Soybeans:
For the week, November soybeans gained 2.50 cents and the March contract gained 22.00 cents. The COT report showed that managed money liquidated 575 contracts of their long positions and also liquidated 2,583 contracts of their short positions. Commercial interests added 3,555 contracts to their long positions and liquidated 3,345 contracts of their short positions. According to the latest report, managed money is currently long by a ratio of 31.59:1, which is up significantly from the previous week of 23.16:1 and the ratio of two weeks ago of 24.54:1.
Like corn, we think soybeans will drift lower due to harvest pressure and some liquidation by disappointed longs. Although, we believe that soybeans will eventually trade north of $20.00, it is possible the market could trade down to its 50 day moving average on the soybean continuation chart of $16.94 1/2, or even lower at the November contract 50 day moving average of $16.50. One noticeable factor has been the massive decline in volatility, and this does not bode well for higher prices in the immediate term. Preferably, we want to see more liquidation by speculators and a bottoming process that may extend to the end of September or early October.
Soybean Meal:
For the week, October soybean meal lost $3.70, while the December contract lost $1.50. The COT report showed that managed money liquidated 3,606 contracts of their long positions and added 1,370 contracts to their short positions. Commercial interests liquidated 514 contracts of their long positions and also liquidated 9,907 contracts of their short positions. As of the latest report, managed money is long by a ratio of 14.52:1, which is down significantly from the previous week of 21.57:1, and down more than 60% from the ratio of two weeks ago of 37.45:1.
On a year to date basis, soybean meal is significantly outperforming the other grains: December soybean meal +66.85%, November soybeans +44.41%, December corn +33.39%, December wheat + 28.37%. It is possible that speculators are getting tired of holding long positions despite the December contract trading within $15.00 of its contract high, and $27.00 of its all-time high on the continuation chart. The liquidation by speculators in the latest COT report may be due to the fact that soybean meal hasn’t done much in the past three weeks. For example, December soybean meal closed at $524.50 on August 21, and on September 14 closed at $525.40. This is the kind of action that can produce profit taking. It appears that the market could easily pull back to the $495.00 level, which is the 50 day moving average for the December soybean meal contract.
Corn:
For the week, December corn lost 17.50 cents. The COT report showed that managed money liquidated 9,305 contracts of their long positions and added 3222 contracts to their short positions. Commercial interests liquidated 8,085 contracts of their long positions and liquidated a massive 29,807 contracts of their short positions. The COT report showed that managed money is long by a ratio of 14.70:1 which is down from the ratio of the previous week of 17.70:1, and lower than the ratio of two weeks ago of 16.25:1.
We continue to think corn will drift lower due to harvest pressure, and as a result, speculators will be inclined to take profits, especially because other markets are moving higher. On September 11, December corn generated a short-term sell signal, but remains on an intermediate term buy signal. In our view, speculators should stand aside and wait for corn to find the bottom. At that point, corn will be a terrific candidate for OTM short put positions and long positions
Wheat:
For the week, December wheat gained 19.25 cents. The COT report showed that managed money added 515 contracts to their long positions and also added 4,133 contracts to their short positions. Commercial interests added 112 contracts to their long positions and liquidated 5,637 contracts of their short positions. As of the latest report, managed money is long by a ratio of 1.96:1 which is down from the previous week’s ratio of 2.08:1, and also lower than the ratio of two weeks ago of 2.11:1.
Grain performance September 10-September 14.
Wheat +2.13%
Soybeans + 0.14%
Soybean Meal -0.28%.
Corn -2.19%
We are bullish wheat because of supply problems in the Black Sea region and the continuing drought in Australia, which is adding fuel to the bullish outlook. We reviewed the performance of Chicago wheat from 1995 through 2011 for the period of September 1 through September 14 and took the best to see how they performed in the September 15 to September 30 period. December wheat in 2012 is the fourth best performer in the September 1- September 14 period going back to 1995. In the following table, we are listing the best performing years from 1995-2011 and then listing the subsequent performance during September 15-September 30.
September 1-September 14 best performing years for Chicago wheat 1995-2011.
2007 +9.01%
2010 +7.15%
2002 +5.82%
2012 +3.91%
Performance for September 15-September 30.
2007 +10.85%
2010 -8.59% .
2002 +0.65%
Crude oil:
For the week, October crude oil gained $2.58. The COT report showed that managed money added 2,512 contracts to their long positions and liquidated 5,678 contracts of their short positions. Commercial interests added 14,866 contracts to their long positions and also added 6,559 contracts to their short positions. As of the latest report, managed money is long by a ratio of 6.53:1, which is up from the previous week of 5.52:1 and up nearly 50% from the ratio of two weeks ago of 4.56:1.
We have been less than enthusiastic about the long side of crude oil at current levels due to the plentiful supply, and the fact that China and the global economy is slowing down. As noted in previous reports, there has been a massive increase in open interest, and undoubtedly, some of the buying can be attributed to anticipation of quantitative easing Act III, and heightened tensions in the Middle East. Despite this, we are extremely concerned that the Shanghai Composite Index has failed to rally along with other major global stock markets. To illustrate the weakness of the Chinese market, consider that the major indices of Australia, Singapore, and India have rallied anywhere from 10 to 15% during the past several weeks. On September 14, the Shanghai Composite Index closed at 2123.85, which is only 94.80 points above the 3 1/2 year low of 2029.05 made approximately 2 weeks ago. This is a very troubling sign when a market as large as China fails to rally with the world’s global markets. This is a potential canary in the coal mine, and appears to confirm economic weakness, which does not bode well for the price of crude oil as China is a large importer. Stand aside.
Heating oil:
For the week, October heating oil gained 9.06 cents. The COT report showed that managed money added 1,685 contracts to their long positions and also added 2,736 contracts to their short positions. Commercial interests added 11,609 contracts to their long positions and also added 13,382 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.25:1, which is down slightly from the previous week’s ratio of 2.52:1 and the ratio of two weeks ago of 2.56:1.
We think heating oil has tremendous upside potential, but until heating oil is relieved of its overbought condition, speculators should stand aside.
Gasoline:
For the week, October gasoline lost .0040. The COT report showed that managed money added 4,095 contracts to their long positions and also added 2,514 contracts to their short positions. Commercial interests added 886 contracts to their long positions and also added 365 contracts to their short positions. As of the latest report, managed money is long by a ratio of 7.12:1, which is down significantly from the previous week’s ratio of 8.54:1 and down more than 20% from the ratio of two weeks ago of 8.94:1. The reason the ratio dropped in the latest reporting week was that the number of new shorts added was a significantly greater percentage of outstanding short positions than the number of new longs added to the outstanding number of long positions.
We don’t see any compelling reason to be involved in gasoline at current levels when the summer driving season is past and consumer resistance to higher gasoline prices is going to curtail demand
Natural gas:
For the week, October natural gas added 26.1 cents. The COT report showed that managed money added 1,637 contracts to their long positions and also added 4,434 contracts to their short positions. Commercial interests added 18,820 contracts to their long positions and also added 15,198 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.11:1 which is up slightly from the previous week of 1.10:1 and of the ratio of two weeks ago of 1.09:1.
The problem with being long natural gas is the glut of it may cause natural gas trade in a range bound fashion for an extended period of time. We anticipate the range may be between $3.50 and $2.60 and with the ever increasing supply of natural gas, the market may trade within this band for years. We have seen this kind of action in the grains when there has been a surplus of product and making money was difficult due to range bound trading parameters. The COT report shows that speculators are evenly divided between bull and bear camps. In the latest COT report, it shows that managed money was long, 212,621 contracts and short 236,291 contracts. Even commercial interests are split with 124,855 contracts held long and 145,032 contracts held short. Remember, as prices move higher, commercials will be looking to hedge their inventory, and this will keep a lid on prices. Also, another sign that natural gas is not about to enter a bull market is the market is structured deeply in contango. Until this changes, we do not see natural gas making much upside progress.
Copper:
For the week, December copper gained 18.75 cents. The COT report showed that managed money added 10,917 contracts to their long positions and liquidated 5,908 contracts of their short positions. Commercial interests liquidated 1,508 contracts of their long positions and added 10,210 contracts to their short positions. As of the latest report, managed money is long by a ratio of 1.73:1, which is up approximately 70% from the previous week’s ratio of 1.02:1 and the ratio of two weeks ago of 1.11:1.
It appears that copper spreads may be in the process of inverting. For example, on August 15, 2012, the long December 2012 short, July 2013 spread made a low of 3.05 cents premium to July on August 15. It has been steadily narrowing, and as of the close on September 14, the spread narrowed to 1.15 cents premium to July. The reason this is important is that when spreads start moving toward inversion (front month(s) selling at a premium to back months) the market is saying that product is in demand. When copper has a major pullback, watch how the front months perform versus the back months. If the back months are going down by a greater amount than the front months, this is a sign that spreads are narrowing and is potentially very bullish. As we stated in the report on crude oil, one of our main areas of concern is that the Shanghai Composite Index has not been able to mount any kind of sustained rally. Since China represents the largest global consumer of copper, it is troubling that the index is not reacting to the optimism of other Asian and global markets.
Gold:
For the week, December gold gained $32.20. The COT report showed that managed money added 11,349 contracts to their long positions and liquidated 3,337 contracts of their short positions. Commercial interests added 790 contracts to their long positions and also added 15,663 contracts to their short positions. As of the latest report, managed money is long by a ratio of 14.65:1 which is up approximately 40% from the previous week’s ratio of 10.16:1, and is approximately 60% higher than the ratio of two weeks ago of 8.76:1.
The gold market is massively overbought and the long to short ratio shows that managed money speculators are piling into the market. Do not chase gold. Wait for a setback before entering new long positions.
Silver:
For the week, December silver gained 96.6 cents. The COT report showed that managed money added 171 contracts to their long positions and liquidated 388 contracts of their short positions. Commercial interests liquidated 901 contracts of their long positions and added 1,038 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 7.73:1 which is up approximately 10% from the previous week’s ratio of 7.00:1 and is approximately 30% higher than the ratio of two weeks ago of 5.81:1.
Like gold, silver is massively overbought and speculators should wait for a sizable pullback before considering entering long positions.
Euro:
For the week, the September Euro gained 3.20 cents. The COT report showed that leveraged funds liquidated 5,467 contracts of their long positions and also liquidated 8,145 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.75:1 which is up slightly from the previous week’s ratio of 1.73:1 and the ratio of two weeks ago of 1.74:1.
The Euro had a rapid rise during the past week, and it appears the market still has a way to go before the bulk of shorts are blown out of the Euro. We are looking for a period of several days when open interest goes down before the Euro is likely to top out. Until buying pressure is relieved by decreasing numbers of short sellers covering their positions, the market is vulnerable to continued upside moves.
S&P 500 E mini:
For the week, the September S&P 500 E mini gained 27.60 points. The COT report showed that leveraged funds added 29,045 contracts to their long positions and also added 10,425 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.03:1 which is down from the ratio of the previous week of 2.13:1 and from the ratio of two weeks ago of 2.12:1.
The rally during the first two weeks of September, is the fourth highest by percentage going back to 1995. See the table below.
S&P 500 E mini 9/1 – 9/14 9/15- 9/30
1998 +7.96% -1.41%
2010 +6.89% +1.85%
1996 +4.80% +0.34%
2012 +4.32%
Average gain 1995-2011 9/1 -9/14: + 9.80 points, or +1.27%.
Average loss 1995-2011 9/14 – 9/30: -19.50 points, or -1.72%
Looking at the average performance for the first half of September, versus the second half, it is apparent that the second half is considerably weaker. The year 2010 is a particularly relevant analog to 2012 because the quantitative easing announcement occurred at approximately the same time. However, the second half of September 2010 was considerably weaker than the first half. If we project performance at +1.85% for the second half of 2012, this would give us a target of approximately 1492.00 on the S&P 500 E mini. Conceivably, the performance could exceed 2010’s second half because there is a tremendous amount of money sitting on the sidelines. Since money managers don’t want to be perceived as having missed the train, a tremendous amount of buying could occur during the next two weeks because September 30 represents the end of the third quarter and quarterly results are reported to clients.
Although the 2010 and 2012 periods may share similarities with regard to quantitative easing, it is important to remember that on September 14, 2010, the S&P 500 E mini closed at 1115.80, or 349.90 points lower than the close on Friday. Also, remember that the all-time highs for the S&P 500 cash index (we use the S&P cash index for longer time frames) was 1552.87 on March 24, and 1576.09 on October 11, 2007. Therefore, the S&P 500 cash index, which closed at 1465.77, is 110.32 points away from its all-time high. This is occurring against a backdrop of high unemployment and a number of other economic indices that clearly show the US and global economies are slowing down. Regardless, of the dismal economic scenario, if institutional, and possibly retail investors start piling into the market, it will continue to advance.
The American Association of Individual Investors survey continues to show that investors are still not buying into the rally.
Latest week 2 weeks ago 3 weeks ago
Bullish 36.5% 33.1% 34.7%
Bearish 33.0% 33.1% 32.6%
Neutral 30.6% 33.9% 32.6%
