During the first half of September, investors are going to be bombarded with a series of announcements that will impact the markets in a major way. On September 6 the European Central Bank meets for its monthly policy meeting. The U.S. employment report will be released on September 7. On September 12 Germany’s equivalent of the Supreme Court is expected to issue a ruling on the legality of the European Stability Mechanism, which the ECB can use as a way to inject liquidity into the system. On September 12, the USDA will issue its monthly crop report. The Federal Reserve will release the results of its two-day meeting on September 13 that many believe will announce quantitative easing measures.
U.S. Dollar Index:
The U.S. cash dollar index made a new low for the move on August 31, which takes the dollar down to a level last seen on May 15. The reason this is important is that a lower dollar makes U.S. commodities cheaper. This is coming at a time when supplies of soybeans and corn are going to be at the lowest levels in many years. On August 22, the cash dollar index generated a short-term sell signal, but an intermediate term sell signal has not yet been generated. Approximately 60% of the movement of the dollar index is powered by the Euro. As indicated in previous reports, we believe the Euro is going higher and on August 31 made a new high for the move. Further Euro strength will result in the dollar continuing its decline, which will in turn make U.S. commodities less expensive.
Soybeans:
For the week, November soybeans gained 25.00 cents. The Commitment of Traders Report showed that managed money liquidated 21,095 contracts of their long positions and added 446 contracts to their short positions. Commercial interests liquidated 2,504 contracts of their long positions and also liquidated 19,409 contracts of their short positions. As of the latest COT report, managed money is long soybeans by a ratio of 24.54:1, which is down from the previous week of 28.29:1 and is about equal to the ratio of two weeks ago of 24.91:1.
In order to gain some perspective on how soybeans may perform during the month of September, we are supplying the following data. From 2000-2011, November soybeans lost an average of 3.52% during the month of September. Of the 12 years sampled, soybeans ended up in the losing column 9 out of the 12 years.
Worst Performance (September) Best Performance (September)
2008 –21.25% 2003 +14.78%
2011 -19.19% 2007 +12.28%
Soybean meal:
For the week, October soybean meal gained $9.30 and the new crop December contract gained 10.60. The Commitment of Traders Report showed that managed money liquidated 4,942 contracts of their long positions and also liquidated 261 contracts of their short positions. Commercial interests liquidated 270 contracts of their long positions and also liquidated 10,220 contracts of their short positions. As of the latest COT report, managed money is long by a ratio of 40.13:1 which is up from the previous week’s ratio of 37.45:1 and the ratio of two weeks ago of 33.37:1.
From 2000-2011 for September the average performance for December soybean meal was -3.70%. Of the 12 years sampled, December soybean meal lost ground in six of the 12 years.
Worst Performance (September) Best Performance (September)
2008 -20.93% 2007 +14.53%
2011 -20.58% 2003 +9.16%
Special comments on soybeans and soybean meal:
There are four reasons not to be long soybeans and soybean meal for the next week. (1). The bull spreads of soybeans and soybean meal have been narrowing dramatically. As an example, the long September-short November soybean spread has narrowed to 8.00 cents on August 31. The spread has been making new lows for a while, and the most recent occurred on August 24 when it reached 6.00 cents, which was the lowest price for the September-November spread going back to mid April. In a bull market, the spread should be widening, not narrowing, and certainly not selling at its lowest level in 4 1/2 months. The high for the spread occurred on April 27 when it reached 48.00 cents, and the most recent high occurred on July 19 when the spread reached 39.00 cents.
The long November-short January soybean spread presents the same picture as the September-November bull spread only less dramatically. For example, on August 31 the November-January closed at 5.50 cents, which is down from its high of 23.00 cents made on July 20, but up from the low made on August 6 of 1.75 cents. Again, the spread is narrowing, which is a short-term negative.
Soybean meal tells the same story. On August 31, the long September-short December soybean meal spread closed at $13 70, which was the lowest price for the spread since July 13 when it closed at $12.20. The spread made its high on July 26 at $29.20. The long December short January soybean meal spread presents the same picture as the long September-short December soybean meal spread. For example, on August 31 the December-January spread closed at $6.60 which match the low made on August 6 of 6.60. The spread made its high on July 20 at $14.80.
The final comment about the spread action of soybeans and soybean meal is this: Spreads fluctuate as rapidly as individual contracts, however, when soybeans and soybean meal are near their all-time highs, spreads should not be consistently narrowing if soybeans and soybean meal are poised to take another leg higher.
2) The volatility of soybeans and soybean meal have been on the decline ever since they made their tops on July 20. Anyone long soybean and soybean meal puts and calls since July 20 have lost a considerable amount just on the cratering of volatility. To put the volatility picture in perspective, consider the action on August 31 for out of the money November soybean calls. On August 31 the November $18.50 call lost 6.00 cents while the November future lost 7.00 cents. The delta, which measures how much the amount the option will gain or lose based upon the movement of the futures contract is 32.8. With respect to Friday’s action, the $18.50 November call should have lost 32.8% of its value, which would have been approximately 2.25 cents, not 6.00 cents. In this case, we believe the disproportionate loss of option value is the manifestation of declining volatility.
It is a short-term negative to see spreads narrowing in soybeans and soybean meal, when they are at their all-time highs. And it also is a short-term negative to see volatility decline when soybeans and soybean meal are hovering near their all-time highs. In our view, the continuing decline of volatility is symptomatic of markets that do not expect big moves anytime soon.
(3) The third reason for not being long soybeans and soybean meal at current levels is the large amount of total open interest. At the end of June 2012, open interest in soybeans was 770,227 contracts and at the end of July was 760,893. Compare the current number of outstanding contracts (745,279) to July 2011 when open interest in soybeans was 518,474 contracts. Tops, or temporary tops, are generally made with higher than normal levels of open interest. Currently, total soybean meal open interest is 256,980 contracts, which compares to 246,607 at the end of July 2012 and 264,381 at the end of June 2012. At the end of July 2011, total open interest amounted to 179,167 contracts
(4 ) The fourth reason that we are leery about being long at current levels is that September tends to be a weak month for commodities as well as equities.The tables for the grains show that September is generally a soft month and speculators should understand that they risk losses or reduced gains.
In summary, we have provided four distinct reasons for not being long soybeans and soybean meal at this particular time: a traditionally weak September, combined with reduced volatility and bull spreads narrowing in soybeans and soybean meal with record high or near record high levels of open interest. This is a powerful body of evidence that favors a stand aside position during the coming week. The USDA crop report will be released September 12, and this could provide the impetus for the next leg higher. We are very bullish soybeans and soybean meal and fully expect to see soybeans trade north of $20.00
Corn:
For the week, December corn lost 8.75 cents. The Commitments of Traders Report showed that managed money liquidated 7,780 contracts of their long positions and added 5,990 contracts to their short positions. Commercial interests liquidated 13,834 contracts of their long positions and also liquidated 13,254 contracts of their short positions. As of the latest COT report, managed money is long by a ratio of 16.25:1, which is down substantially from the previous week of 23.63:1 and the ratio of two weeks ago of 20.54:1.
From 2000-2011 for September, the 12 year average performance was -4.33%. For the 12 years sampled, corn lost ground in seven of those years.
Worst Performance (September) Best Performance (September)
2011 -22.96% 2010 +12.59%
2008 -16.41% 2007 +9.35%
Readers have to be careful if they are long corn. Not only is September a relatively weak month, but during July 30 through August 31, corn has not been able to mount any sustained rally. For example, from July 30 through August 31, December corn is down 14.25 cents or 1.75%. With the beginning of the harvest there will be some pressure on prices, and there is a danger that longs will become discouraged. With the current strong moves in gold and silver taking place, longs may decide to take profits and redeploy their capital. During the past several days, open interest has been decreasing rather rapidly, and it appears that open interest will again decline on August 31, which would make it the eighth day in a row. In other words, both longs and shorts are taking money off the table.
Wheat:
For the week, December Chicago wheat gained 1.00 cents. The Commitment of Traders Report showed that managed money liquidated 4,698 contracts of their long positions and also liquidated 1,488 contracts of their short positions. Commercial interests liquidated 661 contracts of their long positions and 9,274 contracts of their short positions. As of the latest COT report, managed money is long wheat by a ratio of 2.11:1, which is down slightly from the previous week of 2.14:1, and the ratio of two weeks ago of 2.20:1.
From 2000-2011 for the month of September, the 12 year average return for December wheat was -2.24%. For the 12 years sampled, wheat lost ground in eight of those years.
Worst Performance (September) Best Performance (September)
2011 -23.18% 2007 +21.01%
2008 -14.99% 2005 +8.68%
Crude oil:
For the week, October crude oil gained 32.00 cents. The Commitment of Traders Report showed that managed money added 7,478 contracts to their long positions and liquidated 5,751 contracts of their short positions. Commercial interests added 25,094 contracts to their long positions and also added 20,105 contracts to their short positions. As of the latest COT report, managed money is long by a ratio of 5.41:1 which is up from the previous week of 4.56:1 and significantly above the ratio of two weeks ago of 3.64:1.
Heating oil:
For the week, October heating oil gained 6.15 cents. The Commitments of Traders Report showed that managed money added 5,479 contracts to their long positions and also added 1,054 contracts to their short positions. Commercial interests liquidated 3,669 contracts of their long positions and also liquidated 4,661 contracts of their short positions. As of the latest COT report, managed money is long by a ratio of 2.56:1, which is up from the previous week of 2.36:1 and the ratio of two weeks ago of 1.99:1.
Gasoline:
For the week, October gasoline gained 6.23 cents. The Commitment of Traders Report showed that managed money added 6,369 contracts to their long positions and also added 1,056 contracts to their short positions. Commercial interests liquidated 15,666 contracts of their long positions and also liquidated 15,894 contracts of their short positions. As of the latest COT report, managed money is long gasoline by a ratio of 8.94:1, which is down slightly from the previous week of 9.32:1 and down substantially from the ratio of two weeks ago of 12.25:1.
Copper:
For the week, December copper lost 3.25 cents. The Commitment of Traders Report showed that managed money added 963 contracts to their long positions and liquidated a massive 5,515 contracts of their short positions. Commercial interests liquidated 2,422 contracts of their long positions and added 1,429 contracts to their short positions. As of the latest COT report, managed money is now long copper by a ratio of 1.11:1, which is a complete reversal from the previous week when managed money was short by a ratio of 1.10:1, and was more short two weeks ago by a ratio of 1.37:1.
Gold:
For the week, December gold gained $14.70. The Commitment of Traders Report showed that managed money added 16,680 contracts to their long positions and liquidated 4,901 contracts of their short positions. Commercial interests added 848 contracts to their long positions and also added 17,985 contracts to their short positions. As of the latest COT report, managed money is now long gold by a ratio of 8.76:1, which is up significantly from the previous week of 5.70:1, and is more than double the ratio of two weeks ago of 3.31:1
The COT report of August 28 showed that the total number of outstanding contracts was 426,559. To put this in perspective, when gold made its high for 2012 at $1792.70 and closed at its high of $1788.40 on February 28, the number of outstanding positions totaled 479,044. This has been the high of the year so far. The report of February 28 showed that managed money was long by a total of 184,843 contracts, and that the long to short ratio reached 24:1. On August 28, the total number of managed money longs was 127,743 contracts. Gold can rally a great deal more before it reaches the number of longs held by managed money on February 28.
Silver:
For the week, December silver gained 73.3 cents. The Commitment of Traders Report showed that managed money added 3,291 contracts to their long positions and liquidated a massive 4,368 contracts of their short positions. Commercial interests liquidated 783 contracts of their long positions and added 1,732 contracts to their short positions. As of the latest COT report, managed money is long silver by a ratio of 5.81:1 which is more than double the previous week’s ratio of 2.77:1 and more than three times the ratio of two weeks ago of 1.81:1.
The COT report of August 28 showed that the number of outstanding contracts totaled 121,777. On February 28 when silver closed at $37.14 the number of outstanding contracts totaled 115,866 contracts and the long to short ratio was 12.38:1. The total number of managed money longs was 32,308 on February 28, and as August 28 the total number is 29,366. As indicated in the report of August 30, the pullback which amounted to 47.6 cents has been the only meaningful decline since the rally began about two weeks ago. If the market continues to rally, it won’t be long before silver reaches the high number of long positions held by managed money on February 28. At that point, a significantly larger decline may be in the offing.
Euro:
For the week, the September Euro gained .0061 points. The Commitment of Traders Report showed that leveraged funds liquidated 554 contracts of their long positions and liquidated 23,794 contracts of their short positions. As of the latest COT report, leveraged funds are now short by a ratio of 1.74:1, which is down from the previous week of 2.03:1 and down significantly from the ratio of two weeks ago of 2.20:1. The current ratio is one of the lowest going back several months.
10 Year Treasury Notes:
For the week, December treasury notes gained 1-07.6 points. The Commitment of Traders Report showed that leveraged funds liquidated 3,429 contracts of their long positions and also liquidated 9,638 contracts of their short positions. As of the latest COT report, managed money is long by a ratio of 2.25:1, which is up from the previous week of 2.12:1 and nearly double the ratio of two weeks ago of 1.24:1.
The note market has had a steady rally since August 21 and the market closed lower on two days. From August 22 through August 24, open interest declined by 69,326 contracts, but this began to change on August 27. From August 27 through August 30, open interest has increased by 55,672 contracts. It appears highly likely that notes will generate a short and intermediate term buy signal. If this is the case, any long put positions should be liquidated.
S&P 500 E mini:
For the week, the September S&P 500 E mini lost 4.70 points. The Commitment of Traders Report showed that leveraged funds added 30,454 contracts to their long positions and also added 52,029 contracts to their short positions. As of the latest COT report, managed money is short by a ratio of 2.12:1 which is down a fraction from the previous week of 2.14:1, and the ratio of two weeks ago of 2.23:1.
The AAII survey indicates that investors remain skittish about the long side of the market.
American Association of Individual Investors Survey
Last week 2 wks ago 3 wks ago
Bullish 34.7% 42.0% 36.8%
Bearish 32.6% 25.9% 28.1%
Neutral 32.6% 32.2% 35.1%
