Soybeans:
For the week, November soybeans gained 11.75 cents, January +14.50, March +17.25. The COT report showed that managed money liquidated 649 contracts of their long positions and also liquidated 3,787 contracts of their short positions. Commercial interests liquidated 5,171 contracts of their long positions and also liquidated 14,280 contracts of their short positions. According to the latest report, managed money is long soybeans by a ratio of 17.30:1, which is up substantially from the previous week’s ratio of 12.96:1, and the ratio of 2 weeks ago of 14.24:1.
We think soybeans are poised to move significantly higher based upon a number of catalysts. First, the dollar is trading at its 200 day moving average of 79.62, and is near 2012 lows, We expect the dollar to continue moving lower. The effect of this is that our commodities have become less expensive on the world market. Second, approximately 70% of the crop has already been sold, and South America is out of soybeans. Third, farmers are not going to sell their soybeans in the $15.00 area. They are well aware of all the factors that are making soybeans stocks tight for the next 3 to 4 months. Fourth, soybeans are priced at the very low end of the range going back to July. As a result, buyers who have been sitting on the sidelines will begin to purchase soybeans due to the short global supply situation, and the need to keep food prices down.
As mentioned in last week’s report, we think that a major harvest low at $14.85 3/4 is in place. The market action of all the grains on Friday was terrific considering that equities, metals, and the petroleum complex were all sharply lower. Due to the potentially bearish slant of many commodities and equities, we could see more of a pullback in soybeans. However, we expect that soybeans will find stasis, but it is important to watch how soybeans and soybean meal trade if the outside markets move lower. If we continue to observe independent strength in the bean complex and the other grains, this will provide additional confirmation that the decline that began on September 5 is over. Also, we want to see strength in the November contract that exceeds that of the deferred months. If soybeans trade down to 15.04, then reverse, this will confirm the bottom
Soybean Meal:
For the week, December soybean meal lost $1.40, January -40 cents, March +2.70. The COT report showed that managed money added 1,942 contracts to their long positions and liquidated 217 contracts of their short positions. Commercial interests liquidated 4,006 contracts of their long positions and added 6,831 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 7.63:1, which is up from the previous week of 7.10:1 and the ratio of 2 weeks ago of 6.36:1.
Like soybeans, we think that soybean meal is at or near harvest lows. As we indicated in the corn commentary, we think the best way to trade the feed stock market is to trade soybean meal. It has strong fundamentals, and its use in aquaculture as a feed ingredient is an additional bonus. The Chinese are the largest producers of fish from aquaculture and soybean meal is the key ingredient used as feed stock. Like soybeans, watch the spreads. We want to see December meal show independent strength over the deferred months.
Corn:
For the week, December corn gained 8.75 cents while March gained 6.75. The COT report showed that managed money added 9,349 contracts to their long positions and also added 5,057 contracts to their short positions. Commercial interests added 26,885 contracts to their long positions and also added 30,358 contracts to their short positions. According to the latest report, managed money is long corn by a ratio of 9.62:1, which is down substantially from the previous week’s ratio of 11.04:1 and the ratio of 2 weeks ago of 11.19:1. The current long to short ratio ratio is is the lowest for corn going back several months. Stand aside.
On Friday, the long December 2012 short March 2013 spread widened to 2 cents premium to December. This was the highest the spread traded at since August 8. On August 10, December corn topped out at $8.49 and at the close, the bull spread collapsed and December sold at a 2.75 cent discount to March. If the spread is able to close above 3 cents, there is no resistance until it reaches 7.50 cents, which was the high made on July 30. The strengthening of the spread underscores the firm cash market for corn. Rather than trade corn on the long side, with its consumption and export issues, we would advise clients to trade soybean meal, which offers more upside with less risk.
Wheat:
For the week, December wheat gained 15.75 cents. The COT report showed that managed money liquidated 5,757 contracts of their long positions and also liquidated 3,261 contracts of their short positions. Commercial interests added 8,510 contracts to their long positions and liquidated 582 contracts of their short positions. According to the latest report, managed money is long by a ratio of 1.68:1, which is the same as the previous week of 1.68:1, and down slightly from the ratio of 2 weeks ago of 1.83:1.
Wheat has been trading in a consolidation zone for the past 2 1/2 months. We think it is likely that wheat will trade higher, and if Ukraine bans wheat exports as it has been rumored, wheat could have a strong rally. Global stocks of wheat have been declining and it is possible that damage to the Australian crop is much worse than reported by the USDA. Also, it is apparent that the use of feed wheat has increased as corn prices have advanced. For example, the Japanese are using more wheat and less corn than they have during the past 20 years. We think it is premature to enter the market at this juncture.
Performance Oct 15-Oct 19 Year to Date
Dec Wheat +1.84% +21.18%
Dec Corn +1.16% +29.89%
Nov Beans +0.77% +27.40%
Dec Meal -0.30% +47.28%
Crude oil:
For the week, November crude oil lost $1.81. The COT report showed that managed money added 5,531 contracts to their long positions and liquidated 281 contracts of their short positions. Commercial interests added 33,233 contracts to their long positions and also added 34,384 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 3.20:1 which is up slightly from the previous week’s ratio of 3.11:1 and the ratio of 2 weeks ago of 3.36:1. Maintain long puts.
Heating oil:
For the week, November heating oil lost 8.94 cents. The COT report showed that managed money added 4,829 contracts to their long positions and liquidated 5,509 contracts of their short positions. Commercial interests liquidated 2,741 contracts of their long positions and added 9,750 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 4.46:1, which is up substantially from the previous week’s ratio of 2.67:1 and the ratio of 2 weeks ago of 2.57:1.
It is apparent that managed money piled into heating oil at the top of the market. On October 11, November heating oil made a high of 3.2668, which slightly exceeded the high made on September 14 of 3.2633, and this left a double top on the chart. Stand aside.
Gasoline:
For the week, November gasoline lost 19.65 cents. The latest COT report showed that managed money added 337 contracts to their long positions and liquidated 70 contracts of their short positions. Commercial interests added 1,469 contracts to their long positions and added 4,204 contracts to their short positions. According to the latest COT report, managed money is long by a hefty 15.35:1 which is up slightly from the previous week of 15.01:1 and the ratio of 2 weeks ago of 14.00:1
In order to put the current lofty ratio of longs to shorts in perspective, consider that gasoline closed at $2.8021 on Tuesday, October 16, which was the tabulation date of the latest COT report. On Tuesday August 28, November gasoline closed at 2.8381, or approximately 3 1/2 cents higher than on October 16. However, the long to short ratio on August 28, which was reported in the September 2 Weekend Wrap was 8.91:1, or approximately 40% less than the ratio tabulated on October 16. Keep in mind, the late August period is the beginning of the end of the summer driving season and we are entering a period of reduced consumption.
On October 17 and 18 open interest in gasoline increased by a net 255 contracts. The final numbers for October 19 will be released Monday morning and will be included in that report. The net long position of managed money on August 28 was 71,915 contracts and the net long position on October 16 was 81,962 contracts. Gasoline closed approximately 11 cents lower on October 19 than on October 16, yet we have not seen massive liquidation. In short, managed money has much more selling to do. Stand aside.
Natural gas:
For the week, November natural gas gained .006 cent (unchanged) while the December contract gained 7 cents and the January contract gained 7.4 cents. The recent COT report showed that managed money added 13,698 contracts to their long positions and also added 21,457 contracts to their short positions. Commercial interests added 10,633 contracts to their long positions and also added 7,649 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.17:1 which is down slightly from the previous week of 1.22:1 and the ratio of 2 weeks ago of 1.18:1.
If natural gas were truly in a bull market, the November contract would have gained nearly as much as the December and January contracts, especially when it is trading at the top of its range. The fact that November was unchanged while the forward months gained is additional corroboration the market is in a trading range.Stand aside.
Copper:
For the week, December copper lost 6.55 cents. The COT report showed that managed money equity liquidated 1,370 contracts of their long positions and also liquidated 1,698 contracts of their short positions. Commercial interests liquidated 155 contracts of their long positions and also liquidated 908 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 2.20:1 which is up from the previous week’s ratio of 2.08:1 and the ratio of 2 weeks ago of 2.05:1. The current ratio is the highest of the last couple of months. Stand aside.
Gold:
For the week, December gold lost $35.70. The COT report showed that managed money liquidated 7,815 contracts of their long positions and added 1,074 contracts to their short positions. Commercial interests liquidated 2,465 contracts of their long positions and also liquidated 19,697 contracts of their short positions. According to the latest report, managed money is long gold by a ratio of 15.10:1, which is down significantly from the previous week of 17.47:1 and the ratio of 2 weeks ago of 19.45:1. Ratios have been coming down during the past 2 weeks as price has declined. This confirms the gold bull market is very much intact.
Silver:
For the week, December silver lost $1.572. The COT report showed that managed money liquidated 1,606 contracts of their long positions and also liquidated 51 contracts of their short positions. Commercial interests liquidated 492 contracts of their long positions and also liquidated 955 contracts of their short positions. The latest COT report shows that managed money is long silver by a ratio of 12.28:1, which is down slightly from the previous week of 12.59:1 and down significantly from the ratio of 2 weeks ago of 14.31:1.
In order to put the current long to short ratio of silver in perspective consider that the net long position as of October 16 is 34,819 contracts and silver closed at $32.959. On September 11, December silver closed at 33.566 and the net long position of managed money was 26,755 contracts and the long to short ratio was 7.73:1. In other words, silver closed higher on September 11 than on October 16, yet the net long position is significantly higher on the 16th. After taking into account the open interest decline of 732 contracts for October 17 and 18, it is clear there is much more liquidation to take place, especially since silver closed at $32.097 on Friday. This is the lowest close since September 5 when December silver closed at 32.329. In other words, anyone who purchased silver after September 5 and has not sold, is showing losses as of October 19, and in many cases, major losses. After the close of September 5, silver never moved below that closing price until October 19. Yet, the net long position of managed money on October 16 is 8,064 contracts greater than on September 11. This sum represents the minimum amount of spec liquidation ahead.
Euro:
For the week, the December euro gained 65 points. The COT report showed that leveraged funds added 322 contracts to their long positions and liquidated 15,901 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 3.16:1 which is down from the previous week’s ratio of 3.80:1, but higher than the ratio of 2 weeks ago of 2.43:1. Stand aside.
S&P 500 E mini:
For the week, the December S&P 500 E mini gained 2.50 points. The NASDAQ 100 lost 46.00 points. The COT report showed that leveraged funds added 14,154 contracts to their long positions and liquidated 26,460 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.55:1 which is down slightly from the previous week’s ratio of 1.65:1 and the ratio of 2 weeks ago of 1.59:1.
Performance October 15-October 19
New York Composite +1.18%
Dow Transports +0.74%
S&P 500 Cash +0.32%
Dow Industrials +0.11%
Russell 2000 Cash -0.26%
NDX 100 -1.54%
American Association of Individual Investors (survey)
Most Recent 2 wks ago 3 weeks ago
Bulls 28.7% 30.6% 33.9%
Bears 44.6% 38.9% 33.2%
Neutral 26.8% 30.6% 32.9%
According to the American Association of Individual Investors: “Bullish sentiment declined 1.9% to 28.7%. This is the lowest level of optimism since July 26, 2012. It also is the 28th out the last 29 weeks that bullish sentiment is below its historical average of 39%.”
“Bearish sentiment…jumped up 5.7 percentage points to 44.5%. This is the highest pessimism since June 7, 2012. It is also the eighth consecutive week and the 24th out of the last 28 weeks that bearish sentiment has been above its historical average of 30%.”
It is important to make a distinction between the high bearish reading on June 7, 2012 and this week’s bearish reading. As is the case in all areas of investing, it pays to drill down to get the details of what actually occurred. The high bearish reading on June 7 was the result of a slide of 140 points (approximately 10%) in the S&P 500 cash index that began on April 2 and hit bottom on June 4. The high bearish reading was a terrific contrary in indicator. Unlike June, high bearish readings of the past several weeks were occurring at the top of the market, and were consistently bearish as the market rallied. Another point to keep in mind is that the recent survey was taken long before Friday’s hammering. In other words, there was high bearish sentiment before the most recent selling, and this is in contrast to the high bearish sentiment at the bottom of the market in June. Collectively, many money managers and members of the financial press found it inconceivable that markets could fall. They believed that high bearish sentiment and quantitative easing would continue to prop up the market.
An interesting piece written on Bloomberg news discusses that financial advisors are telling their wealthy clients to sell equities in 2012 rather than risk increase an increase of capital gains in 2013.
“Taxes are set to rise in January in the U.S. pushing the top rate on dividends 24.4% from 15% and the top rate on capital gains to 23.8% from 15%.”
“Even if Congress averts the so-called fiscal cliff of tax increases on investments, income and estates, pressure to reduce budget deficits will mean higher taxes eventually, said Ron Florance of Wells Fargo and Company. The answer is to take advantage of historically low rates and move taxable income and investment gains in this year,” said Florance, managing director of investment strategy at the company’s private bank.
“It’s opposite of what people normally do,” said Florence whose clients usually have at least $1 million in investable assets. “You’re paying taxes today in anticipation of higher tax rates in the future.”
The article goes on to say: “Advisors at companies including Wells Fargo, Bank of America Corp., Bank of New York Mellon Corp., J.P. Morgan Chase and Company, Northern Trust Corp. and U.S. Bancorp are discussing with their wealthy clients such strategies as selling appreciated securities, relocating assets to tax-deferred retirement accounts, converting IRAs, exercising stock options and making large gifts to heirs this year.”
“The opportunity for individuals to transfer up to $5.12 million-or $10.24 million for couples-free of estate taxes and gift taxes is also set to expire at the end of the year and drop to $1 million.”
“The last time there was a significant increase in the capital gains tax rate-in 1986-positive realizations spiked 91% to $328 billion from $172 billion a year earlier, according to the Tax Policy Center. Most investors waited until December to sell, according to a 1994 report in the National Tax Journal.”
“People should look at how much the underlying security would need to appreciate to cut to the head wind of a potentially higher tax rate, when deciding whether to exercise options this year,” said Mitchell Drossman, national director of wealth planning strategies at US trust, a unit of Charlotte North Carolina-based Bank of America.
In other words, the equities market is facing a potential perfect storm of masses of investors selling assets to benefit from 2012’s capital gains tax rates. Additionally, investors likely will remain skittish due to the unknown ramifications of the fiscal cliff, and the possibility the U.S. is in recession. Poor earnings of major players such as General Electric, Federal Express, Google, IBM, McDonald’s, Intel, Microsoft are the canaries in the coal mine.
The S&P 500 E mini and the S&P 500 cash index have not yet generated a short-term sell signal, but are likely to do so on Monday. The NASDAQ 100 and the Russell 2000 have already generated short-term sell signals, and it is likely the NASDAQ 100 will generate in intermediate term sell signal, possibly this coming week. This market is catching the professional investor class with a fairly substantial long position. On the other hand, the public is out of the market, and will not be returning anytime soon.
On October 11, Apple Computer generated a short-term sell signal and on October 19 closed at $609.84 which is the lowest closing price since August 2 when Apple closed at 607.79. Conceivably, between Monday October 22nd and the 25th when Apple releases its earnings report, the stock could generate an intermediate term sell signal. Earnings will be released after the close on Thursday.
Maintain long puts.
