Soybeans:
For the week, November soybeans lost 20.00 cents. The Commitments of Traders Report showed that managed money added 2,272 contracts to their long positions and also added 632 contracts to their short positions. Commercial interests liquidated 4,669 contracts of their long positions and added 3,779 contracts to their short positions. As of the latest COT report, managed money is long by a ratio of 23.16:1, which is down somewhat from the previous week of 24.54:1, and is down significantly from two weeks ago at 28.29:1.
We are very bullish on soybeans, and so is everyone else, which worries us and it is worrisome that daily highs for soybeans during the past four sessions have been lower each successive day. Again, the big question is: how much of the supply demand report is already priced in soybeans at this juncture. Although it is likely that nearly 60% of the crop has already been sold, if soybeans were to have an extended decline for any reason, there could be some export cancellations. It is likely that some buying for 2013 can be attributed to concerns of ever-increasing prices when countries are trying to keep inflation low and their populations fed. An important lesson relevant to soybeans can be gleaned from the August 10 USDA supply-demand report. On the day of the report, September corn spiked to $8.49, and sold off, never to see $8.49 since that date. Readers should stand aside until after the report. Conceivably we may see a bounce on Monday and Tuesday.
Soybean meal:
For the week, October soybean meal lost $9.00 and the new crop December lost $6.50. The COT report showed that managed money liquidated 402 contracts of their long positions and added 1,531 contracts to their short positions. Commercial interests liquidated 2,236 contracts of their long positions and also liquidated 2,755 contracts of their short positions. As of the latest reporting week, managed money is long soybean meal by a ratio of 21.57:1, which is nearly half of the previous week’s ratio of 40.13:1, and is significantly lower than the ratio of two weeks ago of 37.45:1.
There has been a significant amount of liquidation of soybean meal during the past four sessions (not including September 7) and the COT report reflected this with one of the lowest long to short ratios in a couple of months. Keep in mind that December soybean meal closed at $526.90, which is a scant $14.90 from its contract high. Additionally, volatility continues to decline, which in our view is a negative sign. As an example: On September 7, December soybean meal futures closed $1.20 lower, but the soybean meal option strike (at the money) of 530 lost $1.60. Considering that the delta is 50.4 (as of Friday), the 530 strike should have lost only 60 cents. This is not what you want to see if you are bullish. The situation was the same for the March contract. For example, March soybean meal futures lost $2.00 and closed at $500.10. The March 500 call lost $2.05 when according to the delta of 53.5 the option should’ve lost only $1.07.
Corn:
For the week, December corn lost 0.25 cents. The COT report showed that managed money added 4,963 contracts to their long positions and liquidated 1,378 contracts of their short positions. Commercial interests liquidated a massive 26,519 contracts of their long positions and also liquidated 16,153 contracts of their short positions. As of the latest COT report, managed money speculators are long by a ratio of 17.70:1, which is up somewhat from the previous week of 16.25:1, but is significantly lower than the ratio of two weeks ago of 23.63:1.
Corn has been trading in a very narrow range for the last month or so, and the direction of corn will be determined by the September 12 USDA report. We suspect the driver of the report will be the USDA’s assessment of demand because the supply outlook is known for the most part. We suggest waiting until the report is released before contemplating new positions.
Wheat:
For the week, December wheat gained 15.50 cents. The COT report showed that managed money added 5,954 contracts to their long positions and also added 3,880 contracts to their short positions. Commercial interests liquidated 6,444 contracts of their long positions and also liquidated 4,851 contracts of their short positions. According to the latest report, managed money is long by a ratio of 2.08:1 which is down slightly from the previous week’s ratio of 2.11:1 and from the ratio of two weeks ago of 2.14:1.
Recently, December wheat has been showing independent strength from corn. On Friday, December wheat closed at $9.05 which is only 23 cents above its 50 day moving average of $8.82. From August 15 through September 7, wheat has advanced 29.50 cents or 3.37% while December corn gained 7.25 cents or 0.92%. Wheat benefits from the powerful narrative of reduced global supplies of grains in general and the need for many second and third world countries to keep food prices in check in order to avoid political problems at home. Additionally, the use of lower grade wheat as feed has picked up considerably since the news of the disastrous U.S. corn crop.
Many people believe that wheat cannot advance significantly due to its relative plentiful supply. However, the corn market of 2010-2011 proved this to be incorrect. Prior to 2012, the highest corn prices in history occurred during June 2011 when July corn reached $7.99 3/4 after a bumper crop. This was a demand led market and is is an example of what can occur when there is high demand combined with a healthy crop. On June 10, when corn made its all-time high in 2011, the high for soybeans on that date was $13.97 1/2 while soybean meal made a high of $375.80 and wheat’s high was $7.63 3/4. During this period, wheat sold at a discount to corn. In other words, the price level of other competitive grains was significantly lower in June of 2011 than it is in September 2012. Interestingly, corn is selling for nearly the exact same price on September 7 as it was on June 10, 2011. The only difference is in 2012, other members of the grain complex are selling at stratospheric prices.
The September USDA supply-demand crop report will be released on Wednesday, September 12. We believe it is wise to wait until after the report before implementing bullish positions in wheat. Wheat options are reasonably priced and much of the volatility has been squeezed out of option prices. This also is true for much of the grain complex. Once the report is released, we will be able to make a better assessment of opportunities in the grain complex and wheat in particular.
Crude oil:
For the week, October crude oil lost 5.00 cents. The COT report showed that managed money added 1,397 contracts to their long positions and liquidated 531 contracts of their short positions. Commercial interests added 1,956 contracts to their long positions and liquidated 7,069 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 5.52:1, which is up slightly from the previous week’s ratio of 5.41:1, and is up approximately 25% from the ratio of two weeks ago of 4.56:1.
Heating oil:
For the week, October heating oil lost 3.13 cents. The COT report showed that managed money added 4,124 contracts to their long positions and also added 1,865 contracts to their short positions. Commercial interests added 5,466 contracts to their long positions and also added 7,773 contracts to their short positions. According to the latest report, managed money is long by a ratio of 2.52:1, which is down slightly from the previous week’s ratio of 2.56:1 and is up slightly from the ratio of two weeks ago of 2.36:1.
Gasoline:
For the week, October gasoline gained 4.68 cents. The COT report showed that managed money added 2,000 contracts to their long positions and also added 655 contracts to their short positions. Commercial interests added 3,341 contracts to their long positions and also added 3,108 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 8.54:1, which is down slightly from the previous week’s ratio of 8.94:1 and down from the ratio of two weeks ago of 9.32:1.
Copper: On September 7, December copper generated an intermediate term buy signal.
For the week, December copper gained 18.80 cents. The COT report showed that managed money liquidated 2,688 contracts of their long positions and also liquidated 104 contracts of their short positions. Commercial interests liquidated 4,638 contracts of their long positions and also liquidated 5,653 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 1.02:1, which is down from the previous week of 1.11:1, but is up significantly from the ratio of two weeks ago when managed money was short by a ratio of 1.10:1.
On September 4, we notified our readers that we had joined the bulls and thought copper should be traded from the long side. On September 4, December copper closed at $3.4690 and on September 7, copper closed at 3.6450, or an advance of 17.60 cents. This is the highest price for copper since May 14 when it reached $3.6805. Do not enter long positions at current levels because the market is massively overbought relative to its 50 day moving average of 3.44.
Gold:
For the week, December gold gained $52.90. The COT report showed that managed money added 8,604 contracts to their long positions and liquidated 1,157 contracts of their short positions. Commercial interests liquidated 1,186 contracts of their long positions and added 17,038 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 10.16:1 which is up significantly from the previous week’s ratio of 8.76:1 and is almost double the ratio of two weeks ago of 5.70:1.
The current long to short ratio indicates that gold is massively overbought from the standpoint of new managed money entering the market, and is overbought based upon its closing price of $17 40.50, which is more than $100.00 above its 50 day moving average of 1622.14. Do not chase this market higher. Wait for a setback.
Silver:
For the week, December silver gained $2.24.8. The COT report showed that managed money added 1,194 contracts to their long positions and liquidated 688 contracts of their short positions. Commercial interests liquidated 2,758 contracts of their long positions and added 2,808 contracts to their short positions. As of the latest report, managed money is long by a ratio of 7.00:1, which is up significantly from the previous week’s ratio of 5.81:1, and is more than double the ratio of two weeks ago of 2.77:1.
As the long to short ratio stats show, managed money has flooded into silver like they have with gold, and as a result the market is massively overbought. This makes it very dangerous to trade silver. If not long from significantly lower levels, stand aside. Longs with significant profits should consider either taking profits or partial profits. The equity and precious metal markets have been responding to the likelihood of money printing campaigns from Europe and the U.S. If either does not come to fruition, hell could break loose on the downside. Remember, markets always look terrific at the top.
Euro:
For the week, the September Euro gained 2.16 cents. The COT report showed that leveraged funds added 215 contracts to their long positions and liquidated 378 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.73:1, which is about the same as the previous week’s ratio of 1.74:1 and down from the ratio of two weeks ago of 2.03:1.
Although we have not received the final statistics on Friday’s trading, if there is an open interest increase, this would confirm in our mind that shorts have dug in and higher prices will be required before they liquidate. The Euro appears to be going through a garden-variety short squeeze, and until there is massive liquidation by shorts, we think the Euro will continue to trade higher.
10 Year Treasury Notes:
For the week, the December 10 year treasury notes closed 16 points lower. The COT report showed that leveraged funds added 72,856 contracts to their long positions and added 14,347 contracts to their short positions. As of the latest report, leveraged funds are long by a ratio of 2.52:1 which is up from the previous week’s ratio of 2.25:1 and from the ratio of two weeks ago of 2.12:1.
S&P 500 E mini:
For the week, the September S&P 500 E mini gained 33.10. The COT report showed that leveraged funds added 10,082 contracts to their long positions and also added 26,560 contracts to their short positions. According to the latest report, leveraged funds are short by a ratio of 2.13:1 which is about the same as last week’s 2.12:1 and the ratio of two weeks ago of 2.14:1.
Although we think the market may move higher during the first part of the coming week, we are extremely cautious at current levels, which is why we have suggested that investors protect themselves with long put protection on the E mini or another major index. We did research on the performance of the S&P 500 E mini for the month of September covering the period of 2000-2011, and are presenting the results below. Additionally, we looked at the performance of August 2012 and compared it to prior years to gain some perspective on how the rest of September may perform. The performance of the S&P 500 E mini during August 2012 was +1.63%. Since 2000, there have been four other years that performed better than the E mini in August 2012. Two of those years had positive performance in September.
September has the infamous reputation of being the worst month for stocks and October is number two. From 2000-2011, there have been four major declines and the most recent occurred in September 2011 of – 7.11 %. The average performance for for the 12 years is -1.96%. There have been four years of positive performance in September and the highest was +8.93% during September 2010. Also, we reviewed the years 2000 and 2004 because they were Presidential election years and found that during September 2000 the S&P E mini declined by 5.87% and 2004 it gained 0.93%. It is important to remember that September 2000 and 2004 were relatively prosperous years.
Best Years August 2000-2012: Best years September 2000-2011
2000 +4.45% 2010 +8.93%
2009 +4.35% 2009 +3.69%
2003 +1.87% 2007 +3.25%
2006 +1.79% 2006 +2.15%
2012 +1.63% 2012 +2.37% (September 1-September 7)
Clearly the S&P 500 E mini is over extended and overbought relative to its 50 day moving average of 1380.16. Additionally, there are indications that the market may be running into trouble. For example, the 50 day moving average of volume on the New York Stock Exchange is 690.34 million shares, which is below its 200 day moving average of 790.86 million shares. On Friday, NYSE volume was 679.73 million shares, which is below the 50 day moving average, despite the E mini closing at its highest price in over four years. The table below shows the number of new highs minus new lows at their recent peaks. We have included the closing prices on each of those dates.
New Highs – New Lows (all exchanges)
February 3, 2012 672 1339.10 (close)
September 7, 2012 617 1438.25
July 3, 2012 573 1368.00
Although the S&P 500 E mini is trading approximately 100 points higher than it was on February 3, the number of new highs minus new lows have not exceeded the February 3 peak.
On September 7, the E mini made a new high for the move at 1438.75, when it came within 1.95 points of the high made on May 19 2008 of 1440.70. This was the highest price for the E mini since it reached a high of 1443.70 on January 4, 2008. Therefore, the 1440 level on the S&P 500 E mini and the cash S&P 500 represents a major turning point. From May 19, 2008, the E mini fell from 1440.70 to 1201.00 by July 15, 2008.
If the S&P 500 E mini and the S&P 500 cash indices rally to 1450.00, but no higher than 1459.90, then reverse down to at least 1420.00, the rally is over, at least temporarily, but possibly for the intermediate term. If the market breaks above 1460.00, the likelihood is the rally continues. Long put protection on at least one of the major indices is advised, rally or no rally. However, if the S&P 500 cash and/or futures reverse down to at least 1420.00, after reaching 1450-1459.90, additional put protection is advised.
American Association of Individual Investors Survey:
Last wk 2 wks ago 3 wks ago
Bulls 33.1% 34.7% 42.0%
Bears 33.1% 32.6% 25.9%
Neutral 33.9% 32.6% 32.2%
It is remarkable that investors have been on the sidelines during the recent market rally. Many people in the financial press think this signifies the likelihood that the rally will continue. If this is the case, the next target would be 1484.50, which was the high on December 31, 2007, and 1510.70, which was the high on December 26, 2007.
