On Friday, November 2, the grain, precious metals, petroleum markets began to move sharply lower after 8:30 AM eastern time. While we are reluctant to match up a narrative with market action, it seems that the catalyst for this were the employment numbers, which were better than expected, and released at 8:30 AM. We thought the moves in gold and silver were considerably overdone over done, especially since there had been a fairly healthy amount of liquidation in gold, and in silver to a lesser degree. The explanation that is being circulated is that the Federal Reserve might be less inclined to continue with its quantitative easing program with better employment numbers. Regardless, each market has to be evaluated on its own merit and in the end, selling for no apparent reason has the same impact as selling for a specific reason. Conceivably, markets may stay correlated for the rest of the year due to nervousness over the fiscal cliff and profit taking in 2012 due to the likelihood of tax increases in 2013. We wrote about this in greater detail in the October 21 Weekend Wrap.
Soybeans:
For the week, November soybeans lost 34.25 cents, January -37.00, March -33.25. The COT report showed that managed money liquidated 14,278 contracts of their long positions and also liquidated 3111 contracts of their short positions. Commercial interests liquidated 15,014 contracts of their long positions and also liquidated 20,353 contracts of their short positions. Another category of traders known as “Other Reportables” liquidated 21,191 contracts of their long positions and also liquidated 10,403 contracts of their short positions. According to the latest COT report, managed money is long soybeans by a ratio of 16.68:1, which is up from the previous week of 13.98:1, but down from the ratio of 2 weeks ago of 17.30:1. The increase in the ratio can be accounted for by the decline in the short interest, which represented a larger percentage of the total number of shorts than did the decline in long positions. The massive liquidation in all categories of the COT report can be accounted for by the liquidation of 122,610 contracts in the November contract from October 24 (Wednesday) through October 30 (Tuesday), which is the period for tabulating the COT report. The report is issued Friday afternoon at 3:30 p.m. EST.
On October 15, January soybeans made its low of $14.84. The central question remains, will this low hold? We researched the time frame of October 1 to December 1, 2000-2011 in order to determine when the harvest low was made. During the past 12 years there have been only been 3 years in which the low was made in November.
Soybean Harvest lows October 1-December 1, 2000-2011
Date Price
2000 October 30 4.64 1/2
2001 October 22 4.26 1/2
2002 October 9 5.28
2003 October 6 6.71
2004 November 8 5.03
2005 November 28 5.45 1/2
2006 October 3 5.54 3/4
2007 October 8 9.40
2008 November 21 8.35 1/4
2009 October 5 8.85 1/2
2010 October 4 10.52 1/2
2011 October 4 11.02 3/4
2012 October 15 14.84 (thru November 2 (January contract)
In the 3 years when the final low was made in November, we examined the interim lows made in October. What we found in the 3 years that the low in October came very close to the November low. Based upon data for 2000 and through 2011, it is more than likely the October 15 low of $14.84 will be the final low or close to it.
Despite this data, performance for soybeans has been disappointing at best. The sharp move lower on Friday was troubling, especially in light of corn and wheat’s performance. For example, the 2 strongest commodities from a supply and demand point of view are soybeans and soybean meal. However, they underperformed the 2 other commodities: wheat and corn whose supply and demand fundamentals are negative. As pointed out in the commentary on the S&P 500 E mini, when a market goes down on positive news, this this usually augurs for a continued move lower. The positive news in the case of soybeans was a robust export sales report, although the soybean meal export numbers were below expectations, but significantly ahead of the five-year average.
Informa and FC Stone released their projections for the 2012-2013 soybean crop and their yield ranged from 38.6 to 39.1 bushels per acre, and the total crop from 2.925 billion to 2.959 billion bushels. This compares with the USDA projection of 37.8 bushels per acre and a total crop of 2.86 billion bushels.
The central question is how much of the increased soybean production has been factored into the market. Setting aside the upcoming USDA supply demand report on November 9, the key factor that clients must hone in on, is the risk proposition that lies ahead. Clearly, the market is not acting in a fashion that suggests a higher move just yet. This does not mean that soybeans are not going to move higher in the future higher, just not at this particular time. As such, risk and money management is extremely important because the name of the game is to preserve capital until a favorable outcome is more likely. The market action in soybeans on November 2 and the other markets indicates that a retest of the October 15 low of 14.84 is certainly possible. Whether or not this holds, is another question.
However, we must plan for an adverse move, despite the outstanding fundamentals of the soybean market. There will be plenty of time to get back in soybeans, if clients take a defensive stance by liquidating all or part of their positions. Here are some things to look for in order to determine whether soybeans have finally turned the corner: (1) the January contract will begin to gain significantly over March and the other deferred contracts. (2) the January contract will reach 15.80 and close near the high. In general, we want to see soybeans close at the high end of their daily range on a regular basis. (3) Soybeans may show weakness during part of the session, but will recover to close near the high end of the range. This is especially important if other markets are sharply lower.
Performance on November 2
December wheat -0.46%
December corn -1.53%
Dec soybean meal -1.73%
January beans -2.13%
Final and interim lows for 2004, 2005 and 2008
Year Final Low Date: Final Low Price: Interim Low Date for October: Low Price for October:
2004 November 8 $5.03 October 18 $5.13 1/2
2005 November 28 $5.45 1/2 October 10 $5.66
2008 November 21 $8.351/4 October 16 $8.38 1/2
Soybean meal:
For the week, December soybean meal lost $7.50, January -7.80:, March -6.30. The COT report showed that managed money added 8,875 contracts to their long positions and also added 1,200 contracts to their short positions. Commercial interests liquidated 827 contracts of their long positions and added 7,922 contracts to their short positions. As of the latest report, managed money is long by a ratio of 5.46:1, which is up slightly from the previous week of 5.22:1 and down significantly from the ratio of 2 weeks ago of 7.63:1.
We performed the same research for soybean meal as we did for soybeans and found the pattern of making harvest lows in October to be the rule.
Harvest lows October 1 through December 1, 2000-2011
Date Price
2000 October 16 161.80
2001 November 29 155.40
2002 November 12 161.30
2003 October 6 196.70
2004 November 8 146.60
2005 October 5 165.20
2006 October 3 161.90
2007 October 8 260.00
2008 October 16 236.90
2009 October 5 266.10
2010 October 4 286.60
2011 November 25 280.60
2012 October 17 450.20 December contract through November 2
Like soybeans, we found that the final low in November was close to the interim low in October. The biggest exception was in 2011 when the final low on November 25 (280.60) was approximately 7% lower than the interim low of 300.90 made on on October 7. A 7% move below the October 17, 2012 low of 450.20 would be 418.50. What we said in the above commentary on soybeans is applicable to soybean meal. If the market is in a liquidation phase, regardless of the reason, it is important to take a defensive stance in order to preserve capital. If this requires lightening up or liquidating the entire position, so be it. There will be plenty of time to get long again when the market is on more solid footing. Keep in mind, that soybean planting in South America will be completed near the end of November or early December. As is the case in the U.S., there undoubtedly will be weather related scares, and it probably won’t take much for soybean meal (and soybeans) to move higher if there is a threat to the Brazilian and Argentine crops.
Final and interim lows for 2001, 2002, 2004, 2011
Year Final Low Date: Final Low Price: Interim Low Date For October Low Price For October
2001 November 29 155.40 October 22 155.60
2002 November 12 161.30 October 9 164.50
2004 November 8 146.60 October 18 152.00
2011 November 25 280.60 October 7 300.90
Corn:
For the week, December corn gained 1.75 cents, March +2.75. The December 2012-March 2013 spread is now trading at 3 cent premium to March, which is a bearish indicator. The COT report showed that managed money liquidated 24,964 contracts of their long positions and added 10,728 contracts to their short positions. Commercial interests added 9,163 contracts to their long positions, but liquidated 17,213 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 7.23:1, which is down substantially from the previous week’s ratio of 10.53:1 and the ratio of 2 weeks ago of 9.62:1. This is the lowest long to short ratio in many months.
As we have written about on numerous occasions, export sales for corn have been abysmal. To put this in perspective, Dow Jones estimates that exports for the first 8 weeks of the season beginning on September 1 are down 48% from the same period last year. Two companies that give crop forecasts (Informa and FC Stone) are projecting that the USDA report on November 9 will project a yield of 122.4-124 bushels per acre, and the total crop will range from 10.706 billion to 10.881 billion. In the October report, the USDA projected yield at 122 bushels per acre and total crop of 10.706 billion. The market has struggled to move higher, and yet every attempt is met with additional selling. We think it is inevitable that corn will retest the September 28 low of 7.05. The first indication that corn is about to retest the September 28 low will be if the December corn breaks below 7.32. 732.1/4- 7.321/2 have provided support during October.
Wheat:
For the week, December wheat gained 0.75 cents. The COT report showed that managed money liquidated 2,889 contracts of their long positions, but added 3,317 contracts to their short positions. Commercial interests liquidated 2,055 contracts of their long positions and also liquidated 6,604 contracts of their short positions. As of the latest COT report, managed money is long wheat by a ratio of 1.68:1, which is down slightly from the previous week of 1.81:1 and the same as the ratio of 2 weeks ago of 1.68:1.
Performance October 29-November 2 Year to Date
December corn +0.24% +26.14%
December wheat +.09% +20.07%
December meal -1.55% +51.13%
January beans -2.37% +25.87%
December bean oil -3.34% -6.65%
Crude oil:
For the week, December crude oil lost $1.42. The COT report showed that managed money liquidated 6,757 contracts of their long positions and added 8,219 contracts to their short positions. Commercial interests added 5,592 contracts to their long positions and also added 4,398 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 2.06:1 which is down from the previous week’s ratio of 2.34:1 and the ratio of 2 weeks ago of 3.20:1.
With refinery difficulties ahead, it looks like crude oil is destined to head lower. However, our concern is that speculators have piled in on the short side and the COT report reflects this. This dynamic was our reasoning, when we recommended that long put positions be liquidated. If the market can generate a burst of short covering, this would be healthy, and more advantageous for the implementation of new long put positions. Keep in mind, the 200 week (4 years) moving average is $82.77, and it is foolish to become overly bearish at a historically low level.
Heating oil:
For the week, December heating oil lost 12.90 cents. The COT report showed that managed money liquidated 3,444 contracts of their long positions and also liquidated 391 contracts of their short positions. Commercial interests liquidated 5,485 contracts of their long positions and also liquidated 8,752 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 3.44:1 which is down slightly from the previous week of 3.61:1 and the ratio of 2 weeks ago of 4.46:1.
On November 2, heating oil broke through major support including the 200 day moving average, which it had been trading above since early August of this year. December heating oil closed at $2.9438, which is the lowest close since August 3 when it closed at $2.944. Apparently, the root of the problem is that 2 major east coast refineries have shut down. The Phillips 66 plant was producing 238,000 barrels per day and the Hess refinery operation was producing 70,000 barrels per day. At this time, it is unknown when the refineries will begin operating again. In the interim, there is a severe heating oil shortage, which is going to cause major problems for residents of areas that were hard hit by the storm. If refineries remain shut, heating oil will likely trade lower. According to Reuters, distillate stocks, which include heating oil and diesel fuel are 45% below their five-year average. Current supply is at the lowest level since mid-2008. There may be a terrific buying opportunity in heating oil when it finds support at lower levels and heating oil demand picks up. The 150 week (3 year) moving average of $2.69 should provide support.
Gasoline:
For the week, December gasoline lost 6.81 cents. The COT report showed managed liquidated 2,204 contracts of their long positions, but added 1,390 contracts to their short positions. Commercial interests added 5,833 contracts to their long positions and also added 1,330 contracts to their short positions. As of the latest report, managed money is gasoline by a ratio of 9.77:1, which is down significantly from the previous week of 12.09:1 and the ratio of 2 weeks ago of 15.35:1.
Natural gas:
For the week, December natural gas lost 17 cents. The COT report showed that managed money liquidated 4,818 contracts of their long positions and also liquidated 2,894 contracts of their short positions. Commercial interests liquidated 7,587 contracts of their long positions and also liquidated 3,679 contracts of their short positions. Remarkably, for the past 3 COT reports, the long to short ratio is unchanged at 1.17:1.
Copper:
For the week, December copper lost 6.85 cents. The COT report showed that managed money liquidated 4,182 contracts of their long positions, but added 6,921 contracts to their short positions. Commercial interests added 1,801 contracts to their long positions, but liquidated 1,970 contracts of their short positions. As of the latest report, managed money is long by a ratio of 1.24:1, which is down significantly from the previous week of 1.83:1, and the ratio of 2 weeks ago of 2.20:1.
Gold:
For the week, December gold lost $36.70. The COT report showed that managed money liquidated 10,023 contracts of their long positions, but added 1,185 contracts to their short positions. Commercial interests added 804 contracts to their long positions, but liquidated 5,294 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 10.70:1, which is down from the previous week of 12.48:1, and down substantially from the ratio of 2 weeks ago of 15.10:1.
Silver:
For the week, December silver lost $1.179. The COT report showed that managed money liquidated 914 contracts of their long positions, but added 1,592 contracts to their short positions. Commercial interests liquidated 62 contracts of their long positions and also liquidated 1,225 contracts of their short positions. As of the latest report, managed money is long by a ratio of 6.58:1, which is down significantly from the ratio of the previous week of 9.72:1 and the ratio of 2 weeks ago of 12.28:1.
Euro:
For the week, the December euro lost 1.08 cents. The COT report showed that leveraged funds added 110 contracts to their long positions and also added 1,110 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.70:1, which is slightly above the previous week of 3.67:1, but higher than the ratio of 2 weeks ago of 3.16:1.
On Friday, the December euro closed below its 50 and 200 day moving averages for the first time since early August. While it is too early to tell whether the euro rally is finally over, it appears more likely than it has ever been. As of November 2 a short or intermediate term sell signal has not been generated. Conceivably, a short-term sell signal could be generated this coming week.
The 500 E mini:
For the week, the December S&P 500 E mini lost 2.10. The COT report showed that leveraged funds liquidated 4,022 contracts of their long positions, but added 2,057 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.61:1, which is slightly above the previous week of 1.59:1 and the ratio of 2 weeks ago of 1.55:1.
The action in the S&P 500 E mini on November 2 was abysmal. After rallying to 1431.50 in the first half hour after the employment report was released at 8:30 AM Eastern time, the market then proceeded to collapse and close at the lows of the day. After the 4 o’clock close (eastern) of the cash markets, the E mini continue to trade lower until the close at 4:15 PM. On November 2, the E mini was unable to take out the high of 1433.25 made on October 23 when the E mini fell 23.25 points. The employment report was better than expected and when a market goes down on good news, it is a sign of a likely move lower. The Dow Jones Industrial Average is within 108 points of breaking below its 200 day moving average. The reason this is so important is that during all of 2012 there were only 2 days in when the Industrial Average penetrated and closed below the 200 day moving average. This occurred on Friday, June 1 and Monday, June 4. On Friday the NASDAQ 100 cash index closed below its 200 day moving average the 2nd time during the week. The Russell 2000 has yet to close below the 200 day moving average, but this appears imminent.
The table below shows the performance of some key indices from the time they topped out on September 14 through November 2.
NY Composite -2.05%
S&P 500 cash -3.14%
DJIA -3.30%
Russell 2000 -4.88%
NASDAQ 100 -6.18%
The American Association of Individual Investors showed that the number of bulls increased to the highest number in a couple of weeks. The big surprise was in the neutral category, which appears the lowest number in several months.
Last wk 2 wks ago 3 wks ago
Bulls 35.7% 29.3% 28.7%
Bears 41.0% 43.1% 44.6%
Neutral 23.3% 27.7% 26.8%
We could not finish the Weekend Wrap without commenting on the absolute abysmal performance of Apple Computer. On October 11, Apple generated a short-term sell signal and closed at $628.10 on that day. On October 26, Apple generated an intermediate term sell signal and closed at 604.00 on heavy volume of 36,372,200 shares. This is the highest volume since April 20 when Apple traded 36,820,500 shares. Volume on October 26 ranks in the top 10 volume days for 2012.
On the day the intermediate term sell signal was generated, we said it was highly likely that Apple would have a countertrend rally up to the 625-630 area before turning around and heading lower again. To our surprise, Apple broke the October 26 low of 591.00 and proceeded to move lower for the rest of the week to close at 576.80, which is the lowest since July 26 when Apple closed at 574.88. The troubling performance of Apple is important because it is the most widely held stock on the planet and is held in large numbers by every major institution in the world.
With the prospect of higher taxes in 2013, we may be seeing the manifestation of selling in 2012 to avoid higher taxes next year. Because Apple represents a large percentage of the movement of the NASDAQ 100, this index will likely underperform the other indices listed in the above table. The decline in Apple is serious, and could head much lower than anyone thinks.
