Weekend Wrap For May 19, 2013

Weekend Wrap for May 19, 2013

The tabulation dates for this week’s COT report is May 8-May 14.

Soybeans:

For the week, July soybeans gained 49.50, August +48.50. The COT report showed that managed money added 14,836 contracts to their long positions and also added 4,077 contracts to their short positions. Commercial interests added 796 contracts to their long positions and also added 8,532 contracts to their short positions. According to the latest report, managed money is long soybeans by a ratio of 2.88:1, which is up slightly from the previous week of 2.81:1 but down from the ratio of 2 weeks ago of 3.82:1.

From the May 9 report when OIA announced that soybeans generated a short-term buy signal

“July soybeans advanced 18 cents on volume of 123,338 contracts. Open interest increased by a massive 6,537 contracts, which relative to volume is approximately 110% above average. Making the total open interest increase more impressive was the fact that May lost 907 of open interest.”

“For the past 2 days, open interest relative to volume has increased dramatically and soybeans have advanced strongly each day. This is bullish. The USDA report was released Friday morning and as this report is being compiled, July soybeans are trading 4 cents lower and have made a low of $13.90. This is 3 cents above the low of 13.87 made on May 9. For those clients wanting to get long soybeans, we would recommend using the 13.87 level as an exit point for long positions.”

Soybean meal:

For the week, July soybean meal gained $18.30, August + 18.20. The COT report showed that managed money added 3,934 contracts to their long positions and liquidated 3,966 contracts of their short positions. Commercial interests liquidated 8,313 contracts of their long positions and added 5,075 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 2.57:1, which is up from the previous week of 2.15:1 and the ratio of 2 weeks ago of 2.33:1.

Soybean oil:

For the week, July soybean oil gained 29 points, August +35. The COT report showed that managed money added 2,126 contracts to their long positions and liquidated 6,471 contracts of their short positions. Commercial interests liquidated 10,500 contracts of their long positions and added 4,639 contracts to their short positions. The latest COT report showed that managed money is short soybean oil by a ratio of 1.28:1, which is down from the previous week of 1.44:1 and the ratio of 2 weeks ago of 1.51:1.

Corn:

For the week, July corn gained 16.50 cents, September +1.50. The COT report showed that managed money added 15,213 contracts to their long positions and also added 676 contracts to their short positions. Commercial interests added 770 contracts to their long positions and liquidated 8,355 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 1.87:1, which is slightly above the previous week of 1.76:1 and the ratio to a 1.64:1.

On May 15, we recommended that clients write out of the money calls in corn. Our reasons for doing so is that although domestic corn supplies are tight, export business has been dismal and promises to remain that way. Additionally, domestic feed consumption has been slowing, and the ever-rising dollar is going to further dampen exports and negatively affect speculative psychology. Another factor to keep in mind is that if US corn prices get too high, the strong dollar will allow US buyers to acquire corn from South America at prices below the US. On the positive side for corn prices is the fact that corn is on a short-term buy signal, and ethanol demand is robust and profitable. The July option contract expires on June 21, which means that time decay begins to work in the favor of option sellers. A more conservative way to trade corn options is to initiate a bear call spread.

Wheat:

For the week, July wheat lost 21 cents, September -21.50. The COT report showed that managed money liquidated 571 contracts of their long positions and added 6,031 contracts to their short positions. Commercial interests liquidated 4,557 contracts of their long positions and also liquidated 8,367 contracts of their short positions. As of the latest report, managed money is short wheat by a ratio of 1.23:1, which is up slightly from the previous week of 1.17:1 and the ratio of 2 weeks ago of 1.10:1.

COT Report May 8-May 14    Year to Date
July beans     +2.35%                         +3.82%
July meal       +2.11%                          +4.37%
July corn        +1.95%                          -6.38%
July bean oil  +1.26%                           -2.17%
July wheat     +0.25%                        -13.92%

Coffee:

For the week, July coffee lost 8.20 cents. The COT report showed that managed money added 48 contracts to their long positions and liquidated 7,908 contracts of their short positions. Commercial interests liquidated 906 contracts of their long positions and added 8,362 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.02:1, which is down from the previous week of 1.25:1 and the ratio of 2 weeks ago of 1.51:1.

On May 8, July coffee generated a short-term buy signal, but this signal was false. We reversed the recommendation and advised clients to move to the sidelines. It is quite possible that coffee will generate a short-term sell signal on May 20. Additionally, preliminary figures from the exchange indicate that open interest increased fairly substantially on the decline, which is more bad news for longs. Stand aside.  

Cotton: Cotton is on a short-term sell signal, but an intermediate term buy signal.

For the week, July cotton lost 7 points. The COT report showed that managed money added 7,516 contracts to their long positions and liquidated 1,533 contracts of their short positions. Commercial interests added 1,014 contracts to their long positions and also added 11,777 contracts to their short positions. As of the latest report, managed money is long cotton by a stratospheric 13.41:1, which is up dramatically from the previous week of 8.76:1 and more than double the ratio of 2 weeks ago of 6.32:1.

Is important to pay attention to the fact that managed money is now long cotton by a stratospheric ratio. However, the very bullish position of managed money provides an opportunity to initiate bearish positions. During the tabulation of the most recent COT report (May 7-May 14), July cotton lost 23 points (1/4 cent) while managed money increased their bullish position by over 50% from the previous report, according to OIA’s calculation of the long to short ratio. Even more astonishing: The long to short ratio has more than doubled from 6.32:1 on April 30 to 13.41:1 on May 14 while cotton prices have declined by 55 points in this time frame. In short, managed money has been aggressively buying cotton, but this has not moved cotton prices higher during the past two weeks.

When the USDA report was released on May 10, July cotton spiked to 87.85 cents, which was short of the May 9 high of 88.40, and July cotton closed 1.44 cents lower on the day. Since then, cotton has drifted irregularly lower. From May 2 through May 9, open interest increased by 13,051 contracts on total volume of 120,860 contracts. Relative to volume, the open interest increase is approximately 320% above average, which is off the charts. During this time, July cotton advanced 4.05 cents. However, from May 10 through May 16, cotton declined 1.89 cents while open interest increased by 5401 contracts. This is bearish open interest action relative to the price decline.

Another bearish factor is that the July-December cotton spread has been performing negatively with July losing ground to the December contract. For example, on May 3, the July contract sold at a 1.52 cent premium to December and on Friday closed at 51 points premium to December. On May 3 July cotton closed at 86.43 and on May 17 closed at 86.41. In short, cotton was almost unchanged during the two-week period, yet the July contract was losing ground to December. This is bearish. The long July, short December cotton spread topped out on March 15 at 4.25 cents premium to July. On that date, July cotton closed at 92.76, which was the high for the move going back to mid December. Ever since, the spread between July and December has been narrowing.

Cotton has a strong seasonal tendency to decline from mid-May through late summer and early fall. Cotton remains on a short-term sell signal, and has never come close to generating a short-term buy signal during the past 30 days. With managed money all in on the long side of the cotton trade, the market remains vulnerable to a move lower that could take July cotton to 81.50 cents. Another very negative factor is the rising dollar, which is going to have a negative impact on export demand. Further dampening demand is the weak economies of the euro zone and China. We recommend that clients initiate bearish positions on rallies, which can take the form of short futures, short calls, or long puts.

For those speculators traders who do not trade futures consider shorting the cotton ETN, BAL. Although it does not track cotton as much as we would like, it does a respectable job. For example, on a short-term basis from April 30 through May 14, BAL declined 1.12% while July cotton declined 0.63%. However, on the year to date basis July cotton has advanced 12.41% while has advanced 10.60%. ETF’s and ETN’s are best used in shorter time frames, which reduces tracking errors that occur over longer periods of time.

We are reprinting the table from last week’s Weekend Wrap where we show the long to short ratios going back a couple of months. We have added the long to short ratio from the current report and the closing price as of May 14. It is readily apparent that the massive increase in the long to short ratio has not moved cotton prices higher during the past 2 weeks.

 COT Tabulation Date         Closing Price     Long to Short Ratio
May 14                                        86.92              13.41:1
May 7                                            87.15                  8.76:1
April 30                                     87.47                6.32:1
April 23                                        85.10                  4.60:1
April 16                                        85.42                   4.15:1
April 9                                          86.61                   4.27:1
April 2                                          90.34                   5.81:1
March 26                                     89.33                    5.55:1
March 19                                      91.53                    5.89 1
March 12                                      88.16                   6.66:1                 

Crude oil:

For the week, June WTI crude oil lost 2 cents. The COT report showed that managed money liquidated 2,905 contracts of their long positions and also liquidated 4,785 contracts of their short positions. Commercial interests liquidated 3,716 contracts of their long positions and also liquidated 349 contracts of their short positions. The latest report showed that managed money is long crude by a ratio of 7.04:1, which is up from the previous week of 6.05:1 and the ratio of 2 weeks ago of 4.24:1.

This week, we are presenting the performance for futures contracts and their corresponding ETF’s. If using ETFs it is important that they closely track the futures contract. The ticker symbol for the crude oil ETF is USO. This ETF shows high tracking ability in short and longer-term time frames and is a good proxy for the futures contract. For example, during the first quarter 2013, June crude oil advanced 4.20% and the ETF added 4.14%. Year to date, June crude oil advanced 2.64% while USO increased by 2.52%.

Brent crude oil: It is possible July Brent crude will generate a short-term buy signal on May 20.

For the week, July Brent crude oil gained 99 cents.

There is a vast difference between the performance of WTI and Brent the ETF. For example, during the first quarter 2013, July Brent crude advanced 1.73% but the ETF BNO increased by only 1.34%. Year to date, July Brent declined 2.62% while the ETF declined 3.53%. In short, the ETF for Brent crude is a poor substitute for WTI’s ETF.

Heating oil:

For the week, June heating oil gained 3.08 cents. The COT report showed that managed money added 2,255 contracts to their long positions and also added 1,129 contracts to their short positions. Commercial interests added 4,853 contracts to their long positions and liquidated 7,302 contracts of their short positions. As of the latest report, managed money is short heating oil by a ratio of 1.25:1, which is down from the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.56:1.

 The performance of the ETF UHN very much lags the heating oil futures contract. Therefore, the heating oil ETF is not favored as a replacement for trading the futures contract. During the first quarter 2013, June heating oil gained 0.94%, but UHN lost 1.96%. Year to date, June heating oil lost 2.34% while the ETF loss 5.28%.

 Gasoline: On May 17, June gasoline generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, June gasoline advanced 4.66 cents. The COT report showed that managed money added 1,148 contracts to their long positions and also added 1,267 contracts to their short positions. Commercial interests added 1,978 contracts to their long positions and also added 5,299 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 2.77:1, which is down from the previous week of 2.90:1 and the ratio of 2 weeks ago of 3.48:1. The current ratio is the lowest of the past several weeks and the lowest in over 2 years.

The performance of the gasoline ETF UGA tracks the gasoline futures contract unacceptably as well. For example, during the first quarter 2013, June gasoline advanced 7.80% while UGA gained 5.51%. Year to date, June gasoline advanced 1.32% while the ETF declined 1.56%. Speculators should keep in mind that when using ETF’s, it is best to use them in shorter time frames due to tracking errors.

With WTI crude, heating oil and now gasoline on short-term buy signals, and Brent crude about to generate one,, we want to offer a word of caution on the long side. With very burdensome crude oil stocks according to the latest Energy Information Administration report, and the lackluster demand for gasoline, we cannot help but think that much of this is due to the uncontrollable boom in the stock market. Massive quantitative easing and money printing around the world is flooding markets with liquidity. The rally in copper along with strong petroleum markets is indicating that we are about to enter a major economic boom, or that the flood of liquidity throughout the world is seeping into the commodity space. From a global fundamental point of view, demand for petroleum products certainly is not robust. Speculators should take this into account when contemplating long positions. If the stock markets swoons, so will the petroleum complex.

Natural gas:

For the week, June natural gas gained 14.5 cents. The COT report showed that managed money added 1,851 contracts to their long positions and also added 12,059 contracts to their short positions. Commercial interests added 2,712 contracts to their long positions and also added 5,658 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.22:1, which is down from the previous week of 1.32:1 and the ratio of 2 weeks ago of 1.40:1.

ETF’s for natural gas (UNG) and WTI crude (USO) track the futures contracts almost identically, which makes them great vehicles for speculation, without the large financial risk posed by futures contracts. During the first quarter 2013, June natural gas advanced 15.56% while the natural gas ETF UNG advanced 15.77%. Year to date, June natural gas advanced 15.65% while UNG increased by 15.71%. While the longer-term tracking ability of natural gas is superior, its correlation should remain high much longer than normal once natural gas futures began to exhibit backwardation (inversion).

COT Report May 8-May 14    Year to Date
June natural gas  +2.21%             +15.65%
June gasoline       +0.53%             +1.32%
July Brent              -1.19%              -2.62%
July WTI               -1.25%              +2.64%
July heating oil     -1.49%               -2.37%   

Copper:

For the week, July copper lost 3 cents. The COT report showed that managed money added 568 contracts to their long positions and liquidated 3,064 contracts of their short positions. Commercial interests added 918 contracts to their long positions and also added 1,752 contracts to their short positions. As of the latest report, managed money is short copper by a ratio of 1.48:1, which is slightly below the previous week of 1.62:1 and the ratio of 2 weeks ago of 1.85:1.

From the May 12 Weekend Wrap:

“The market has rallied to the precise area where normally we would favor bearish positions. However, with the number of managed money shorts holding 43,731 contracts and managed money longs holding 26,935 contracts, it is certainly possible to see a further advance in order to shake out holders of short positions. We would be far more bearish had we seen massive liquidation on the 26 cent rally. The upside target for July copper is $3.44, but we are not convinced the market has the momentum to move significantly higher from here. A move sharply lower in the stock indices would likely drag copper down with them.”

Since last week’s report, we have continued to evaluate the price movements of copper. It appears that copper may generate a short-term buy signal this coming week. From May 1 through May 17, copper has been rising when the prices of platinum, silver, and gold and gold have fallen sharply. In last week’s report, we stated that we didn’t think copper had the momentum to move higher. However, we now think with the relatively high number of managed money shorts combined with a robust stock market, copper can move higher. This is not to say that copper is a bull market or anything close to it, but what we may experience is a garden-variety technical bounce of longer duration and magnitude.

Palladium: Cash palladium generated a short-term buy signal on May 17.

For the week, June palladium gained $34.55. The COT report showed that managed money added 55 contracts to their long positions and liquidated a massive 1,397 contracts of their short positions. Commercial interests added 299 contracts to their long positions and also added 558 contracts of their short positions. As of the latest report, managed money is long by a stratospheric 31.76:1, which is more than 3 times the ratio of the previous week of 9.85:1 and the ratio of 2 weeks ago of 11.30:1.

Platinum:

For the week, July platinum lost $18.00. The COT report showed that managed money added 701 contracts to their long positions and liquidated 463 contracts of their short positions. Commercial interests added 168 contracts to their long positions and also added 308 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 3.59:1 which is up from the previous week of 3.35:1 and the ratio of 2 weeks ago of 3.48:1.

Gold:

For the week, June gold lost $71.90. The COT report showed that managed money liquidated 3,172 contracts of their long positions and added 5,977 contracts to their short positions. Commercial interests added 13,442 contracts to their long positions and also added 3,045 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 1.54:1, which is down from the previous week of 1.72:1 and the ratio of 2 weeks ago of 1.79:1.

Silver:

For the week, July silver lost $1.306. The COT report showed that managed money added 143 contracts to their long positions and added 3,051 contracts to their short positions. Commercial interests added 440 contracts to their long positions and liquidated 856 contracts of their short positions. As of the latest report, managed money remains long silver by a ratio of 1.18:1, which is down from the previous week of 1.37:1 and the ratio of 2 weeks ago of 1.39:1.

COT Report May 8-May 14    Year to Date
June palladium  +7.04%              +5.05%
July platinum     +1.32%               -6.00%
July copper          -0.33%               -9.75%
June gold              -1.83%              -19.23%
July silver             -2.03%             -26.92% 

Canadian dollar:

For the week, the June Canadian dollar lost 1.64 cents. This COT report showed that leveraged funds added 3,943 contracts to their long positions and liquidated 6,512 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 3.48:1, which is down substantially from the previous week of 4.67:1 and the ratio of 2 weeks ago, when leveraged funds were short by a ratio of 6.14:1.

Australian dollar:

For the week, the June Australian dollar lost 2.68 cents. The COT report showed that leveraged funds added 1,960 contracts to their long positions and also added 17,313 contracts to their short positions. As of the latest report, leveraged funds remain long the Australian dollar by a ratio of 1.06:1 which is down substantially from the previous week of 1.38:1 and the ratio of 2 weeks ago of 1.95:1.

Swiss franc:

For the week, the June Swiss franc lost 1.75 cents. The COT report showed that leveraged funds added 2,381 contracts to their long positions and also added 10,485 contracts to their short positions. As of the latest report, leveraged funds are short the Swiss franc by a ratio of 2.06:1, which is up substantially from the previous week when they were short by a ratio of 1.38:1, and 2 weeks ago when leveraged funds were short by a ratio of 1.95:1.

British pound: It is likely that June British pound will generate a short-term sell signal on May 20. It remains on an intermediate term sell signal.

For the week, the June British pound lost 1.85 cents. The COT report showed that leveraged funds added 4,927 contracts to their long positions and also added 7,823 contracts to their short positions. As of the latest report, leveraged funds are short the British pound by a ratio of 2.36:1, which is down slightly from the previous week of 2.47:1 and the ratio of 2 weeks ago of 2.83:1.

Euro: On May 15, the June euro generated a short-term sell signal and remains on an intermediate term sell signal.

For the week, the June euro lost 1.55 cents. This COT report showed that leveraged funds added 1,882 contracts to their long positions and also added 12,262 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.79:1, which is up from the previous week of 1.59:1 and the ratio of 2 weeks ago of 1.57:1.

Japanese yen:

For the week, the June yen lost 158 points. The COT report showed that leveraged funds added 6,661 contracts to their long positions and also added 10,637 contracts to their short positions. As of the latest report, leveraged funds are short the Japanese yen by a ratio of 2.06:1 which is down slightly from the ratio of 2.13:1 and the ratio of 2 weeks ago of 2.08:1.

Dollar index:

For the week, the June dollar index gained 1.15 points. The COT report showed that leveraged funds added 10,247 contracts to their long positions and also added 9,710 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by a ratio of 1.13:1 which is down from the previous week’s ratio of 1.20:1, but above the ratio of 2 weeks ago when leveraged funds were short by a ratio of 1.01:1.

The dollar rocketed to new highs, and we think the rally has farther to go. With the euro on a short-term sell signal and the British pound and Canadian dollar about to generate one on May 20, more shorts will get blown out, which will send the market higher. A rising dollar however, is negative for multinational corporations and for commodities in general as well as the stock market.

 From the May 12 Weekend Wrap:

“The dollar index rallied strongly during the past week and reached its highest level since April 4. If the June dollar index breaks out to 83.75 (which we expect), it would trade at the highest level since August 2012. On May 9, the June dollar index rallied 92.4 points on remarkably light volume of 35,446 contracts. Open interest increased only 173 contracts. This leads us to believe that shorts are digging in and refusing to cover positions.”

“The current ratio shows that leveraged funds are considerably short by 1.20:1, which means that short covering should be more robust. If open interest for Friday does not show a significant decline, the dollar index could be in for a sharp rally in a compressed timeframe.”

COT Report May 8-May 14    Year to Date
June dollar index     +1.63%             +5.43%
June euro                 -1.30%               -2.85%
June pound              -1.72%               -6.58%
June franc               -2.69%               -6.26%
June Aussie dollar  -2.97%                -5.31%
Japanese yen           -3.21%               -16.14%

S&P 500 E mini:

For the week, the June S&P 500 E mini gained 33.40. The COT report showed that leveraged funds liquidated 6,601 contracts of their long positions and added a massive 57,712 contracts to their short positions. As of the latest report, leveraged funds are short the E mini by a ratio of 1.61:1, which is up from the previous week of 1.50:1 and the ratio of 2 weeks ago of 1.44:1.

Our view of the stock market is that it clearly is in a bubble, and the risk remains on the downside. Additionally we are seeing bubble like characteristics in the real estate market and in global art markets. The Federal Reserve has done an excellent job of raising asset prices, but this is not filtered down much to the general economy and certainly has not boosted employment significantly. We think this disconnect will snap with either the general economy improving rapidly, or the stock market declining significantly. One or the other will eventually have to give, and we think as the market moves higher, new longs will be reluctant to put new money to work, which sets the stage for a top. We continue to advise put protection, though this has not paid off.  However, when the market turns, it could be rapid without allowing much time to initiate bearish positions. Forewarned is forearmed.