Soybeans:
For the week, November soybeans gained 27 cents, January +27.25, March +27.75. The latest COT report showed that managed money added 1,866 contracts to their long positions and also added 2,778 contracts to their short positions. Commercial interests liquidated 11,329 contracts of their long positions and also liquidated 5,499 contracts of their short positions. As of the latest COT report, managed money is long by 13.98:1 which is down substantially from the previous week’s ratio of 17.30:1, but higher than the ratio of 2 weeks ago of 12.96:1.
Soybean meal:
For the week, December soybean meal gained $19.60, January +19.00, March +18.40. The COT report showed that managed money added 609 contracts to their long positions and also added 3,174 contracts to their short positions. Commercial interests added 2,962 contracts to their long positions and also added 2,012 contracts to their short positions. As of the latest report, managed money is long by a ratio of 5.22:1, which is down substantially from the previous week’s ratio of 7.63:1 and the ratio of 2 weeks ago of 7.10:1.
The performance for soybean meal has exceeded soybeans in a number of different time frames. In the tables below, we show the performance of soybeans versus soybean meal from the top of the market on September 4 through October 26. We also calculated the performance of these 2 commodities from the time they bottomed on October 17 through October 26. Also listed is the year to date performance. As the tables reveal, soybean meal outperforms soybeans in the major time frames.
What truly amazes us is the long to short ratio of soybeans is 160% greater than soybean meal despite soybean meal’s outstanding performance. With a few exceptions during the decline, which began on September 4, soybean meal has been the leader and soybeans the follower.
According to the mid-October USDA Supply Demand Report, soybean global stocks to usage ratio is pegged at 22%. However, that takes into account the South American crops, which have not been planted for the most part, and will not be harvested until late in the 1st quarter 2013. Until that crop is harvested, global stocks to usage is pegged at 12-13% according to Matthew Roberts, an agricultural economist at Ohio State University. This means that stocks will be tight until the Brazilian and Argentinian harvest is in. This does not take into account any weather problems, whic may come into play during the growing season. Although we are bullish on soybeans as well as soybean meal, soybean meal looks like it will continue to lead the trend higher. Additionally, the risk in soybean meal appears to be less than soybeans.
Performance September 4-October 26 Year to Date
December soybean meal – $50.00 (-9,37%) + $168.50 (+53.51%)
January soybeans – $2.02 1/2 (-10.69%) + $3.50 3/4 (28.92%)
Performance October 17-October 26
December soybean meal + $30.60 (6.76%)
January soybeans +71 cents (4.76%)
Corn:
For the week, December corn lost 23.75 cents while March lost 19.75. The COT report showed that managed money added 11,806 contracts to their long positions and liquidated 1,725 contracts of their short positions. Commercial interests liquidated 3,504 contracts of their long positions and added 4,285 contracts to their short positions. As of the latest report, managed money is long corn by a ratio of 10.53:1, which is up from the previous week of 9.62:1, but below the ratio of 2 weeks ago of 11.04:1.
Wheat:
For the week, December wheat lost 8.75. The COT report showed that managed money added 7,872 contracts to their long positions and liquidated 137 contracts of their short positions. Commercial interests liquidated 2,080 contracts of their long positions and added 7,781 contracts to their short positions.. As of the latest report, managed money is long wheat by a ratio of 1.81:1, which is up slightly from the previous week’s ratio of 1.68:1 and the ratio of 2 weeks ago of 1.68:1.
We think that both corn and wheat will begin to see some strength toward the end of 2012 and into early 2013. The problem with wheat and corn is that export sales have been disappointing for the current crop year. Both are trading in consolidation patterns and this has made it difficult for bulls and bears to make money. Matthew Roberts, the agricultural economist at Ohio State University says that global stocks to usage ratio of 13.7% is the lowest since at least 1985. At at some point, in the not-too-distant future, the shortfall of supply will reassert itself in the market. The table below shows how corn and wheat have performed from the time that corn topped out on August 10 and the year to date performance.
Performance August 10-October 26 Year to Date
December corn -86 cents (-10.44%) +1.51 1/2 (+25.84%)
December wheat -63.25 (-6.82%) + 1.43 3/4 (+19.97%)
Crude oil:
For the week, December crude oil lost $4.16. The COT report showed managed money liquidated 7,616 contracts of their long positions, but added 20,257 contracts to their short positions. Commercial interests added 11,104 contracts to their long positions and also added 10,007 contracts to their short positions. According to the latest report, managed money is long crude oil by a ratio of 2.34:1 which is down significantly from the previous week’s ratio of 3.20:1 and the ratio of 2 weeks ago of 3.11:1. Stand aside.
Our recommendation to liquidate put positions in crude oil was based upon the factors listed our report issued on October 26. When we wrote the report, the Commitment of Traders Report had not been released (released at 3:30 p.m. EDT). As referenced above, the report showed that managed money speculators got very bearish on crude oil, which is evidenced by a dramatic increase in short positions in the latest report.
To put the current long to short ratio in perspective, the last time the ratio got this low was on July 3 and July 10 when the long to short ratio was 2.66:1 and 2.48:1 respectively, before moving higher. In other words, the current ratio is at a level where prices tend to rise rather than fall. One final comment about crude oil…During the three-day carnage (October 22-October 24) in which crude oil lost $4.71,volume declined relative to its year to date average daily volume. For example, during those 3 days, the average daily volume was 527,316 contracts, but year to date average daily volume is 578,265 contracts. In other words, during the time that crude oil was making new lows for the move, its 3 day volume averaged 9% less than the average daily volume year to date. We are not implying that crude cannot go lower. It can if equities take a dive. However, based upon all the factors we cited in the October 26 report and the information in this report, we think crude is more likely to rally in the short term. Once this occurs, we can again look at the short side if appropriate.
Heating oil:
For the week, December heating oil lost 4.12 cents. The COT report showed managed money liquidated 3,424 contracts of their long positions, but added 1,622 contracts to their short positions. Commercial interests liquidated 10,077 contracts of their long positions and also liquidated 23,722 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 3.61:1 which is down significantly from the previous week’s ratio of 4.46:1, but up from the ratio of 2 weeks ago of 2.67:1. Stand aside.
Gasoline:
For the week, December gasoline lost 3.04. The COT report showed that managed money liquidated 5,416 contracts of their long positions, but added 1,092 contracts to their short positions. Commercial interests added 8,422 contracts to their long positions and also added 1,854 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 12.09:1, which is down significantly from the previous week’s ratio of 15.35:1, and the ratio of 2 weeks ago of 15.01:1. Stand aside, there is more liquidation ahead.
Natural gas:
For the week, December natural gas lost 22.3 cents. The COT report showed that managed money added 10,987 contracts to their long positions and also added 8,068 contracts to their short positions. Commercial interests added 1,212 contracts to their long positions and liquidated 352 contracts of their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.17:1, which is the same as the previous week of 1.17:1, and slightly below the ratio of 2 weeks ago of 1.22:1. Stand aside.
Copper:
For the week, December copper lost 8.75 cents. The COT report showed that managed money liquidated 3,938 contracts of their long positions, and added 1,771 contracts to their short positions. Commercial interests added 4,361 contracts to their long positions and added 3,015 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 1.83:1 which is down from the previous week’s ratio of 2.20:1 and the ratio of 2 weeks ago of 2.08:1. Stand aside.
Gold:
For the week, December gold lost $12.10. The COT report showed managed money liquidated 10,417 contracts of their long positions and added 1,531 contracts to their short positions. Commercial interests added 1,485 contracts to their long positions and liquidated 6,843 of their short positions. As of the latest report, managed money is long gold by a ratio of 12.48:1, which is down significantly from the previous week of 15.10:1, and the ratio of 2 weeks ago of 17.47:1, as well as the ratio of 3 weeks ago of 19.45:1.
Silver:
For the week, December silver lost 6.1 cents. The COT report showed managed money liquidated 2,664 contracts of their long positions and added 539 contracts to their short positions. Commercial interests added 376 contracts to their long positions and liquidated 544 contracts of their short positions. According to the latest report, managed money is long silver by a ratio of 9.72:1, which is down significantly from the previous week of 12.28:1, the ratio of 2 weeks ago of 12.59:1 as well as the ratio of 3 weeks ago of 14.31:1.
Both gold and silver are probing for a bottom, and we believe there is another rally coming in the precious metals. The table below shows that after gold and silver topped out on October 5, silver received biggest drubbing. For the past 3 days, gold has tested the $1700 area 3 times. While it is too early to tell whether this is the bottom, we know there has been a healthy amount of liquidation, which will reduce selling pressure. Additionally, new spec short selling will likely be at a minimum, which is another positive factor. On the continuation chart, silver’s 50 day moving average is $32.81, and gold’s is $1730.
The precious metals are beginning to enter a seasonally strong period. However, both gold and silver are on short term sell signals, but on intermediate term buy signals. On October 25 and 26, both gold and silver did not break their October 24 lows of $1698.70, and $31.535. During the October 26 decline to new lows in the S&P 500 E mini, NASDAQ 100 E mini, and the Russell 2000 E mini, the precious metals stayed above their October 24 lows. This may be the 1st sign that gold and silver are decoupling from the equities market.
If clients want to participate in the precious metals during the strong seasonal period ahead, one safer way of playing them is to write puts on out of the money options in the December contract. For example, on Friday, the $1650 December gold put closed at $7.10 and has a delta of 17.75, which means if gold goes down $10.00, the option will lose $1.70. However, one mitigating factor is that the December option has 21 trading days before it expires. This means the time premium begins to decay at an ever increasing rate, which works in the favor of the option writer. This kind of trade can contribute to your bottom line, especially if you transact several of these each year. The December silver option is more volatile and the 30.00 December put is selling for 25.7 cents with a delta of 18.16. Writing puts on gold options is a more conservative play than silver. Caution should be exercised because of the shaky environment of the equities market, which could bring down precious metals. While we don’t think it is wise to be long gold or silver at this juncture, we do believe writing put options is a safer way to participate.
Performance October 5-October 26 Year to Date
December silver – $2.96 (-8.44%) + $4.03 (+14.37%)
December gold – $81.30 (-4.53%) + $133.60 (+8.47%)
Euro:
For the week, the December euro lost 91 points. The COT report showed that leveraged funds liquidated 4,563 contracts of their long positions and also liquidated 3,116 contracts of their short positions. The latest COT report shows that leveraged funds are short by a ratio of 3.67:1 which is up slightly from the ratio of 2 weeks ago of 3.16:1, but below the ratio of 2 weeks ago of 3.80:1.
S&P 500 E mini:
For the week, the December S&P 500 E mini lost 16.40. The COT report showed that leveraged funds added 6,032 contracts to their long positions and also added 32,125 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.59:1, which is up slightly from the previous week’s 1.55:1, but below the ratio of 2 weeks ago of 1.65:1..
The next 2 days are likely to be chaotic due to the approaching storm on the eastern seaboard, which likely will close a number of New York markets. We expect a short countertrend rally, but in our view, this will be the time to implement new long put positions for clients who have not yet participated.
American Association of Individual Investors (sentiment)
Last week 2 wks ago 3 wks ago
Bulls 29.3% 28.7% 30.6%
Bears 43.1% 44.6% 38.9%
Neutral 27.7% 26.8% 30.6%
Apple Computer: On October 26, Apple Computer generated an intermediate term sell signal.
On October 11, Apple generated a short-term sell signal and with the new intermediate sell signal, a confirmed sell signal is in place. We understand that clients may not want to short Apple, or liquidate their holdings, especially if they are long from lower levels. Our best advice is to avoid trading Apple from the long side, at least in the short term. Consider taking partial profits on rallies. Often, when a short and/or intermediate term sell signal is generated, the market has a countertrend rally.We expect Apple to follow this pattern and think it is highly likely that Apple will rally to the 625-630 area before it turns around and heads lower. If long Apple from a lower level, clients also should consider writing calls against long positions once Apple has rallied.
