Soybeans:
For the week, November soybeans closed. 49.50 lower, January -51.75 and March closed -51.25 cents lower. The COT report showed that managed money liquidated 4,709 contracts of their long positions and added 2,411 contracts to their short positions. Commercial interests added 4,163 contracts to their long positions and also added 711 contracts to their short positions. According to the latest report, managed money is long soybeans by a ratio of 14.24:1, which is down from the previous week’s ratio of 17.66:1 and significantly lower than the ratio of two weeks ago of 23.20:1.
Rather then implement an outright long position, speculators should consider buying January 2013 soybeans and selling March 2013, or May 2013 soybeans. On October 5, the January-March soybean spread closed at 38.00 cents premium to January, which is 7.25 cents above the low made on October 3, 2012, and 8.25 cents above the previous low of 29.75 made on June 18, 2012. On that date, January soybeans closed at 13.39.00 and March closed at $13.091/4.
In other words, the spread is trading at the very low end of its four month trading range. When soybeans begin to rally in earnest, the spread should widen, and perhaps widen considerably. Incidentally, the high for the spread occurred on July 20, when it reached $1.24 1/2 premium to January. July 20 was the date that soybeans reached its first major high of $17.77 3/4 for the August contract. Subsequently, on September 4, soybeans made their secondary high at $17.89, which is the all-time high.
Soybean meal:
For the week, October soybean meal closed 12.30 lower, December -15.70, January -16.80, March 2013 -17.20. The COT report showed that managed money liquidated 5,415 contracts of their long positions and also liquidated 2,536 contracts of their short positions. Commercial interests liquidated 1,032 contracts of their long positions and also liquidated 7,711 contracts of their short positions. According to the latest report, managed money is long soybean meal by a ratio of 6.36:1 which is up from the previous week’s ratio of 5.33:1, but down significantly from the ratio of two weeks ago of 9.14:1.
Although there has been a considerable amount of liquidation in soybean meal, the ratios show that managed money is significantly more committed to the long side of soybeans than they are to soybean meal. From the time that soybeans and soybean meal topped out on September 4 through October 5, November soybeans have lost $2.05, or 11.67% and December soybean meal has lost $62.20 or 11.66%.
As the table a couple of paragraphs below shows, soybean meal is significantly outperforming soybeans on a year-to-date basis. And from September 17 through October 4, soybean meal has shed three times the amount of open interest than soybeans. We think when the market begins its ascent soybean meal will outperform soybeans, and since managed money has heavily liquidated their positions in soybean meal, the downside appears to be limited at this juncture.
A more conservative approach to playing the soybean meal market is to implement a bull spread in December 2012-March 2013 soybean meal. For example, the December-March soybean meal spread closed at $20.00 premium to December. This is up from the low made on October 2 of $14.10 premium to December. Going back to mid May 2012, the spread has narrowed to 11.80 (on June 1) premium December. In other words, on October 5, the long December 2012 short March 2013 spread is just $8.20 above the low made four months ago. Keep in mind when the spread made its low on June 1, December meal closed at 354.00 while March closed at 342.20.
In short, long December 2012 soybean meal, short March 2013 soybean meal appears to have limited risk and tremendous upside potential. The market has been in an inverted formation for many months, and when supply shrinks as the season moves forward, demand will pull the front months higher than the back months. Another advantage to using a spread is that it is safer than an outright long position, which is especially important if the position is held through the October 11 report.
In order to provide some perspective, we examined the price of the front month of soybeans and soybean meal, when the drought began on June 25. Aside from the fact that both November soybeans and December soybean meal are close to their 150 day moving averages, they are not far away from where they closed on June 25. On that day, July soybean meal closed at $432.80 and July soybeans closed at $14.82 1/2. Based upon the close of November beans on October 5, beans are 69.00 cents higher than the close on June 25, and December soybean meal is $38.40 higher. Keep in mind, no one knew how severe the drought would become, nor was it known that sales of soybeans would eventually reach record levels for a crop that was in the early stage of maturation. The point of this, is to let readers know that soybeans and soybean meal are priced inexpensively based upon its trading history at the beginning of the drought and the incredible pace of export sales during following 3 1/2 months.
Corn:
For the week, December corn closed 8.25 cents lower and March closed 11.00 cents lower. The COT report showed that managed money added 2,251 contracts to their long positions and also added 3,594 contracts to their short positions. Commercial interests added 15,508 contracts to their long positions and also added 17,718 contracts to their short positions. According to the latest COT report, managed money is long corn by a ratio of 11.19:1, which is lower than the previous week’s ratio of 12.77:1 and is nearly the same as the ratio of two weeks ago of 11.41:1. Stand aside.
Wheat:
For the week, December wheat closed 45.00 cents lower and March closed -43.50. The COT report showed that managed money liquidated 7,599 contracts of their long positions and also liquidated 1,224 contracts of their short positions. Commercial interests added 1,510 contracts to their long positions and liquidated 49 contracts of their short positions. According to the latest report, managed money is long wheat by a ratio of 1.83:1, which is lower than the previous week’s ratio of 1.91:1, and the same as two weeks ago of 1.83:1. Stand aside.
Performance October 1-October 5 Performance Year to Date
December corn -1.09% +27.59%
November beans -3.09% +28.84%
Dec soybean meal -3.22% +49.63%
December wheat -4.99% +19.10%
Crude oil:
For the week, November, crude oil lost $2.31. The COT report showed that managed money liquidated 4,795 contracts of their long positions and added 7,980 contracts to their short positions. Commercial interests added 7,021 contracts to their long positions and liquidated 3,789 contracts of their short positions. According to the latest report, managed money is long crude oil by a ratio of 3.36:1, which is down somewhat from the previous week’s ratio of 3.98:1, but down significantly from the ratio of two weeks ago of 6.12:1.
On October 3, when November, crude advanced $3.57 on relatively light volume (based on the magnitude of the advance) of 552,980 contracts and open interest declined by 14,440 contracts, it confirmed the move was a false breakout. As readers know, we have been unimpressed with the action in crude oil even when it was trading at the very high end of the range. The reversal on October 5 confirmed the negative volume and open interest action relative to price on October 4.
We examined our records to see how crude oil performed when it had a move of similar magnitude to the advance of October 4. The last time crude oil advanced as much or more than October 4 was on August 3, 2012. On August 3, crude oil advanced $4.27 on volume of 628,855 contracts and open interest increased by 12,779 contracts. Note that open interest increased on the August 3 advance and declined on the October 4 advance. Additionally, there was follow through from the August 3 advance. On August 6, crude oil gained 80.00 cents while open interest increased by 2,274 contracts. The following day on August 7, crude oil advanced an additional $1.47 while open interest increased by 17,137 contracts.
It is readily apparent that the crude oil move in early August was positive, and the move on October 4 was negative. Two points to keep in mind is that crude oil’s 50 day moving average is below its 200 day moving average and on a year-to-date basis, November, crude is down $8.44 or 8.58%. We think losses in crude oil will continue, and it looks likely crude will generate an intermediate term sell signal sometime next week. Stand aside
Heating oil:
For the week, November heating oil lost .0033 cents. The COT report showed that managed money added 2,066 contracts to their long positions and liquidated 1,138 contracts of their short positions. Commercial interests liquidated 7,624 contracts of their long positions and also liquidated 2,549 contracts of their short positions. According to the latest report, managed money is long heating oil by a ratio of 2.57:1, which is above the previous week’s ratio of 2.29:1, and slightly above the ratio of two weeks ago of 2.42:1. Stand aside.
Gasoline:
For the week, November gasoline gained 3.24 cents. The COT report showed that managed money added 1,657 contracts to their long positions and liquidated 1,416 contracts of their short positions. Commercial interests liquidated 15,509 contracts of their long positions and also liquidated 11,819 contracts of their short positions. According to the latest report, managed money is long by a ratio of 14.00:1, which is up significantly from the previous week’s ratio of 11.26:1 and the ratio of two weeks ago of 8.49:1. Stand aside
Natural gas:
For the week, November natural gas gained 7.6 cents. The latest COT report showed that managed money added 20,820 contracts to their long positions and liquidated 23,469 contracts of their short positions. Commercial interests liquidated 860 contracts of their long positions and added 12,133 contracts to their short positions. As of the latest report, managed money is now long by a ratio of 1.18:1, which is a major reversal from the previous week’s ratio in which managed money was short by a ratio of 1.05:1, and short two weeks ago by a ratio of 1.06:1. Stand aside.
Copper:
For the week, December copper gained 1.30 cents. The COT report showed that managed money added 905 contracts to their positions and liquidated 2,829 contracts of their short positions. Commercial interests liquidated 950 contracts of their long positions and added 3,963 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 2.05:1, which is up from the previous week’s ratio of 1.79:1 and the ratio of two weeks ago of 1.68:1. Stand aside.
Gold:
For the week, December gold gained $7.50. The COT report showed that managed money added 4,418 contracts to their long positions and liquidated 344 contracts of their short positions. Commercial interests liquidated 2,028 contracts of their long positions and added 1,656 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 19.45:1 (which is a new high for the ratio), and is up from the previous week of 18.24:1, and up substantially from the ratio of two weeks ago of 13.37:1. Wait for a correction.
Silver:
For the week, December silver gained 11.3 cents. The COT report showed that managed money added 4,418 contracts to their long positions and liquidated 344 contracts of their short positions. Commercial interests liquidated 2,028 contracts of their long positions and added 1,656 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 14.31:1, which is up substantially from the previous week’s ratio of 8.36:1 and the ratio of two weeks ago of 7.92:1. Wait for a correction.
The investment community has been talking about the skyrocketing price of gold and silver. However, the untold story is the outstanding performance of the gold mining ETF’s. Since July 24, when silver was below 27.00 and gold was below 1600.00 through October 5, GDX and GDXJ, the two major gold mining ETF’s have dramatically outperformed the metals. See the table below.
Performance July 24, 2012-October 5, 2012.
GDXJ +37.74%
GDX +31.75%
DEC SIL +27.86%
DEC GOLD +12.62%
We examined the stocks that comprise GDX and the strongest performers are in the table below. Although Royal Gold is not a stock in GDX, we took the liberty of adding it because it’s performance is outstanding. We are not suggesting purchases of these stocks, rather we wanted our readers to know about an alternative way to play the precious metal markets. We have not done an overbought/oversold analysis, therefore many of the stocks may not be candidates for acqusition due to their overbought condition. The companies listed are substantial companies with fairly long track records.
Best Performing Stocks in GDX-Year-To-Date.
RGLD +45.81% (not in GDX)
AEM +47.49%
AG +38.48%
SLW +38.26%
ANV +30.28%
AUY +29.34%
HL +26.20%
GOLD +22.14%
CDE +18.43%
Euro:
For the week, the December euro gained 1.80 cents. The COT report showed that leveraged funds liquidated 6,004 contracts of their long positions and also liquidated 4,873 contracts of their short positions. According to the latest report, leveraged funds are short by a ratio of 2.43:1 which is up from the previous week’s ratio of 2.21:1, but down from the ratio of two weeks ago of 2.90:1. Stand aside.
S&P 500 E mini:
For the week, the December S&P 500 E mini gained 21.30. The COT report showed that leveraged funds added 41,998 contracts to their long positions and also added 58,549 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.59:1, which is down slightly from the previous week’s ratio of 1.60:1 and the ratio of two weeks ago, 1.88:1. Long put protection is advised.
As our readers know, we have been less than enthusiastic about the upside in the S&P 500 E mini. Numerous financial journalists and their interviewees, usually give three reasons to be in the market. Reason number 1: Don’t fight the fed. Reason number 2: There is a tremendous amount of money sitting on the sidelines. Reason number 3: The market likes to climb the wall of worry.
The problem with the adherence to the three reasons listed above, is while there is a lot of truth to them, these are narratives that trap people in a mindset that prevents them from seeing what is actually occurring with supply and demand for equities and futures. The fact that so many people are citing these as reasons to be long, informs us that many in the investment community have moved to one side of the boat. In this particular case, it pays to be a contrarian, especially since market action in the E mini and other major indices have been considerably less than impressive. We all know about the fiscal cliff facing the U.S. at the end of the year. However, there are other warning signs that third quarter earnings could be problematic, and the market is currently priced for earnings perfection. Caterpillar, and Federal Express have both warned about revenue and earnings going forward. Technology stocks are at risk due to the slowdown in China, which purchases large amounts of U.S. technology. We are living in a bifurcated market where fundamentals tell us one thing, and the major indices tell a different story. We believe there will be a merging of this divergence and that one perceived reality will correct and move closer to the real one. This likely will result in the market declining, perhaps sharply.
One major sign of danger is that IPOs have slid to their lowest level since 2009. On October 1, Bloomberg wrote a piece about this titled “Global IPOs Slump To Second Lowest Level Since Financial Crisis.”
“The U.S. stock market’s rally to a more than four-year high has provided only limited momentum for share sales as slowing growth in China and the European debt crisis helped spur the International Monetary Fund to lower its forecast for the global economy. With Facebook having lost about half its value since pricing its initial offering at 107 times earnings, potential IPO investors are now demanding cheaper valuations in the face of economic uncertainty,” according to Bank of America Corp.’s Frank Maturo, Vice Chairman of equity capital markets.
“One of the biggest reasons companies are not moving forward is that the discounts buyers are demanding are high,” Maturo said in a briefing last week in New York. “Otherwise, if discounts were traditional levels, it would be wide open.”
Maturo said that while investors in the past, typically expected IPOs to be priced 10 percent to 15 percent more cheaply than comparable publicly traded stocks, they’re now demanding discounts that sometimes exceed 20%.
“As long as the global economic recovery remains uncertain, some investors will be reluctant to pay higher valuations for newly listed companies,” according to Pete Sorrentino of Huntington asset advisors. “If the broader market finally wakes up and sees that valuations don’t make sense given where we are in the economic cycle, then the switch gets flipped again and everything goes dormant,” Cincinnati based Sorrentino, who helps oversee $14.7 billion in assets, said in a telephone interview.
If this is the attitude of institutional investors when major indices are trading at four-year highs, what happens when the market begins to move sharply lower. The institutions and venture capitalists that back these IPOs, want to be able to cash out of their investments. The fact that institutions are unwilling to pay what usually passed for standard discounts for IPOs compared to existing companies conveys a basic lack of confidence in the new issue market. In our view, this is emblematic of a problem with the equities market and numbers of companies who are trading at lofty valuations. If the IPO window is essentially shut down with S&P 500, in the mid-1400 range, what does this portend for the future of new companies. Frankly, if I were a venture capitalist and saw that I was unable to obtain valuations at normal levels, when the S&P is trading at over 4 year highs, I would take what I could get, because valuations will only worsen.
We dissected Friday’s action, and the volume stats for the day’s trading are abysmal. For example, when the employment report was released at 7:30 CDT, the S&P 500 E mini rallied from 1457.25 to a high of 1466 by 9:30 am. During this two-hour timeframe, the E mini traded a total of 478,899 contracts. From 9:30, the E mini traded lower during the remainder of the session until it reached 1451.25 at 2:35 pm. The total volume traded from 9:30 am-2:35 pm was 819,546 contracts. Total volume traded on October 5 was 1,682,606 contracts, which is approximately 115,000 contracts above the volume on October 4, when the market advanced 11.00 points. Not only was downside volume significantly greater than upside volume, but the amount of time the market spent rallying was significantly less than the time it was falling. Additionally, the market didn’t have the strength to take out the 1468 high made on September 14. In the September 30 Weekend Wrap, we discussed the massive volume spikes on September 13 and 14, and proposed that 1468 could be the top, or at the very least a temporary top. The action on October 5 confirms the likelihood of this and revealed the internal weakness of the market.
The American Association of Individual Investors survey shows that investors are still not buying into the rally, and that a great deal of skepticism abounds.
AAII Survey
Recent week 2wks ago 3 wks ago
Bulls 33.9% 36.1% 37.5%
Bears 33.2% 36.5% 33.8%
Neutral 32.9% 27.4% 28.7%
