Soybeans:
For the week, November soybeans lost. 29.00 cents and the March contract lost 21.00 cents. The COT report showed that managed money liquidated 3,346 contracts of their long positions and added 1,112 contracts to their short positions. Commercial interests liquidated 1,557 contracts of their long positions and also liquidated 1,966 contracts of their short positions. As of the latest report, managed money is long by a ratio of 12.96:1 which is down from the previous week’s ratio of 14.24:1, and down significantly from the ratio of two weeks ago of 17.66:1.
Based upon the new USDA projected exports for the rest of the season, soybean sales need to average approximately 220,000 tons per week in order to reach the USDA’s new projection. The planting season is beginning in Brazil and any disruption during the growing season could send US soybeans sharply higher. It appears that farmers in Brazil will plant a record number of acres, and Brazil may replace the United States in soybean production during 2013. Despite this, soybean stocks are going to be tight until the Brazilian harvest begins in February-March.
The only concern we have going forward is if current low prices produce cancellations of previous sales. We have and will continue to monitor this closely. Speculators should be cautious at current levels, despite the fundamental tightness. It appears that almost all markets want to go lower. This includes equities, petroleum products, grains and metals. In order to give some parameters to the current soybean price, consider the November contract’s 150 day moving average is $14.77, and on the soybean continuation chart, the 150 day moving average is $15.13.
It is important to remember there are huge numbers of speculative longs that have massive losses. When you compare the long to short ratio of soybeans to soybean meal (where there has been considerable liquidation), it is not difficult to see if the soybean long to short ratio falls to that of soybean meal, we could see an avalanche of selling. One important factor to keep in mind: major tops and bottoms are made on heavy volume/open interest extremes (more about this in corn and wheat). If we see a sharp down day on heavy volume, the chances are, this will be the bottom.
As soybeans have declined, so has volatility. To put this in perspective, we looked at the closing price of November soybeans on October 12 ($15.22 1/2) and compared it to the last time November soybeans closed at this level. This occurred on July 5 when November beans closed at 15.26 1/2. On July 5, the November soybean option had 81 days left to expiration. On October 12, the March contract had 90 days left to expiration.
For example, on July 5, when November soybeans closed at 15.26 1/2, and a 1520 strike had been purchased, the cost of the option on that date would have been $1.13 ($5,650) with 81 days left to expiry. We then calculated the same approximate number of days left on an option as of October 12. We found that on October 12, the March option came closest with an expiration date of February 22, 2013 or 90 days. The March 2013 option with 90 days left to expiration costs 67 cents using a 15.00 strike ( March futures closed at 14.92 October 12). Remember our goal is to compare the cost of a near the money option with approximately the same number of days left to expiration in two different time frames. The purpose of this is to provide a frame of reference for understanding how cheap soybean options are currently.
In short, with nearly the same number of days left to expiration, the March soybean option near the money costs 46 cents ($2,300) less than the November option on July 5. This is the impact of significantly reduced volatility in the March option on October 12 versus the November option on July 5.
Soybean meal:
For the week, December soybean meal lost $6.00 and the March contract lost 6.80. The COT report showed that managed money liquidated 504 contracts of their long positions and also liquidated 860 contracts of their short positions. Commercial interests liquidated 3,329 contracts of their long positions and also liquidated 4,518 contracts of their short positions. As of the latest report, managed money is long by a ratio of 7.10:1, which is up from the previous week of 6.36:1 and up significantly from the ratio of two weeks ago of 5.33:1.
Some key moving averages to watch for on soybean meal is the 150 day moving average of 454.70 and the 200 day moving average of 422.58, both on the continuation chart. The 150 day moving average on the continuation chart dovetails with the lows made in December meal of 454.30 on July 24 and 455.80 on October 3. If December meal closes below $454.00 ( which we don’t believe will occur), the next area support would be in the 433.00-436.00 area. One very positive aspect of the downside move is there will be little, if any short selling by commercial interests or speculators in the 450.00 area for meal, or the 15.00 range for soybeans. What this means going forward is that advances will be fueled by new buyers entering the market, not panicked short sellers covering their positions. This may in part explain reduced volatility in both soybeans and soybean meal. This dynamic also is applicable to corn.
In the table below, we are providing the performance stats for soybeans, soybean meal and soybean oil from the date they topped out on September 4 through October 12.
Soybean meal -12.79%
Soybean Oil -12.79%
Soybeans -13.90%
Corn:
For the week, December corn gained 4.75 cents. The COT report showed that managed money liquidated 2,272 contracts of their long positions and added 166 contracts to their short positions. Commercial interests liquidated 5,688 contracts of their long positions and also liquidated 5,517 contracts of their short positions. As of the latest COT report, managed money is long corn by a ratio of 11.04: 1 which is about the same as last week’s ratio of 11.19:1 and down from the ratio of two weeks ago of 12.77:1.
Wheat:
For the week, December wheat lost 0.75 cents. The COT report showed that managed money liquidated 8,001 contracts of their long positions and added 1,088 contracts to their short positions. Commercial interests added 1,461 contracts to their long positions and liquidated 2,066 contracts of their short positions. As of the latest report, managed money is long wheat by a ratio of 1.68:1, which is down from the previous week’s ratio of 1.83:1, and also lower from the ratio of two weeks ago of 1.91:1. Stand aside.
The action on Thursday for corn and wheat was revelatory in a number of ways. First, volume in corn of 398,255 contracts was the highest since August 10 when 457,645 contracts were traded. Additionally, open interest increased by an astounding 49,911 contracts. We see the action on Thursday as indicative of a short-term top, that we do not think will be breached anytime soon. While we have always thought corn would trade up to its 50 day moving average, it came close on October 11, when December corn made a high of $7.76 and the 50 day moving average on the continuation chart is $7.79 1/2. The 50 day moving average for the December contract is 7.80 1/2. In essence, we see the massive volume and open interest spike as kind of a last upside gasp for corn. We do think corn will take out the high made on October 11, but this may not happen until later in the year or early next. If corn continues to trade lower, feed consumption will likely increase, which at some point, which will set the stage for a new upside move. Some key moving averages to keep an eye on is the 150 day moving average of $6.96 on the continuation chart, and the 150 day moving average on the December chart of 6.54.
The move in wheat on Thursday was perhaps the most surprising. Volume on October 11 (115,489 contracts), did not take out the high volume made on September 28 of 164,789 contracts when open interest increased only 4,294 contracts. On October 11, there was approximately 40% less volume than on September 28, but open interest tripled even though wheat advanced only 16.25 cents versus 47.00 cents on September 28 when open interest increased by 4,294. This appears to be the final attempt to break out to the upside of the consolidation pattern that began in late July. The 150 day moving average on the continuation chart is $7.53 5/8 and the 150 day moving average on the December contract is 7.81 1/2.
Performance for October 8-October 12. Performance Year to Date
Corn +0.64% December +28.40%
Wheat -0.09% December +18.99%
Bean oil -1.02% December -3.98%
Meal -1.27%. December +47.73%
Beans -1.87% November +26.43%
Crude oil:
For the week, November, crude gained $1.98. The COT report showed that managed money liquidated 2,075 contracts of their long positions and added 4,252 contracts to their short positions. Commercial interests liquidated 13,731 contracts of their long positions and also liquidated 13,411 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of
3.11:1, which is down slightly from the ratio of the previous week of 3.36:1 and the ratio of two weeks ago of 3.98:1.
Based upon the declining long to short ratios during the past several weeks, it is apparent that the speculative community has lost its taste for oil. Much of this can be attributed to the global slowing of growth, and in particular the slowing Chinese economy as evidenced by the dismal performance of the Shanghai Composite Index. With all the talk of additional stimulus by the Chinese, the fact remains the index is only 5% above its 3 1/2 year lows. Many commentators talk about Chinese economic numbers as if they are gospel. The fact is, the numbers can’t be trusted, but the Shanghai Composite Index is by far, a more reliable indicator.
Three major trade organizations, OPEC, Energy Information Agency and the International Energy Agency, have cut oil consumption forecasts due to the slowing global economy. Additionally, last week, the International Monetary Fund presented a bearish picture of the global economy. Crude is on a short and intermediate sell signal. Long puts are advised.
Heating oil:
For the week, November heating oil gained 6.80 cents. The COT report showed that managed money added 1,048 contracts to their long positions and liquidated 243 contracts of their short positions. Commercial interests added 928 contracts to their long positions and also added 6,992 contracts to their short positions. According to the latest report, managed money is long heating oil by a ratio of 2.67:1 which is up slightly from the previous week of 2.57:1 and the ratio of two weeks ago of 2.29:1. Stand aside.
Gasoline:
For the week, November gasoline lost 5.97 cents. The COT report showed managed money liquidated 2,469 contracts of their long positions and also liquidated 63 contracts of their short positions. Commercial interests added 4,004 contracts to their long positions and also added 1,590 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 15.10:1, which is up from the previous week of 14.00:1 and up significantly from the ratio of two weeks ago of 11.26:1. Stand aside.
Natural gas:
For the week, November natural gas gained 21.5 cents. The COT report showed that managed money added 13,109 contracts to their long positions and also added 4,033 contracts to their short positions. Commercial interests added 8,366 contracts to their long positions and also added 8,623 contracts to their short positions. As of the latest report, managed money is long by a ratio of 1.22:1 which is up slightly from the previous week of 1.18:1 and up substantially from the ratio of two weeks ago when managed money was short by a ratio of 1.05:1.
Despite a move into new high ground, natural gas in storage is nearly 8% above the five-year average. The spread action is improving, but has to do much better before speculators should climb aboard. For example, the November 2012-November 2013 spread closed on October 12 at 52.7 cents premium to November 2013. This is close to the high of 53.2 cents made on October 2 and the same high made on July 24. On July 24, November 2012 natural gas closed at 3.299, which is 31.2 cents lower than the close on October 12. However, the spread is trading lower on October 12 than it did on July 24, but natural gas has advanced 31.2 cents above the close of July 24.
If the market is as bullish as many people think, the spread should be significantly above July 24 and October 2 high of 53.2 cents. Approximately 10 days ago, the 50 day moving average closed above the 200 day moving average for the first time in a couple of years. This is an extremely positive development, and indicates that the worst of the long bear market in natural gas is over. However, natural gas has a seasonal tendency to peak in mid to late October, therefore we continue to suggest that speculators stand aside. As we’ve indicated in previous reports, as the price of natural gas moves higher, trade selling will increase in order to lock in profits. Also, there is the prospect of additional supply coming online, if natural gas prices stay elevated for an extended period of time.
Copper:
For the week, December copper lost 7.50 cents. The COT report showed that managed money liquidated 2,500 contracts of their long positions and also liquidated 1,632 contracts of their short positions. Commercial interests liquidated 266 contracts of their long positions and added 2,207 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 2.08:1, which is up slightly from the previous week of 2.05:1 and the ratio of two weeks ago of 1.79:1. Stand aside.
Gold:
For the week, December gold lost $21.10. The COT report showed that managed money added 5,822 contracts to their long positions and also added 1,339 contracts to their short positions. Commercial interests liquidated 121 contracts of their long positions and added 277 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 17.47:1, which is down from the previous week’s ratio of 19.45:1 and the ratio of two weeks ago of 18.24:1. Wait for a further correction.
Silver:
For the week, December silver lost 90.3 cents. The COT report showed that managed money added 1,921 contracts to their long positions and added 511 contracts to their short positions. Commercial interests added 172 contracts to their long positions and liquidated 544 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 12.59:1, which is down from the previous week’s ratio of 14.31:1, but up substantially from the ratio of two weeks ago of 8.36:1. Wait for a further correction.
Euro:
For the week, the December euro lost 77 points. The COT report showed that leveraged funds liquidated 11,801 contracts of their long positions and added 7,179 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.80:1 which is up significantly from the previous week’s ratio of 2.43:1 and the ratio of two weeks ago of 2.90:1.On October 10 the euro generated a short term sell signal. Stand aside.
S&P 500 E mini:
For the week, the December S&P 500 E mini lost 34.00 points. The COT report showed that leveraged funds liquidated 20,653 contracts of their long positions and liquidated 2,279 contracts of their short positions. As of the latest report, leveraged funds were short by a ratio of 1.65:1, which is up slightly from the previous week’s ratio of 1.59:1 and the ratio of two weeks ago of 1.60:1. Long put protection should be in place.
The major indices are sitting on a precipice known as the 50 day moving average. The Russell 2000 and the NASDAQ 100 have already closed below these averages. The S&P 500 E mini closed below the 50 day moving average (1424.70) on the continuation chart for the first time on Friday. The December contract of the E mini closed at 1421.50 and its 50 day moving average is 1420.60.The Dow Jones Industrial Average closed on Friday at 13,328.85, which is a mere 10 points from its 50 day moving average. On Friday, the cash S&P 500 index closed at 1428.59 while its 50 day moving average is 1428.38. The Russell 3000, which combines the small cap Russell 2000 with the large and mid-cap, Russell 1000, closed two ticks below its 50 day moving average of 841.73.
The danger of all major indices closing below their 50 day moving averages is they have not closed below their 50 day moving averages since July. This makes them vulnerable to panicked profit-taking based upon this and underlying concerns about the fiscal cliff and slowing economic growth. Additionally there is fear about of negative earnings surprises along with and poor future revenue and earnings guidance.
The well-worn expression of “don’t fight the fed.” has not worked out very well for anyone who bought the E mini when the Federal Reserve announced its Quantitative Easing Program Act III on September 13. From the September 13 close to the close on October 12, the E mini has lost 2.00%. This compares with the same period in 2011 when the Emini gained +6.36% and 2010 when it gained +3.29%. In the first two weeks of October 2009, the E mini gained +1.49%. You have to go back to the first two weeks of October 2008 (-12.93%) before you get a negative print. Prior to 2008, the next negative reading occurred during 2005 when in the first two weeks of October, the E mini lost 4.57%. The average gain for all years: 2000 through 2011 is +0.48%.
The dismal sentiment from the American Association of Individual Investors continue to show a great deal of skepticism about market prospects, and has only gotten worse during the past two weeks.
Current 2 wks ago 3 wks ago
Bulls 30.6% 33.9% 36.1%
Bears 38.9% 33.2% 36.5%
Neutral 30.6% 32.9% 27.4%
