Grosso are already higher than the peak levels registered during last harvest and we aren’t in the February 20 to March 20 high season. Brazil has plans to send more grains through northern ports, easing the pressure on Santos and Paranagua, but most of these projects are years away from being able to handle large volumes.

Soybean meal:

For the week, March soybean meal gained 40 cents, May + $2.90, July +3.60. The COT report showed that managed money added 2,571 contracts to their long positions and liquidated 4,370 contracts of their short positions. Commercial interests liquidated 1,947 contracts of their long positions and also liquidated 3,084 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.68:1, which is up substantially from the previous week of 2.88:1, and slightly above the ratio of 2 weeks ago of 3.30:1.

The bull spread in May-July has widened since January 3 when the spread made a low at $2.40 premium to May. It closed at $5.40 premium to May on March 1. During this time, May soybean meal advanced $30.90. This is bullish spread action on the price advance.  We continue to suggest that bullish positions be implemented using an exit point of 424.30 for positions. Soybean meal remains on a short and intermediate term buy signal

Soybean oil:

For the week, March soybean oil lost 88 points, May -1.06, July -1.08. The COT report showed that managed money liquidated 9,152 contracts of their long positions and added a massive 18,827 contracts to their short positions. Commercial interests added a massive 20,434 contracts to their long positions and liquidated 10,561 contracts of their short positions. As of the latest report, managed money is short by a ratio of 2.03:1, which is up dramatically from the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.23:1.

Wait for a rally to the 51.00 area before implementing bearish positions.

Corn:

For the week, March corn gained 34.00 cents, May +24.25, July +15.25. The COT report showed that managed money liquidated 10,904 contracts of their long positions and added 13,880 contracts to their short positions. Commercial interests liquidated a massive 34,805 contracts of their long positions and also liquidated 37,777 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 1.61:1, which is down from the previous week of 1.87:1, and down dramatically from the ratio of 2 weeks ago of 2.93:1. This is the lowest long to short ratio since the slide in corn prices began late in 2012. Do not short corn even though it is on a short and intermediate sell signal. 

Wheat:

For the week, March wheat lost 1.75 cents, May +1.75, July -1.25. The COT report showed that managed money added 2,297 contracts to their long positions and also added 603 contracts to their short positions. Commercial interests liquidated 4,618 contracts of their long positions and also liquidated 16,037 contracts of their short positions. As of the latest report, managed money is short wheat by a ratio of 1.67:1, which is down slightly from the previous week of 1.71:1, but up slightly from the ratio of 2 weeks ago of 1.41:1.

Performance February 25-March 1   Year to Date
May corn                 +3.54%                      +1.18%
May soybean meal  +0.68%                     +4.25%
May wheat               +0.24%                      -8.54%
May soybeans          -0.02%                      +3.16%
May soybean oil      -2.09%                       -1.02%

Crude oil: On March 1, April crude oil generated an intermediate term sell signal.

For the week, April crude oil lost $2.45. The COT report showed that managed money liquidated 17,241 contracts of their long positions and added 13,870 contracts to their short positions. Commercial interests liquidated 4,306 contracts of their long positions and also liquidated 7,352 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 4.16:1, which is down significantly from the previous week of 6.38:1, and down dramatically from the ratio of 2 weeks ago of 9.02:1.

Crude oil’s dismal performance continued this past week, and on Friday closed below the 200 day moving average of 92.05 for the first time since January 2. Crude oil is now on a short and intermediate term sell signal, which confirms that it should be traded only from the short side. As is often the case after a sell signal is generated, crude should have a bounce. This would allow anyone who is not currently short to implement bearish positions.

We are proud that we are able to provide clients with early warnings of impending moves. This was certainly the case with crude oil and as the reports below reveal, we were bearish when the prevailing market opinion was bullish. We have reprinted paragraphs from the Weekend Wrap of February 10 and 17. The Friday before each Wrap, April crude oil closed at $96.27 (Feb 8) and $96,41 on February 15 respectively.

We have been warning our readers for quite some time about the disproportionately large increase in open interest and the failure of crude oil to move significantly higher with this. Although, we don’t have the final open interest stats for Friday, from January 30 when crude oil made a high of $98.24 and closed at $97.94 through February 14 when it closed at $97.31, open interest increased by 96,734 contracts, a loss of 63 cents. In short, since crude made its high, open interest action relative to price has been bearish. We envision crude oil dipping to its 50 day moving average of $93.08. This may be somewhat conservative because we believe the major equity indices are about to undergo a correction. With the high long to short ratio, there are a large number of speculative longs that will run for the exit once it becomes apparent that crude oil is headed lower.

On February 10 in the Weekend Wrap, we wrote the following:

Crude oil has had an extraordinarily high long to short ratio for the past 3 weeks, however recently, the ratio has expanded even though crude oil’s performance since January 30 has been to the downside. We wrote about this in past reports, but we now have additional data to support our thesis of lower crude oil prices. From January 31 through February 7 open interest has increased 47,588 contracts while March crude oil has declined by $2.32. With a high long to short ratio, it would be normal to see open interest decline when prices decline, but instead, open interest has increased, which is bearish. This means there are huge numbers of speculative longs that have not liquidated, and will be forced to, as prices move lower.

Heating oil:

For the week, April heating oil lost 17.17 cents. The COT report showed that managed money liquidated 8,108 contracts of their long positions and added 620 contracts to their short positions. Commercial interests added 73 contracts to their long positions, but liquidated 25,296 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 3.21:1, which is down somewhat from the previous week of 3.72:1 and the ratio of 2 weeks ago of 3.52:1.

Gasoline:

For the week, April gasoline lost 13.72 cents. The COT report showed that managed money liquidated 2,787 contracts of their long positions and also liquidated 91 contracts of their short positions. Commercial interests added 667 contracts to their long positions and liquidated 732 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 8.66:1, which is down slightly from the previous week of 8.83:1 and the same as the ratio of 2 weeks ago of 8.65:1.

Natural gas: On March 1, April natural gas generated a short term buy signal.

For the week, April natural gas gained 10.7 cents. The COT report showed that managed money added 676 contracts to their long positions and liquidated 14,319 contracts of their short positions. Commercial interests added 10,311 contracts to their long positions and also added 6,887 contracts to their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.32:1, which is down slightly from the previous week of 1.39:1, and approximately the same as 2 weeks ago of 1.31:1.

From February 19 through February 28, April natural gas has advanced 26 cents, or +7.95%. During this time, open interest has increased only 18,853 contracts. Managed money is positioned solidly in bear territory and have been net short for a couple of months. However, we think it is possible that natural gas may be on the edge of moving higher. Keep in mind that during the past week while the rest the petroleum complex was getting decimated, natural gas held up well. Additionally, the 50 day moving average is above the 200 day moving average on the natural gas continuation chart. This is not the case with the April natural gas chart (50 day 3.40, 200 day 3.51). Natural gas must close decisively over its 200 day moving average in order to move higher. We think this is highly likely and one reason is: natural gas is entering its strong seasonal period. On February 25, natural gas gapped above the 50 day moving average (3.40) and this has been providing support thus far. Natural gas remains on a short term buy signal and intermediate sell signal.

Copper:

For the week, May copper lost 4.95 cents. The COT report showed that managed money liquidated 12,340 contracts of their long positions and added 6,238 contracts to their short positions. Commercial interests added 40 contracts to their long positions and liquidated 11,673 contracts of their short positions. As of the latest report, managed money is short by a ratio of 1.28:1, which is a dramatic reversal from the previous week when managed money was long by a ratio of 1.43:1 and the ratio of 2 weeks ago when they were long by 2.06:1.

Gold:

For the week, April gold lost 50 cents. The COT report showed that managed money added 3,381 contracts to their long positions and liquidated 4,662 contracts of their short positions. Commercial interests liquidated 5,251 contracts of their long positions and also liquidated 547 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.82:1, which is up slightly from the previous week of 1.64:1, but down substantially from the ratio of 2 weeks ago of 2.41:1.

Platinum:

For the week, April platinum lost $33.90. The COT report showed that managed money liquidated 6,631 contracts of their long positions and added 434 contracts to their short positions. Commercial interests liquidated 104 contracts of their long positions and also liquidated 2,437 contracts of their short positions. As of the latest report, managed money continues to be long platinum by a stratospheric 21.13:1, which is down dramatically from the previous week of 34.58:1 and slightly below the ratio of 2 weeks ago of 22.84:1.

Palladium:

For the week, June palladium lost $17.10. The COT report showed that managed money liquidated 2,019 contracts of their long positions and also liquidated 1,128 contracts of their short positions. Commercial interests liquidated 263 contracts of their long positions and also liquidated 1,293 contracts of their short positions. The COT revealed that managed money is long palladium by a stratospheric 17.13:1, which is up dramatically from the previous week of 10.18:1 and the ratio of 2 weeks ago of 11.54:1.

The chart below shows that palladium has been outperforming platinum during the month of February and on a year to date basis. On March 1, palladium closed under its 50 day moving average for the first time since November 19. This indicates the likelihood of a continued move lower.

Silver:

For the week, May silver lost 3 cents. The COT report showed that managed money liquidated 1,350 contracts of their long positions and added 4,041 contracts to their short positions. Commercial interests liquidated 557 contracts of their long positions and also liquidated 1,896 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 1.94:1, which is down dramatically from the previous week of 2.93:1 and the ratio of 2 weeks ago of 6.56:1.

Canadian dollar:

For the week, the Canadian dollar lost 51 points. The COT report showed that leveraged funds added 8,642 contracts to their long positions, and added a massive 39,321 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.28:1 which is a dramatic reversal from the previous week when leveraged funds were long by a ratio of 1.64:1 and the ratio of 2 weeks ago when funds were long by a ratio of 2.84:1. 

Australian dollar:

For the week, the March Australian dollar lost 1.24 cents. The COT report showed that leveraged funds liquidated 4,764 contracts of their long positions and added 6,189 contracts to their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 1.78:1, which is down significantly from the previous week of 2.25:1 and the ratio of 2 weeks ago when leveraged funds were long by a ratio of 2.46:1.

Swiss franc:

For the week, the March Swiss franc lost 1.51 cents. The COT report showed that leveraged funds added 1,088 contracts to their long positions and also added 3,351 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.08:1, which is a reversal from the previous week when leveraged funds were long by a ratio of 1.11:1, and the ratio of 2 weeks ago when they were long by a ratio of 1.94:1.

British pound:

For the week, the March British pound lost 2.23 cents. The COT report showed that leveraged funds liquidated 8,452 contracts of their long positions and added 10,768 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.72:1, which is up dramatically from the previous week when they were short by a ratio of 1.78:1 and the ratio of 2 weeks ago when they were short by a ratio of 1.33:1.

Euro:

For the week, the March euro lost 1.61 cents. The COT report showed that leveraged funds liquidated 2,778 contracts of their long positions and added a massive 15,079 contracts to their short positions. As of the latest report, leveraged funds are now short by a ratio of 1.03:1, which is a dramatic shift from the previous week when they were long by a ratio of 1.30:1 and the ratio of 2 weeks ago when leveraged funds were long by a ratio of 1.42:1.

Japanese yen:

For the week, the March Japanese yen lost 22 points. The COT report showed that leveraged funds added 183 contracts to their long positions and also added 9,635 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 4.00:1 which is up from the previous week of 3.69:1 and the ratio of 2 weeks ago of 3.54:1.

US dollar index:

For the week, the March dollar index advanced 77 points. The COT report showed that leveraged funds added 15,047 contracts to their long positions and also added 19,646 contracts to their short positions.. According to the latest report, leveraged funds are short by a ratio of 1.14:1 which is up from the previous week of 1.05:1, and a dramatic reversal from 2 weeks ago when leveraged funds were long by a ratio of 1.18:1.

It is odd that leveraged funds went from a net long to a net short position just as the dollar index rallied strongly. For example, during the 2 reporting periods of the COT report which span the dates of February 13 through February 26, the March dollar index advanced 1.78 points, or 2.22%, while funds increased their net short position. Since the rally began on February 1, through February 28, the dollar index advanced 2.70 points or 3.41%. Additionally, the fund short position is occurring when major currencies that comprise the dollar index also have moved to a net short position: Canadian dollar, Swiss franc, and Euro. Leveraged funds have been net short in the British pound and Japanese yen for a number of weeks.

It is interesting to examine the open interest action from the time the rally began on February 1 through February 28. From February 1 through February 13, total open interest went from a high of 61,931 on February 1 down to 45,012 contracts on February 13. During this time, the dollar index rallied 97 ticks (3 ticks shy of 1 full point). In short, the rally from February 1 through February 13 consisted of longs and shorts liquidating as the market moved higher. However, the action from February 14 through February 28 was much different. On February 14 total open interest was 46,739 contracts and on February 28 it increased to 73,883 contracts. During this time, the dollar index advanced 1.54 points or 1.91%.

In short, during the first 2 weeks of February open interest acted in a bearish fashion relative to the price advance. During the next 2 weeks open interest action acted in a bullish congruent manner relative to the price advance. As we have written in the “About” section of the website, open interest increases when there is a difference of opinion between longs and shorts, and it declines when there is agreement between the two camps. We believe that funds they are on the wrong side of the trade. However, the dollar index is overbought by any standard, even relative to its 10 day moving average of 81.45, and the 20 day moving average of 80.75. We see a sharp pullback in the offing, and this may give shorts the erroneous conviction they are on the right side of the trade.

As it stands now, both the British pound and the Japanese yen 50 day moving averages are below their 200 day moving averages. These 2 currencies comprise 25.5% of the weight of the dollar index. This coming week, the Canadian dollar’s 50 day moving average will cross below its 200 day moving average. Therefore, next week 34.6% of the dollar index’s weight will be comprised of 3 very weak currencies. They are extremely oversold and due for a major bear market rally. The fact that managed money is now net short at the very bottom of the trading range for 3 heavily weighted currencies, gives additional credence they are likely to rally. This will produce a good-sized pullback in the dollar index, at which time, an opportunity will present itself to implement long positions in the index.

Please see the table below that shows performance from February 1 through March 1 and year to date. It would probably surprise many people to know the Japanese yen has slightly outperformed the British pound year to date. And despite the outperformance, the short to long ratio in the Japanese yen is approximately 50% higher than the ratio in the British pound. Another interesting point: During the month of February, the Australian dollar outperformed the euro, however, on a year to date basis their performance is nearly equal. The difference is: funds are net short the euro by a ratio of 1.03:1 versus net long the Australian dollar by a ratio of 1.78:1

  S&P 500 E mini:

For the week, the March S&P 500 E mini gained 1.90 points. The COT report showed that leveraged funds liquidated 9,280 contracts of their long positions and also liquidated 11,457 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.72:1 which is about the same as the previous week of 1.72:1 and slightly below the ratio of 2 weeks ago of 1.91:1.
Excel Spreadsheet

The above table shows the weakness of the major indices during the month of February. It is apparent that year to date gains were concentrated in January. Additionally, the weakness of the New York Composite Index (NYA) is borne out by the dismal performance of stocks on the NYSE that are above their 50 day moving average. 

For example, from February 1 through February 14, the E mini gained 1.55% and the number of NYSE stocks above their 50 day moving average fell from 2,024 on February 1 to 1,873 on February 14. From February 15 through February 28, the E mini declined 0.43% while stocks above their 50 day moving average fell to 1541 on February 28.

American Association of Individual Investors

Recent week     2 weeks ago    3 weeks ago
Bullish  28.4          41.8                  42.3
Bearish 36.6          32.5                  28.7
Neutral 35.0          25.7                  29.0

We continue to think the more conservative way of trading the E mini with a correction in progress is to write calls for out of the money  options.