Weekend Wrap for January 5, 2014

The COT report was not released on Friday due to the New Year’s holiday, but will be released on Monday and incorporated into this report. As a result, this report will be somewhat shorter than usual.

Soybeans: On December 31, March soybeans generated a short-term sell signal and on January 3 generated an intermediate term sell signal.

For the week, January soybeans lost 42.25 cents, March -42.50, May -40.50. The COT report revealed that managed money liquidated 16,093 contracts of their long positions and added 8,849 contracts to their short positions. Commercial interests liquidated 24,080 contracts of their long positions and also liquidated 40,025 contracts of their short positions. As of the latest report, and managed money is long soybeans by ratio of 6.42:1, which is a substantial reduction from the previous week of 10.29:1 and the ratio of 2 weeks ago of 9.08:1.

Soybean meal: On January 2, March soybean meal generated a short-term sell signal, but remains on an intermediate term buy signal.

For the week, January soybean meal lost $21.20, March -20.10, May -17.20.The COT report revealed that managed money liquidated 1,336 contracts of their long positions and added 1,241 contracts to their short positions. Commercial interests liquidated 4,035 contracts of their long positions and also liquidated 9,648 contracts of their short positions. As of the latest report, managed money is long soybean meal by ratio 3.55:1, which is down from the previous week of 3.82:1 and the ratio of 2 weeks ago of 3.87:1.

Soybean oil:

For the week, January soybean oil lost 68 points, March -75, May -79.The COT report revealed that managed money added 90 contracts to their long positions and also added 1,781 contracts to their short positions. Commercial interests added 3,934 contracts to their long positions and liquidated 2,843 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 2.07:1, which is up from the previous week of 2.04:1 and the ratio of 2 weeks ago of 1.99:1.

Corn:

For the week, March, May and July corn lost 4.00 cents each.The COT report revealed that managed money liquidated 1,352 contracts of their long positions and added 4,885 contracts to their short positions. Commercial interests added 23,631 contracts to their long positions and also added 2,960 contracts to their short positions. As of the latest report, managed money is short corn by ratio of 1.45:1, which is up from the previous week of 1.41:1 and the same as 2 weeks ago of 1.45:1.

Chicago wheat:

For the week, March Chicago wheat lost 3.25 cents, May -5.00, July -6.75. The COT report revealed that managed money liquidated 2,209 contracts of their long positions and added 1,061 contracts to their short positions. Commercial interests added 4,543 contracts to their long positions and also added 2,472 contracts to their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.78:1, which is up from the previous week of 1.7:1, but slightly below the ratio of 2 weeks ago of 1.79:1.

Although COT stats for this week will not be released until January 6, we wanted to take time and examine the short to long ratios of managed money and commercial interests, and why they may be signaling wheat is near a bottom. The short to long ratio of managed money for the past 4 reports beginning with the tabulation date of December 3 has been 1.72:1, December 10, 1.77:1, December 17, 1.79:1 and December 24, 1.73:1.

In short, managed money has barely increased their net short position in Chicago wheat from December 4 through December 24, even though March Chicago wheat declined 55 1/2 cents or -8.39% in this time frame. To put a finer point on it, consider the net short position of managed money on December 3 was 65,081 contracts and by December 24 was only 67,075 contracts or an increase of 1,994 contracts. In other words, managed money has been reluctant to add significantly to short positions even though wheat prices have fallen dramatically. This tells us managed money as a whole doesn’t think wheat prices have much further to fall.

When examining the net short position of commercial interests, we reach the same conclusion about wheat bottoming. For example, on December 3, the commercial net short position was 24,106 contracts or a short ratio of of 1.38:1. By December 24, the net short position had fallen to just 3,335 contracts or a short ratio of 1.04:1. In other words, the two major groups that drive wheat prices are getting less bearish as a whole as prices have fallen to their lowest levels in over 18 months.

On Friday, Egypt made its largest purchase of wheat since 2010 taking 535,000 metric tons, which surpassed its previous large purchase of 475,000 metric tons made during September 2012 and the 420,000 metric ton purchase in 2011. Additionally, Algeria purchased 500,000 – 550,000 metric tons of milling wheat. US wheat was the cheapest among the bidders, but the cost of freight from the United States made the purchase uncompetitive. Even though these purchases were not from the United States, it boosted prices for Chicago and KC wheat in Friday’s trading. The main point is: 1,000,000 tons of wheat has been taken off the world market in one fell swoop, which reduces the world’s balance sheet of available supply.

On January 10, the USDA WASDE report will be released and this will have a significant impact on the grain markets. We think there is a more than reasonable chance that the report will be friendly to wheat. If feed usage is increased per the September NASS (National Agricultural Statistics Service) report of 474 million bushels versus the WASDE feed number of 280 mb, the market could explode to the upside. The important point is that the market has discounted the lower feed number, but has not discounted the higher feed number. Additionally, with the massive short position held by managed money and potential new longs wanting to initiate positions due to a positive report, the wheat market has the potential to deliver a big surprise in January.

Although we rarely endorse initiating new positions prior to a report, in this case, it is a reasonable prospect for adventurous speculators because of the factors listed above and that call options are extremely cheap, especially February, which is an option on the March contract. For example, as of Friday’s close, an at the money strike (6.05) call can be had for $668.75, and a slightly out of the money call at a 620 strike can be purchased for $375.00. Mind you, this option expires on January 24, so if the trade does not work out immediately, it should be sold as possible due to the power of option decay (Theta). If the trade does work, it would still be advisable to switch out of February into the March or April option, but speculators have somewhat more time to do so. Positions should be small and initiated only by clients who are willing to assume the risk of a quick loss. Do not initiate positions in futures. Use call options only

Kansas City wheat:

For the week, March Kansas City wheat lost 1.75 cents, May -2.25, July -4.50.TheCOT report revealed that managed money added 2,773 contracts to their long positions and also added 2,775 contracts to their short positions. Commercial interests added 1,710 contracts to their long positions and liquidated 1,459 contracts of their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 1.26:1, which is down from the previous week of 1.29:1 and the ratio of 2 weeks ago of 1.60:1.

Cotton:

For the week, March cotton lost 1.18 cents, May -77 points, July -50.The COT report revealed that managed money added 3,386 contracts to their long positions and liquidated 1,728 contracts of their short positions.Commercial interests liquidated 2,239 contracts of their long positions and added 3,540 contracts to their short positions. As of the latest report, managed money is long cotton by a ratio of 6.42:1, which is up from the previous week of 4.91:1 and the ratio of 2 weeks ago of 4.04:1.

 Sugar #11:

For the week, March sugar lost 35 points, May -32, July -27.The COT report revealed that managed money liquidated 2,617 contracts of their long positions and also liquidated 410 contracts of their short positions. Commercial interests liquidated 1,879 contracts of their long positions and also liquidated 5,042 contracts of their short positions. As of the latest report, managed money is short sugar by a ratio of 1.16:1, which is up from the previous week of 1.14:1 and the ratio of 2 weeks ago of 1.05:1.

Coffee:

For the week, March coffee was unchanged, May -5 points, July +5. The COT report revealed that managed money liquidated 660 contracts of their long positions and added 156 contracts to their short positions. Commercial interests added 6 contracts to their long positions and liquidated 523 contracts of their short positions. As of the latest report, managed money is short coffee by ratio of 1.30:1, which is up slightly from the previous week of 1.27:1 but down from the ratio of 2 weeks ago of 1.40:1.

Cocoa: On January 2, March cocoa generated a short-term sell signal, but remains on an intermediate term buy signal.

For the week, March cocoa lost $86.00, May -87.00, July -85.00. The COT report revealed that managed money liquidated 232 contracts of their long positions and added 1,587 contracts to their short positions. Commercial interests added 787 contracts to their long positions and liquidated 3,528 contracts of their short positions. As of the latest report, managed money is long cocoa by a ratio of 7.26:1, which is down from the previous week of 8.31:1 and the ratio of 2 weeks ago of 7.50:1.

On December 2, March cocoa made its high at 2844, which was the highest price for cocoa on the continuation chart since September 2011. From December 2 through January 2, March cocoa lost $177.00, or -6.29%. From December 2 through January 2 total open interest declined by 15,418 contracts, which represents an open interest decline approximately 7.00%. While it is healthy to see an open interest decline along with a decline in prices, cocoa has been displaying all the signs of a market that is topped out.

On December 3, one day after March cocoa topped out, the long to short ratio of managed money stood at 6.30:1 and the net long position was 81,755 contracts. Commercial interests held short positions by a ratio of 3.35:1, or a net short position of 106,760 contracts. By December 24 (the latest tabulation of the COT report) the long to short ratio of managed money had increased to 8.31:1, and the net long position held by managed money declined by 122 contracts to 81,633. The commercial short ratio increased to 3.85:1 and the net short position increased by 6,000 contracts to 112,760.

However, from December 3 through December 24, March cocoa advanced $12.00. In other words, even though cocoa prices essentially traded flat for approximately 3 weeks, managed money continued to hold their stratospheric net long position, while commercial interests became increasingly bearish.

We have pointed out in numerous past reports that action in spreads often foretell a major move. In the case of cocoa, on December 31, the March-July 2014 spread closed at a $15.00 premium to July, which is the lowest close for the spread since July 15, 2013 when the March-July spread close at 16.00 premium to July and  March cocoa closed at 2241.00. In short, the spread is revealing weakness that has not shown up in cocoa prices. On January 3, the spread pulled back somewhat and July closed at an $11.00 premium to March.

On January 2, March cocoa closed at 2636.00, which is the lowest close since November 12 of 2622.00. On November 12 when the COT report was tabulated, managed money was long by a ratio of 7.36:1 and held a net long position of 78,525 contracts. Commercial interests were short by a ratio of 3.20:1 or a net short position of 99,376 contracts.

March cocoa generated a short-term sell signal on January 2 and is usually the case after the generation of a sell signal, the market has a tendency to rally that can last 1-3 days. In this case, March cocoa can rally to its 20 day moving and 50 day moving averages of 2765 and 2742 respectively. Additionally, according to our calculation, the rally could carry as far as 2797, but this is likely to be the upper end of the trading range. OIA recommends the initiation of bearish positions if the rally continues. Based upon our evaluation of various COT reports, it is highly likely that managed money will dig in strongly and refused to liquidate, in part because it is one of the few commodities in a bull market. Typically, managed money is often the last group to figure out  the party is over. From a seasonal point of view, cocoa tends to trade in a sideways pattern during January and February, therefore, writing out of the money calls makes sense on a rally, plus it is more conservative.

Live cattle:

For the week, February live cattle advanced 1.35 cents, April +95 points, June +50. The COT report revealed that managed money added 4,240 contracts to their long positions and liquidated 214 contracts of their short positions. Commercial interests added 495 contracts to their long positions and also added 4,224 contracts to their short positions. As of the latest report, managed money is long cattle by a ratio of 5.23:1, which is up from the previous week of  4.99:1 and slightly below the ratio of 2 weeks ago of 5.32:1.

Lean hogs:

For the week, February lean hogs advanced 1.02 cents, April +60 points, June +75. The COT report revealed that managed money liquidated 2,192 contracts of their long positions and added 542 contracts to their short positions.Commercial interests added 1,499 contracts to their long positions and liquidated 1,403 contracts of their short positions.As of the latest report, managed money is long hogs by ratio of 2.99:1, which is down from the previous week of 3.18:1 and the ratio of 2 weeks ago of 3.91:1.

 Crude oil: On January 2, February WTI crude oil generated a short-term sell signal and remains on an intermediate term sell signal.

For the week, February WTI crude oil declined $6.36, March -6.25, April -5.91. The COT report revealed that managed money added 6,302 contracts to their long positions and liquidated 469 contracts of their short positions. Commercial interests liquidated 6,684 contracts of their long positions and also liquidated 1,680 contracts of their short positions. As of the latest report, managed money is long WTI crude oil by a ratio of 8.59:1,which is up from the previous week of 8.30:1 and the ratio of 2 weeks ago of 6.8:1.

Heating oil: On January 2, February heating oil generated a short-term sell signal and on January 3 generated an intermediate term sell signal.

For the week, February heating oil lost 15.27 cents, March -15.19, April -15.02.The COT report revealed that managed money added 6,407 contracts to their long positions and liquidated 513 contracts of their short positions. Commercial interests liquidated 13,484 contracts of their long positions and added 619 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.71:1, which is up substantially from the previous week of 2.22:1 and the ratio of 2 weeks ago of 2.05:1.

Gasoline: On January 2, February gasoline generated a short-term sell signal, but remains on an intermediate term buy signal.

For the week, February gasoline lost 16.07 cents, March -15.18, April -13.74.The COT report revealed that managed money added 5,748 contracts to their long positions and liquidated 215 contracts of their short positions. Commercial interests liquidated 11,199 contracts of their long positions and also liquidated 4,077 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 8.74:1, which is up from the previous week of 7.68:1 and the ratio of 2 weeks ago of 6.44:1.

Natural gas:

For the week, February natural gas lost 6.4 cents, March -5.4, April -1.0. The COT report revealed that managed money added 9,896 contracts to their long positions and also added 7,996 contracts to their short positions. Commercial interests liquidated 6,165 contracts of their long positions and also liquidated 1,201 contracts of their short positions. As of the latest report, managed money is long natural gas by ratio of 1.76:1, which is down slightly from the previous week of 1.79:1, but up from the ratio of 2 weeks ago of 1.63:1.

Copper:

For the week, March copper lost 3.00 cents, May -2.65, July -2.55. The COT report revealed that managed money added 5,339 contracts to their long positions and liquidated 832 contracts of their short positions. Commercial interests liquidated 2,825 contracts of their long positions and added 5,007 contracts to their short positions. As of the latest report, managed money is long copper by ratio of 2.76:1, which is up from the previous week of 2.40:1 and the ratio of 2 weeks ago of 1.89:1.

Palladium:

For the week, March palladium advanced $19.35. The COT report revealed that managed money added 14 contracts to their long positions and also added 456 contracts to their short positions. Commercial interests added 71 contracts to their long positions and also added 32 contracts to their short positions. As of the latest report, managed money is long palladium by ratio of 4.65:1 , which is down significantly from the previous week of 5.21:1 and the ratio of 2 weeks ago of 9.52:1. The current ratio is the lowest in at least a year

Platinum: On January 2, April platinum generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, April platinum advanced 35.30.The COT report revealed that managed money added 168 contracts to their long positions and liquidated 1,324 contracts of their short positions. Commercial interests liquidated 139 contracts of their long positions and added 897 contracts to their short positions. As of the latest report, managed money is long platinum by ratio of 1.97:1, which is up from the previous week of 1.80:1 and the ratio of 2 weeks ago of 1.93:1.

Gold:

For the week, February gold advanced $24.60. The COT report revealed that managed money added 2,101 contracts to their long positions and liquidated 4,431 contracts of their short positions. Commercial interests liquidated 2,262 contracts of their long positions and added 4,136 contracts to their short positions. As of the latest report, managed money is long gold by ratio 1.23:1, which is up from the previous week of 1.14:1 and the ratio of 2 weeks ago of 1.17:1.

Silver:

For the week, March silver advanced 16.2 cents.The COT report revealed that managed money added 1,458 contracts to their long positions and liquidated 3.029 contracts of their short positions. Commercial interests liquidated 609 contracts of their long positions and added 1,360 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.33:1, which is up from the previous week of 1.12:1 and the ratio of 2 weeks ago of 1.14:1.

Canadian dollar:

For the week, the March Canadian dollar advanced 84 pips. The COT report revealed that leveraged funds added 426 contracts to their long positions and also added 1,717 contracts to their short positions. As of the latest report, leveraged funds are short by ratio of 4.73:1 , which is the same as the previous week of 4.74:1, but substantially above the ratio of 2 weeks ago of 4.14:1.

Australian dollar:

For the week, the March Australian dollar advanced 1.13 cents.The COT report revealed that leveraged funds liquidated 413 contracts of their long positions and added 3,549 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by ratio of 4.59:1, which is up from the previous week of 4.22:1 and the ratio of 2 weeks ago of 4.40:1.

Swiss franc:

For the week, the March Swiss franc lost 1.51 cents.The COT report revealed that leveraged funds added 390 contracts to their long positions and liquidated 32 contracts of their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 2.61:1, which is up from the previous week of 2.56:1 and significantly below the ratio of 2 weeks ago of 3.31:1. 

We think it is highly likely the March Swiss franc will generate a short-term sell signal shortly, and if the daily high is below 1.1060, a short-term sell signal will be generated. We like the long side of GBP/CHF, however this cross is significantly overbought relative to its 50 day moving average of 1.4649, and would not chase it at current levels. The high for the cross occurred on December 2 at 1.4921.

British pound:

For the week, the March British pound lost 40 pips.The COT report revealed that leveraged funds added 8,324 contracts to their long positions and liquidated 656 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by ratio of 3.40:1, which is up from the previous week of 3.10:1 but down slightly from the ratio of 2 weeks ago of 3.52:1.

Euro:

For the week, the March euro lost 1.35 cents. The COT report revealed that leveraged funds added 1,003 contracts to their long positions and also added 649 contracts to their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 2.29:1, which is the same a the previous week of 2.30:1, but above the ratio of 2 weeks ago of 2.18:1. 

The March euro will generate a short-term sell signal if the high for the day is below 1.3625.

Yen:

For the week, the March yen advanced 43 pips. The COT report revealed that leveraged funds liquidated 1,734 contracts of their long positions and also liquidated 8,362 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 3.01:1, which is down from the previous week of 3.08:1, but up from the ratio of 2 weeks ago of 2 2.90:1.

Dollar index:

For the week, the March dollar index advanced 42 points.The COT report revealed that leveraged funds added 1,953 contracts to their long positions and liquidated 2,285 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by a ratio of 3.86:1, which is down significantly from the previous week of 5.51:1 and the same as the ratio of 2 weeks ago of 3.84:1. 

Based upon our analysis, it appears the dollar index is in the process of generating a short and intermediate term buy signal. On January 3, the March dollar index closed at 80.955, which is the highest close since December 2 (81.120). On January 2, the March dollar index advanced 60 points on volume of 22,476 contracts and open interest increased by a massive 1,390 contracts, which relative to volume is approximately 140% above average. What makes the hefty open interest increase important is that managed money is short by a massive 5.51:1, according to the COT report, which was tabulated on December 24. In other words, managed money was digging in and refusing to liquidate on January 2, even though the dollar index was rallying strongly and on January 3 closed at its highest level in 30 days. On December 31, which will be the tabulation date for the upcoming COT report, the March dollar index was trading at the very low-end of its trading range going back to October 31. As a result, we do not expect to see massive changes in the short ratio. 

The strength in the dollar index will be aided by rising interest rates, and we expect rising interest rates to continue and perhaps accelerate beyond expectations. However, treasury notes are massively oversold and could have a bear market rally. A rising dollar index has major negative implications for commodities. On January 2, grains, petroleum complex and equities were sharply lower, but the dollar index was sharply higher along with precious metals. We cannot extrapolate much from one day’s action, and it remains to be seen whether precious metals can advance in the face of a rising dollar.

S&P 500 E mini:

For the week, the March S&P 500 E mini lost 11.00 points.The COT report revealed that leveraged funds added 14,950 contracts to their long positions and also added 6,532 contracts to their short positions. As of the latest report, leveraged funds are short the S&P 500 E mini by a ratio of 1.50:1, which is down from the previous week of 1.54:1, but up substantially from the ratio of 2 weeks ago of 1.06:1.