Weekend Wrap for May 5, 2013

The tabulation period for this week’s COT report is April 24 through April 30.

Soybeans:

For the week, May soybeans gained 24.25 cents, July +6.25, August +16.75. The COT report showed that managed money added 10,933 contracts to their long positions and liquidated 3,078 contracts of their short positions. Commercial interests liquidated 19,855 contracts of their long positions and added 755 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 3.82:1, which is up from the previous week of 3.21:1 and the ratio of 2 weeks ago of 3.01:1.

Soybean meal:

For the week, May soybean meal lost 10 cents, July – $1.80, August +8.60. The COT report showed that managed money added 4,512 contracts to their long positions and liquidated 294 contracts of their short positions. Commercial interests liquidated 797 contracts of their long positions and added 8,334 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 2.33:1, which is up from the previous week of 2.17:1 and the ratio of 2 weeks ago of 2.06:1.

Soybean oil:

For the week, May soybean oil lost 50 points, July -27, August -15. The COT report showed that managed money added 5,772 contracts to their long positions and liquidated 1,971 contracts of their short positions. Commercial interests liquidated 11,095 contracts of their long positions and added 644 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.51:1, which is down from the previous week of 1.73:1 and the ratio of 2 weeks ago of 1.91:1.

Corn: On May 3, July corn generated a short-term buy signal.

For the week, May corn gained 55 cents, July +41.50, September +34.50. The COT report showed that managed money added 6,476 contracts to their long positions and liquidated 4,215 contracts of their short positions. Commercial interests liquidated 38,205 contracts of their long positions and also liquidated 16,677 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 1.64:1 which is up from the previous week of 1.54:1 but down from the ratio of 2 weeks ago of 1.85:1.

The rally in corn has been primarily due to the tight ending supply, and fears associated with late planting. Planting for the current season is the slowest since 1984. However, since 1984, there have been huge improvements in seed quality, which makes late planting not as disastrous as it used to be. Managed money has taken flight from the commodity markets, and have redeployed assets into equities. It is difficult to ascertain the extent of the rally, but it is likely that corn will rally to $6.76, which would fill the gap made between March 28 and April 1. As is usually the case once a buy signal is generated, corn should have a pullback, but it may be shallow. The 50 day moving average on the July corn chart is $6.62 1/2, and since July corn closed on May 3 at $6.61 1/4, the market is not overbought from a price standpoint. Another positive is that the long to short ratio is at extremely low levels going back over a year. This means as corn rallies further, there is money on the sidelines that can push corn prices higher. After corn reaches $6.76, which coincides with the 50 day moving average on the corn continuation chart of 6.75 3/8, the next target is 6.88 3/4.

Wheat: This week (May 2) July wheat generated a short-term buy signal.

For the week, May wheat gained 22.50 cents, July +28.50, September +29.50. The COT report showed that managed money added 5,441 contracts to their long positions and liquidated 13,568 contracts of their short positions. Commercial interests liquidated 10,981 contracts of their long positions and added 6,098 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.10:1, which is down from the previous week of 1.34:1 and the ratio of 2 weeks ago of 1.41:1. The current ratio is the lowest in at least several weeks.

COT Report April 24-April 30   Year to Date
July corn       +5.86%                                -5.16%
July wheat    +5.10%                                -9.17%
July meal      +4.17%                                -0.20%
July beans    +2.98%                                -0.57%
July bean oil +1.67%                                -2.67% 

Live Cattle: This week (May 2) June cattle generated a short-term buy signal

For the week, June live cattle lost 78 points, August -1.30. The COT report showed that managed money added 1,038 contracts to their long positions and liquidated 251 contracts of their short positions. Commercial interests liquidated 4,109 contracts of their long positions and added 851 contracts to their short positions. As of the latest report, managed money is long cattle by a ratio of 1.40:1, which is up from the previous week of 1.35:1 and the ratio of 2 weeks ago of 1.37:1. The current long to short ratio in lean hogs is 1.34:1.

Our concern about live cattle is that on the year to date basis, it is underperforming hogs and since April 1, continues to underperform hogs. Another concern is that the long to short ratio in cattle is higher than hogs. For example, the current long to short ratio in hogs is 1.34:1, which is below the current ratio for cattle. Also, the long to short ratio for cattle has been higher than hogs for the past 2 weeks, during which time hogs outperformed cattle. The volatility of the market as exemplified by the action on May 3 and there isn’t a suitable stop-loss point  for new longs until the low of 1.20350 cents made on April 22. 

On May 2, live cattle generated a short-term buy signal, and as we said in the May 1 report, cattle would likely pull back. The market did in fact have a very sharp pullback on May 3 and in the May 2 report we stated: “We recommend implementing bullish positions, but we would wait until the end of the session before implementing a long futures position. If the market looks like it is going to close near the lows, we would hold off until Monday.”

From the May 1 report:

It is highly likely that June cattle will generate a short-term buy signal on May 2. However, similar to wheat, cattle is likely to have a pullback and this is the move you want to buy.

                    Year to Date          April 1-May 3
June hogs   -5.80%                       +1.21%
June cattle  -6.83%                      -2.05%                      

Crude oil:

For the week, crude oil advanced $2.61. The COT report showed that managed money added 2,152 contracts to their long positions and liquidated 10,571 contracts of their short positions. Commercial interests added 29,656 contracts to their long positions and also added 22,035 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 4.24:1, which is up from the previous week of 3.57:1, but down slightly from the ratio of 2 weeks ago of 4.31:1.

It appears quite likely that June crude oil will generate a short-term buy signal, and possibly an intermediate term buy signal on May 6. Although the open interest action relative to the price advance has been lackluster, crude oil has rallied nonetheless. This is occurring despite the record levels of crude oil stocks as recently reported by the Energy Information Administration. We may be witnessing the effect of quantitative easing in the petroleum market. It appears that heating oil is not far away from generating a short-term buy signal. The table below shows that crude oil (with the exception of natural gas) has been the strongest of the petroleum complex, yet the fundamentals leave much to be desired. This is especially the case considering that Europe is in a recession, China’s economy is slowing down, and the US GDP does not look to exceed much beyond 2% for 2013.

Heating oil:

For the week, June heating oil gained 1.83. The COT report showed that managed money added 1,492 contracts to their long positions and also added 771 contracts to their short positions. Commercial interests liquidated 9,175 contracts of their long positions and also liquidated 2,018 contracts of their short positions. As of the latest report, managed money is short heating oil by a ratio 1.56:1, which is down slightly from the previous week of 1.62:1, but up substantially from the ratio of 2 weeks ago when managed money was short by 1.03:1.

Gasoline:

For the week, June gasoline lost .0019 of a cent. The COT report showed that managed money liquidated 1,248 contracts of their long positions and added 1,716 contracts to their short positions. Commercial interests liquidated 4,245 contracts of their long positions and also liquidated 13,340 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 3.48:1, which is down from the previous week of 4.03:1 and the ratio of 2 weeks ago of 5.61:1. The current ratio is the lowest in at least 2 years.

The terrible performance of gasoline during its period of seasonal strength is probably the biggest surprise thus far in 2013. Although gasoline consumption is declining, its fundamentals are certainly much better than crude oil, yet crude oil continues to outperform. To put the current dismal state of speculative interest in gasoline in perspective, consider that the current long to short ratio of 3.48:1 is lower than the current ratio in crude oil of 4.24:1. This is rare. However, as gasoline prices have declined, consumption should increase. 

From the April 21 Weekend Wrap:

There is support for the June contract at $2.68, the low on November 5, 2012 and $2.70, the low on October 24, 2012. The support level on the gasoline continuation chart is $2.72, the low made on January 15, 2013. We expect gasoline to test the lows, and it will be important that these hold. Gasoline remains on a short and intermediate term sell signal. Stand aside. Do not short this market.

As the April 21 Weekend Wrap stated, it was important for the lows to hold, which were made on November 5, 2012, October 24, 2012 and the $2.72 low made on the continuation chart on January 15, 2013. These lows have held and we think the trend of gasoline prices are  higher. What makes the trade even more appealing is that speculative interest is low. If the effect of quantitative easing is beginning to impact commodity markets, then it is only a matter of time before gasoline generate a short-term buy signal. Gasoline remains on a short and intermediate term sell signal.

Ethanol:

For the week, June ethanol gained 18.4 cents and closed at $2.565, which is only slightly below its contract high of 2.620.

Natural gas: on May 3, June natural gas generated a short-term sell signal

For the week, June natural gas lost 18.2 cents. The COT report showed that managed money added 2,661 contracts to their long positions and liquidated 12,097 contracts of their short positions. Commercial interests liquidated 4,212 contracts of their long positions and also liquidated 7,218 contracts of their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.40:1, which is up from the previous week of 1.32:1 and the ratio of 2 weeks ago of 1.26:1. The current ratio is the highest since natural gas generated a short-term buy signal on March 1, 2013.

We have been advising clients to be cautious when natural gas was trading at much higher levels. With the generation of a short-term sell signal, lower prices are in store. As is usually the case when a sell signal is generated, there is a rally lasting 1-2 and possibly 3 days. We have a very favorable longer-term outlook for natural gas, but in the short-term, the market should continue to pullback and  test our original downside target of $3.83, and quite possibly its 200 day moving average of 3.72. 

COT Report April 24-April 30   Year to Date
June crude oil    +4.11%                      +2.10%
June ethanol      +3.38%                    +15.74%
June gasoline     +2.37%                      – 1.52%
June natural gas+1.66%                    +15.59%
June Brent          +1.25%                      -3.54%
June heating oil +0.85%                     -4.10%

Copper:

For the week, June copper advanced 12.85 cents. The COT report showed that managed money liquidated 2,581 contracts of their long positions and added 5,058 contracts to their short positions. Commercial interests liquidated 1,064 contracts of their long positions and also liquidated 3,990 contracts of their short positions. As of the latest report, managed money is short copper by a ratio of 1.85:1, which is an increase from the previous week of 1.52:1, but slightly lower than the ratio of 2 weeks ago of 2.05:1.

Gold:

For the week, June gold advanced $10.50. The COT report showed that managed money liquidated 2,847 contracts of their long positions and also liquidated 1,519 contracts of their short positions. Commercial interests added 8,795 contracts to their long positions and also added 1,685 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 1.79:1, which is exactly the same as the previous week of 1.79:1, but down from the ratio of 2 weeks ago of 2.27:1.

Platinum:

For the week, July platinum gained $24.70. The COT report showed that managed money added 695 contracts to their long positions and liquidated 1,415 contracts of their short positions. Commercial interests liquidated 690 contracts of their long positions and added 1,253 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 3.48:1, which is up from the previous week of 2.96:1 and the ratio of 2 weeks ago of 3.23:1.

Palladium:

For the week, June palladium gained $11.35. The COT report showed that managed money liquidated 354 contracts of their long positions and also liquidated 503 contracts of their short positions. Commercial interests added 458 contracts to their long positions and also added 246 contracts to their short positions. As of the latest report, managed money is long palladium by a ratio of 11.30:1, which is up from the previous week of 8.99:1, but down from the ratio of 2 weeks ago of 12.40:1.

Silver:

For the week, July silver gained 22.6 cents. The COT report showed that managed money liquidated 1,306 contracts of their long positions and also liquidated 836 contracts of their short positions. Commercial interests added 3,566 contracts to their long positions and also added 325 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.39:1, which is about the same as the previous week of 1.40:1 but down slightly from the ratio of 2 weeks ago of 1.53:1.

COT Report April 24-April 30   Year to Date
July platinum    +6.48%                     -3.00%
July silver           +5.71%                    -20.64%
June gold            +4.31%                    -12.54%
June palladium  +3.56%                      -1.25%
July copper         +2.92%                     -9.90%

Canadian dollar:

For the week, the June Canadian dollar gained 89 points. The COT report showed that leveraged funds liquidated 3,218 contracts of their long positions and also liquidated 7,797 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 6.14:1 which is up from the previous week of 5.49:1 and the ratio of 2 weeks ago of 6.06:1.

Australian dollar:

For the week, the June Australian dollar gained 37 points. The COT report showed that leveraged funds liquidated 2,428 contracts of their long positions and also liquidated 196 contracts of their short positions. As of the latest report, leveraged funds are long the Australian dollar by a ratio of 1.95:1, which is about the same as the previous week of 2.01:1, but down from the ratio of 2 weeks ago of 2.57:1.

Swiss franc:

For the week, the June Swiss franc gained 77 points. The COT report showed that leveraged funds liquidated 5,087 contracts of their long positions and added 4,020 contracts to their short positions. As of the latest report, leveraged funds are now short by a ratio of 1.45:1, which is a major reversal from the previous week when leveraged funds were long by a ratio of 1.51:1 and the ratio of 2 weeks ago when they were long by 1.13:1.

British pound:

For the week, the June British pound gained 78 points. The COT report showed that leveraged funds liquidated 1,871 contracts of their long positions and also liquidated 11,961 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.83:1, which is down from the previous week of 3.03:1 and the ratio of 2 weeks ago of 3.17:1.

Euro: This week (May 1) the June euro generated a short-term buy signal.

For the week, the June euro gained 80 points. The COT report showed that leveraged funds added 7,515 contracts to their long positions and also added 4,162 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.57:1 which is down from the previous week of 1.76:1 and the ratio of 2 weeks ago of 1.71:1.

The euro advanced 2.22 cents during the recent rally which began on April 24 through May 1. During this time, open interest increased by a minuscule 3383 contracts. Though the euro generated a short-term buy signal, it remains on an intermediate term sell signal. 

Japanese yen:

For the week, the June yen lost 84 points. The COT report showed that leveraged funds liquidated 987 contracts of their long positions and also liquidated 9,307 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.08:1 which is down from the previous week of 2.26:1 and the ratio of 2 weeks ago of 2.96:1.

Dollar index:

For the week, the June dollar index lost 38 points. The COT report showed that leveraged funds liquidated 4,499 contracts of their long positions and also liquidated 7,319 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.01:1 which is down from the previous week when they were short by a ratio of 1.08:1, but a reversal from the ratio of 2 weeks ago when leveraged funds were long by a ratio of 1.08:1. The dollar index remains on a short-term sell signal.

COT Report April 24-April 30   Year to Date     COT Ratio
Japanese yen         +1.94%                       -12.62%       Short 2.08:1   
June Canadian $  +1.89%                         -1.05%        Short 6.14:1
June pound           +1.89%                        -4.16%         Short 2.83:1  
June Swiss franc   +1.65%                        -2.53%         Short 1.45:1
June euro              +1.31%                         -0.70%         Short 1.57:1
June Australian $+1.10%                        +0.20%         Long 1.95:1
June dollar index  -1.67%                         +2.71%        Short 1.01:1

S&P 500 E mini:

For the week, the June S&P 500 E mini gained 32.00 points. The COT report showed that leveraged funds added 77,897 contracts to their long positions and also added 10,885 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.44:1 which is down from the previous week of 1.63:1 and the ratio of 2 weeks ago of 1.59:1.

From Bloomberg News May 2:

“Margin debt amounted to $379.5 billion in March, the latest month available. The total was the second-highest in the history of the NYSE’s figures, going back to 1959. The highest was the $381.4 billion recorded in July 2007.”

“It’s rather alarming to see NYSE margin debt just shy of its all-time high,” Roche wrote yesterday in a posting on his Pragmatic Capitalism blog. The borrowing points to “a fragile foundation” for the current advance in stocks, he wrote.”

“The 2007 record was set three months before the end of a five-year bull market, which sent the S&P 500 to an all-time high. The index surpassed its peak five weeks ago, after more than doubling from its March 2009 low, and later closed as much as 2.1 percent higher.”

“Investors owed $92.2 billion in March after subtracting credit balances in cash and margin accounts, according to the NYSE’s data. Holders of cash accounts have to pay the entire purchase price for stocks up front, while those with margin accounts can borrow as much as 50 percent of the price.”

The high amount of margin debt is another warning bell, that there is asymmetric downside risk. We continue to advise put protection, especially for those who hold equity positions.

We consider the move on May 3 to be confirmation that the S&P 500 is in a bubble. After examining the report, it certainly should not have been the catalyst for a move into new high ground. Preliminary open interest stats show that the increase in open interest was very modest. According to Zerohedge, David Kostin of Goldman Sachs takes the position that the S&P 500 is at fair value. 
“S&P 500 now trades near fair value based on a variety of approaches. Our macro valuation model, the ROE vs. price/book relationship, and our DDM all suggest year-end 2013 fair value of roughly 1625 (see Exhibit 1). The Fed model points to a large gap between bond and stock values that could close from either side. We believe bonds are more mispriced than stocks and recent P/E expansion may show investor preference for equities.”