Soybeans:
For the week, November soybeans gained 20.75 cents and the March contract gained 15.25. The COT report showed that managed money liquidated 12,076 contracts of their long positions and added 2,211 contracts to their short positions. Commercial interests added 10,331 contracts to their long positions and liquidated 6,180 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 17.66:1 and the previous week’s ratio was 23.20:1; two weeks ago the ratio was 31.59:1, and three weeks ago the ratio was 23.16:1.
Soybean meal:
For the week, December soybean meal gained 90.00 cents while March gained $3.40. The COT report showed that managed money liquidated a massive 7,919 contracts of their long positions and added 3,414 contracts to their short positions. Commercial interests added 3,673 contracts to their long positions and liquidated 12,556 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 5.33:1 which is down significantly from the previous week of 9.14: 1 and significantly below the ratio of two weeks ago of 14.52:1 and the ratio of three weeks ago of 21.57:1.
The most recent COT reading for soybean meal is extremely positive because the market has wrung out the excessive number of longs, which reduces selling pressure. The pattern of liquidation in soybean meal has been vastly different than soybeans. For some odd reason, the liquidation in soybean meal has been severe, but not so in soybeans, despite a nearly equal performance. For example, from the top of the soybean meal and soybean market, which occurred on September 4, through September 28, soybean meal has declined by 8.72% while soybeans have declined by 8.85%.
It is important for readers to know that soybean meal is used heavily in aquaculture. The reason for this is that fish cannot digest corn, wheat and other grains that are fed to livestock. Soybean meal is used heavily in the production of poultry and is used as a mixing agent, with wheat in order to make feed wheat more digestible to livestock.
China, which produces 63% of global aquaculture is a large consumer of soybean meal. According to Joe Meyer, who is a director of the United Soybean Board in a published article in High Plains Journal said: “the amount of soybean meal used for aquaculture in China exceeds the total amount of soybeans produced in the state of Indiana.” The only substitute for soybean meal is fish meal, which is processed primarily from anchovies and the bulk of it is produced by Peru. In other words, soybean meal is a beneficiary of consumption by livestock, poultry and aquaculture, whereas corn is consumed by livestock and poultry and ethanol production. The table below shows performance of the grains on a year-to-date basis, and although soybean meal has the lowest long to short ratio compared to corn and soybeans, it is by far the leader in performance year-to-date.
Year to date performance
Soybean meal +54.62%
Soybeans +32.95%
Corn +29.00%
Wheat +25.35%
Corn:
For the week, December corn gained 8.00 cents. The COT report showed that managed money liquidated 12,017 contracts of their long positions and also liquidated 3,906 contracts of their short positions. Commercial interests added 10,223 contracts their long positions and liquidated 9322 contracts of their short positions. According to the latest COT report, managed money is long corn by a ratio of 12.77:1 which is higher than the previous week’s ratio of 11.41:1, but down from the ratio of two weeks ago of 14.07:1 and approximately 30% less than the ratio of three weeks ago of 17.70:1.
We need to see more data and trading activity before we can chart a course of action for wheat and corn. Both remain on a short-term sell signal. The 50 day moving average for December corn is $7.88 and it closed at $7.56 1/4, therefore we think a rally up to the 50 day moving average is likely. On Friday, December Chicago wheat closed at $9.021/2 and its 50 day moving average is $8.94. In other words, we are slightly above the 50 day fair value price for wheat. It is possible that wheat could generate a short term buy signal on Monday, but it is not likely to occur in corn.
Wheat:
For the week, December wheat gained 5.25 cents. The COT report showed that managed money liquidated 894 contracts of their long positions and also liquidated 3,458 contracts of their short positions. Commercial interests added 1,565 contracts to their long positions and liquidated 2,765 contracts of their short positions. According to the latest report, managed money is long wheat by a ratio of 1.91:1, which is up slightly from the previous week’s ratio of 1.83:1 and about the same as the ratio of two weeks ago of 1.96:1 and down from the ratio of two weeks ago of 2.08:1.
Performance for September 24-September 28
December corn +1.07%.
December wheat +0.59%.
December meal +0.19%
November beans -1.28%
Crude oil:
For the week, November crude oil lost 70.00 cents. The COT report showed that managed money liquidated 24,159 contracts of their long positions and added 14,213 contracts to their short positions. Commercial interests liquidated 18,391 contracts of their long positions and also liquidated 20,096 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 3.98:1 which is down significantly from the previous week’s ratio of 6.12:1 and the ratio of two weeks ago of 6.53:1.
On September 14, the day after quantitative easing was announced crude oil peaked at $100.42 on extremely heavy volume of 828,091 contracts. Although volume on the 14th was the highest since May 4, 2012, when volume reached 884,050 contracts, the fact is crude oil generated that volume by declining $4.05. In order to find volume equal to or greater than the volume on September 13-14 on an advance, we have to go back to March 1, 2012 when crude oil advanced $1.77 and volume spiked at 864,500 while open interest increased by 20,269 contracts. Interestingly, on March 1, crude oil spiked at $110.55, which is the highest price for crude for 2012. The September 14 high ocurred on heavy volume when the markets were going crazy over quantitative easing. In our view, the high of $100.42 will stand for at least a couple of months, unless there is a threat of some serious military action against Iran. Despite the elevated price of crude oil, the 50 day moving average of $93.48 still remains below its 200 day moving average of $96.24 on the continuation chart. Stand aside.
Heating oil:
For the week, November heating oil gained 4.15 cents. The COT report showed that managed money liquidated 3,139 contracts of their long positions and also liquidated 12 285 contracts of their short positions. Commercial interests added 999 contracts to their long positions and liquidated 6,047 contracts of their short positions. As of the latest report, managed money is long by a ratio of 2.29:1, which is down slightly from the previous week’s ratio of 2.42:1 and up slightly from the ratio of two weeks ago of 2.25:1.
Gasoline:
For the week, November gasoline gained 10.06 cents. The COT report showed that managed money added 970 contracts to their long positions and liquidated 2,441 contracts of their short positions. Commercial interests liquidated 838 contracts of their long positions and also liquidated 284 contracts of their short positions. According to the latest report, managed money is long gasoline by a ratio of 11.26:1, which is significantly above the previous week’s ratio of 8.49:1 and the ratio of two weeks ago of 7.21:1. Stand aside.
Natural gas:
For the week, November natural gas gained 24.9 cents. The COT report showed that managed money liquidated 3,073 contracts of their long positions and also liquidated 4,719 contracts of their short positions. Commercial interests liquidated 3,492 contracts of their long positions and also liquidated 2,225 contracts of their short positions. As of the latest report, managed money is currently short natural gas by a ratio of 1.05:1 which is about the same as last week’s ratio of 1.06:1 and the ratio of two weeks ago of 1.11:1. The market is on a short and intermediate term buy signal, but we believe nat gas is in a trading range bounded by $3.50 and $2.70.
Copper:
For the week, December copper lost 3.10 cents. The COT report showed that managed money added 4,486 contracts to their long positions and also added 1,068 contracts to their short positions. Commercial interests liquidated 79 contracts of their long positions and added 1,819 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 1.79:1, which is up from the previous week of 1.68:1 and the ratio of two weeks ago of 1.73:1. Stand aside.
Gold:
For the week, December gold lost $4.10. The COT report showed that managed money added 11,432 contracts to their long positions and liquidated 2,494 contracts of their short positions. Commercial interests liquidated 267 contracts of their long positions and added 20,356 contracts to their short positions. As of the latest report, managed money is long gold by a spectacular 18.24:1 ratio, which is up substantially from the previous week of 13.37:1 and the ratio of two weeks ago of 14.65:1, and is approximately 80% higher than the ratio of three weeks ago of 10.16:1.
Silver:
For the week, December silver lost 5.8 cents. The COT report showed that managed money added 4,031 contracts to their long positions, and also added 269 contracts to their short positions. Commercial interests liquidated 52 contracts of their long positions and added 1,089 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 8.36:1 which is up from the previous week of 7.92:1 and the ratio of two weeks ago of 7.73:1. Three weeks ago, the ratio stood at 7.00:1.
On the continuation chart, silver’s 50 day moving average crossed above its 200 day moving average. Relative to their 50 day moving averages of $1673.47 and $30.64 for the December contracts, both gold and silver are massively overbought, and the ever-increasing long to short ratio indicates that more speculators are entering the market at the high end of the trading range. Do not enter long positions at current levels. Stand aside and wait for a correction.
Euro:
For the week, the December euro lost 1.39 cents. The COT report showed that leveraged funds added 6,803 contracts to their long positions and liquidated 10,341 contracts of their short positions. As of the latest report, leveraged funds are short the euro by a ratio of 2.21:1 which is down substantially from the previous week’s ratio of 2.90:1, but up from the ratio of two weeks ago of 1.75:1 Stand aside.
S&P 500 E mini:
For the week, the December S&P 500 E mini lost 17.70. The COT report showed that leveraged funds liquidated 64,630 contracts of their long positions and also liquidated 253,988 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.60:1 which is down from the previous week of 1.88:1 and the ratio of two weeks ago of 2.03:1. Long put protection should be in place.
Although the performance of the S&P 500 E mini was certainly respectable for the month of September, it actually ranks at the low end of the scale when compared to the best performing years. During the month of September for 2000-2012, it ranked number 4.
Best Performers: S&P 500 E mini- September 1-September 30, 2000-2012.
2010 +8.93%
2009 +3.69%
2007 +3.25%
2012 +2.57%
2006 +2.15%
Average Performance for 13 years 2000-2012 = -1.96%
Best Performers: S&P 500 E mini-July 1-September 30.
2009 + 15.51%.
2010 + 11.19%
2012 + 6.25%
Average Performance for 13 years 2000-2012 = -2.09%
Conventional wisdom says “don’t fight the Fed.” Ever since the Federal Reserve announced its quantitative easing program Act III, all of the so-called experts are calling for ever-increasing prices for the major indices. As we have noted in previous posts, we believe the market can retest the high of 1468.00 made on September 14. However, we are not in the camp that says this market is a rocket to the moon.
Consider on September 13, after quantitative easing was announced, volume, in the S&P 500 E mini spiked at 3,959,689 contracts and the S&P 500 E mini closed up 17.75 points. The following day, the E mini closed up another 8.50 points on volume of 3,755,516 contracts. When taking volume into account, the performance of the S&P 500 during September 13-14 was disappointing to say the least, with a two day gain of 26.25 points. In 2012, the highest volume day occurred on June 11, when the E mini traded 4,288,775 contracts. However, this was a day when the S&P E mini lost 21.75 points. In order to determine when volume on an advancing day exceeded the volume on September 13 and 14, we had to go back to October of 2011. On October 4, 2011, the E mini advanced 27.75 points on volume of 4,194,137 contracts. The advance on October 4, 2011 came from a major bottom on October 4 of 1068.00 after the market had declined nearly 300 points from late July 2011 from its high of 1360.
One point to understand is that volume near the 4 million contract level is quite rare. The volume that occurred on September 13 and 14 is anomalous and in our opinion has major significance. It is perfectly understandable massive volume from a major low would occur as the market moved sharply higher. The rally that began on October 4 peaked on October 27 (+221.25 points) and made an interim top at 1289.25 on volume of 3,327,919 contracts. In other words, the rally began with the massive increase in volume on October 4 ended with the massive increase in volume on October 27. From the high of 1289.25, the E mini sold off to a low of 1147.50, or 141.75 points on November 25, 2011. From that low, it took the S&P 500 E mini until January 10 to surpass the October 27 peak.
Compare the rally from October 4 through October’s 27 to the high volume rally that occurred on September 13-14 and the subsequent performance through September 28. After September 14, the market didn’t continue to rally as it had in the October 4-October 27, 2011 period, but instead declined by 24.75 points through September 28. Another factor to consider is that the last two weeks of September, is typically end of the quarter window dressing when institutions and hedge funds who are sitting on cash enter the market. If this was the case, the S&P should have been be stronger in the second half of September (especially with the quantitative easing announcement) than it was in the first half of the month. However, from September 1 through September 14, the S&P 500 E mini gained 61.00 points, while in the second half it declined. In other words, the market had already discounted quantitative easing by the Federal Reserve. The performance of the S&P 500 E mini during the third quarter 2012 ranked number 3 out of 13 years (2000-2012), which we attribute to the discounting of quantitative easing. The massive spike in volume that occurred on September 13 and 14 represented the last gasp of buyers who felt they had the missed boat.
One other factor that readers should keep in mind is that the S&P 500 E mini and the other major indices have had significant declines during the period that quantitative easing was in effect. Any person who says the market can’t go down because of quantitative easing should look at some of the equity debacles that occurred in 2010 and 2011. In our opinion, 1468.00 on the S&P 500 E mini likely could be the high of the year.
There is another major concern that is ignored by the financial press. That concern is about the performance of the Dow Jones Transportation Index. The following table shows the performance of the transportation, index, the DJIA, the NASDAQ 100 and the S&P 500 cash index.
Year to Date Performance:
NASDAQ 100 +22.86%
S&P 500 cash index +14.56%
DJIA +9.98%
Dow Jones Trans Index -2.53%
The performance of the transportation index is problematic for a number of reasons. Transportation now represents a greater measure of economic growth than it used to. With the massive spread of e-commerce, transportation has become an integral part of the new economy. Federal Express recently reported a dismal earnings forecast and its outlook going forward was negative too. In our view, the transportation index is telling us what the real economy is doing while the S&P 500 and to a lesser extent, the Dow Jones Industrial Average is telling us what money printing is doing. The transportation index down on a year-to-date basis, and its 50 day moving average is below its 200 day moving average. The weight of the real economy as exemplified by the transportation index is going to be a drag on the major indices.
At this point, it is likely that anyone who wanted to be in the market already has positions. The question is: What event or series of events will power the market significantly beyond 1468.
The survey by the American Association of Individual Investors continue to show that many investors are not buying into the rally. In this most recent survey, the bears outnumber bulls and investors who are neutral. Many people in the brokerage and investment advisory business claim this is a sign the market has farther to go because there is all this pent up demand that will be unleashed once the indices move higher. The problem with this argument is that it has been used for a couple of years, and still investors are not returning to the market. Unlike professional investors, who embrace volatility, the overwhelming majority of investors hate it, and as a result will do everything to avoid it, including investing in the long dated government bonds. There have been numerous stock market crashes and other financial disasters during the past 10 years and we do not believe the average investor is coming back to the market anytime soon. This phenomenon occurred in the 1930s through a good portion of the 1950s because people had vivid memories of horrific losses. This begs the question: Who is going to be buying equities above 1468 when the all-time high for the cash S&P is 1576 (October 11, 2007).
American Association of Individual Investors (survey)
Recent week 2wks ago 3 wks ago
Bulls 36.1% 37.5% 36.5%
Bears 36.5% 33.8% 33.0%
Neutral 27.4% 28.7% 30.6%
