On March 10, the USDA will release its World Agriculture Supply Demand Report (WASDE). The report will be released at 11 o’clock CDT and we strongly recommend stops be tightened  because money management is paramount. If there are outstanding positions that show losses or marginally profitable, we would liquidate these and wait until after the report. 

The reporting period for the current COT report is from February 26 through March 4.

From the February 9 Weekend Wrap:

“In yesterday’s report we said OIA would be writing about a major shift in the markets. Over the past couple of weeks, we have noticed, that more and more commodities are generating short and intermediate term buy signals. The remarkable aspect of it is most commodities generating the signals are in plentiful supply. The exceptions to this are live cattle, cattle, hogs, heating oil, cocoa, all of whom are on short and intermediate term buy signals.”

“The Greenhaven index bottomed at 25.09 on November 19 and made a subsequent attempt to test that low on January 9, but failed having reached a low of 25.32. From January 10 through January 30 the index moved sideways to higher and really began to take off on February 3. From January 10 through February 7, GCC rallied 3.72% and on a year-to-date basis has rallied 3.07% while the S&P 500 cash index declined 2.78% DJIA – 4.72% and the NASDAQ 100 – 0.84%. On February 6, GCC made a high of 26.58, which is the index’s highest print since October 25, 2013 when it reached 26.63.”

Since that report, the GCC has advanced 7.81% and year to date has gained 11.13%. This week April milk made a new contract high and since the writing of the February 9 report, the April contract has gained 9.31% and year to date has advanced 17.86%. Most commodities we follow are on short and intermediate term buy signals and the exception is May copper, which is on a short and intermediate term sell signal. It is a very rare occurrence to have almost all commodities on short and intermediate term buy signals, especially since the talk in the financial press is about low inflation. Although it is certainly possible the rally in commodities is temporary, it may signal there is a shift in the supply and demand dynamics for certain commodities.We think natural gas fits into this category and the huge draws over the past couple of months have definitely changed the outlook for natural gas.

Soybeans:

For the week, May soybeans advanced 43.75 cents, July +39.50, November +18.00. The COT report revealed that managed money added 10,459 contracts to their long positions and also added 5,507 contracts to their short positions. Commercial interests liquidated 14,870 contracts of their long positions and also liquidated 11,264 contracts of their short positions. As of the latest report, managed money is long soybeans by ratio 7.82:1, which is down from the previous week of 9.20:1 and the ratio of 2 weeks ago of 9.50:1.

Soybean meal:

For the week, May soybean meal advanced 10 cents, July + $1.40, December -2.10. The COT report revealed that managed money liquidated 589 contracts of their long positions and added 2,356 contracts to their short positions. Commercial interests added 7,194 contracts to their long positions and also added 2,390 contracts to their short positions. As of the latest report, managed money is long soybean meal by ratio 3.81:1, which is down from the previous week of 4.23:1 and the ratio of 2 weeks ago of 4.49:1.

Soybean oil:

For the week, May soybean oil advanced 2.53 cents, July +2.57, December +2.27. The COT report revealed that managed money added 5,369 contracts to their long positions and liquidated 7,637 contracts of their short positions. Commercial interests liquidated 5,318 contracts of their long positions and added 12,222 contracts to their short positions. As of the latest report, managed money remains short soybean oil by ratio of 1.11:1, which is down from the previous week of 1.39:1 and the ratio of 2 weeks ago of 1.72:1.

Corn:

For the week, May corn advanced 25.50 cents, July +25.50, September +19.50. The COT report revealed that managed money added 19,367 contracts to their long positions and liquidated a massive 54,203 contracts of their short positions. Commercial interests liquidated 39,534 contracts of their long positions and added 36,831 contracts to their short positions. As of the latest report, managed money is long corn by a stratospheric 2.83:1, which is up dramatically from the previous week of 1.68:1 and more than double the ratio of 2 weeks ago of 1.33:1.

In last weekend’s report, we wrote about the large net long position of manage money, and according to this week’s COT report, they have increased long positions to a level last seen in early April and late March of 2013. The last time the long to short ratio approached the level of this week’s COT report occurred in the report of April 2, 2013 when the long to short ratio reached 2.43:1 In the report tabulated on March 26, 2013, the ratio reached 3.62:1. On April 2, 2013, May corn closed at $6.42 and on March 26, 2013, May corn closed at 7.34 3/4.

We have no idea whether the USDA is going to raise exports, however, based upon the current reading for managed money in the COT report, they are all in on the long side. This makes the market is vulnerable to a sharp correction if there is a disappointment. Even if the numbers are bullish, there is a high likelihood the market could rally, and then sell off. Last week, we recommended for those holding long positions to write calls against them in the event the market has a sharp rally. We continue to think this makes sense, because if corn prices are to continue to moving higher, the market needs new buyers who are willing to step up and pay the price and corn is already saturated with longs. As we have said before, farmers are holding large stockpiles corn and could rush to sell in event the report disappoints. Another important point is that the 20 day moving average for the May contract stands at $4.62 and the 50 day ma is 4.46 1/2 making corn overbought relative to the Friday close of 4.89.

From the March 2 Weekend Wrap:

Remarkably, the current long to short ratio is the highest since the COT tabulation date of June 25, 2013 when the ratio for managed money was 1.67:1. During the COT tabulation period of June 19-June 25, July 2013 corn traded in a range of $6.50 1/2-6.83 1/2. In short, managed money is stratospherically long corn currently, however corn prices are approximately $2.00 lower than they were in late June 2013 when the COT ratio was the same as today’s.

Chicago wheat:

For the week, May Chicago wheat advanced 51.75 cents, July +50.75, December +49.00. The COT report revealed that managed money liquidated 695 contracts of their long positions and also liquidated 14,599 contracts of their short positions. Commercial interests liquidated 11,665 contracts of their long positions and also liquidated 1,025 contracts of their short positions. As of the latest report, managed money remains short Chicago wheat by ratio of 1.08:1, which is down from the previous week of 1.24:1 and the ratio of 2 weeks ago of 1.40:1.

We reviewed some recent COT reports and beginning with the February 11 report through the report of March 4, managed money has consistently liquidated long positions. Starting with the February 11 report, managed money longs liquidated 944 contracts, February 18 -4737, February 25 – 5869 and March 4 -695. The period encompassed by the 4 reports is from February 5 through March 4. During this time, May wheat advanced 56.75 cents, or 9.67%, yet managed money was liquidating long positions! This behavior is beyond comprehension, and OIA cannot remember longs liquidating during 4 consecutive COT reports when prices were rising. With managed money continuing to hold a net short position, there remains plenty of fuel to power the market higher.

Kansas City wheat:

For the week, May Kansas City wheat advanced 47.25 cents, July +44.50, December +42.50. The COT report revealed that managed money added 1,363 contracts to their long positions and liquidated 3,409 contracts of their short positions. Commercial interests liquidated 2,298 contracts of their long positions and added 2,397 contracts to their short positions. As of the latest report, managed money is long Kansas City wheat by ratio of 3.16:1, which is up significantly from the previous week of 2.42:1 and the ratio of 2 weeks ago of 1.91:1.

Year to date, May soybeans is the leader with a gain of 14.15%, followed by May corn +13.65%, May soybean meal +12.32%, May soybean oil +12.23%, May Kansas City wheat + 12.17%, May Chicago wheat +6.86%

Cotton:

For the week, May cotton advanced 4.13 cents, July +3.48, December + 1.50. The COT report revealed that managed money added 232 contracts to their long positions and liquidated 632 contracts of their short positions. Commercial interests liquidated 1,005 contracts of their long positions and also liquidated 4,843 contracts of their short positions. As of the latest report, managed money is long cotton by ratio of 8.51:1, which is up from the previous week of 7.79:1 but down slightly from the ratio of 2 weeks ago of 8.61:1.

Sugar #11:

For the week, May sugar advanced 35 points, July +42, October +45. The COT report revealed that managed money liquidated 4,364 contracts of their long positions and liquidated a massive 45,495 contracts of their short positions. Commercial interests liquidated 23,529 contracts of their long positions and added 13,770 contracts to their short positions. As of the latest report, managed money is long sugar by ratio of 1.77:1, which is up substantially from the previous week of 1.25:1 and dramatically higher than the ratio of 2 weeks ago when managed money was short sugar by ratio of 1.10:1.

Coffee:

For the week, May coffee advanced 16.55 cents, July +16.45, September +16.35. The COT report revealed that managed money liquidated 2,756 contracts of their long positions and also liquidated 3,245 contracts of their short positions. Commercial interests added 3,488 contracts to their long positions and also added 3,506 contracts to their short positions. As of the latest report, managed money is long coffee by ratio of 3.62:1, which is up from the previous week of 3.00:1 and up dramatically from the ratio of 2 weeks ago of 2.27:1.

Cocoa:

For the week, May cocoa advanced $24.00, July + 21.00, September +23.00. The COT report revealed that managed money added 1,997 contracts to their long positions and also added 1,141 contracts to their short positions. Commercial interests added 245 contracts to their long positions and liquidated 780 contracts of their short positions. As of the latest report, managed money is long cocoa by ratio of 6.64:1, which is down from the previous week of 7.07:1 and about the same as the ratio of 2 weeks ago of 6.76:1.

Year to date, the leader is May coffee with a gain of 74.29% followed by May Cocoa +9.76%, May sugar +8.76%, May cotton +8.14%.

Live cattle:

For the week, April live cattle lost 1.72 cents, June +1.67, August +1.23. The COT report revealed that managed money added 783 contracts of their long positions and liquidated 1,363 contracts of their short positions. Commercial interests added 3,979 contracts to their long positions and also added 3,745 contracts to their short positions. As of the latest report, managed money remains long by a stratospheric 12.05:1, which is up from the previous week of 10.7:1 and the ratio of 2 weeks ago of 10.59:1.

Lean hogs:

For the week, April lean hogs advanced 6.15 cents, June +8.28, August +5.67. The COT report revealed that managed money liquidated 781 contracts of their long positions and also liquidated 4,821 contracts of their short positions. Commercial interests added 1,938 contracts to their long positions and also added 8,191 contracts to their short positions. As of the latest report, managed money is long lean hogs by ratio 9.41:1, which is up substantially from the previous week of 5.94:1 and double the ratio of 2 weeks ago of 4.71:1.

Year to date, April hogs is the leader with a gain of 24.62% followed by cattle +5.88%.

WTI crude oil:

For the week, April WTI crude oil lost 1 cent, May +10, June +12. The COT report revealed that managed money added 9,039 contracts to their long positions and liquidated 1,110 contracts of their short positions. Commercial interests added 7,939 contracts to their long positions and also added 13,574 contracts to their short positions. As of the latest report, managed money remains long WTI crude oil by ratio of 14.98:1, which is above the previous week of 13.97:1 but slightly below the ratio of 2 weeks ago of 15.20:1.

Heating oil:

For the week, April heating oil lost 42 ticks, May -1.31 cents, June -1.66. The COT report revealed that managed money liquidated 1,202 contracts of their long positions and added 2,214 contracts to their short positions. Commercial interests added 2,371 contracts to their long positions and also added 4,228 contracts to their short positions. As of the latest report, managed money is long heating oil by ratio of 3.76:1, which is down from the previous week of 4.49:1, but above the ratio of 2 weeks ago of 3.11:1.

Gasoline:

For the week, April gasoline lost 36 ticks, May -31, June -40. The COT report revealed that managed money added 4,024 contracts to their long positions and also added 194 contracts to their short positions. Commercial interests liquidated 6,279 contracts of their long positions and also liquidated 1,649 contracts of their short positions. As of the latest report, managed money is long gasoline by ratio of 4.97:1, which is up slightly from the previous week of 4.76:1 and substantially above the ratio of 2 weeks ago of 3.14:1.

Ethanol:

For the week, April ethanol advanced 8.6 cents and made a new contract high at $2.369.

Natural gas:

For the week, April natural gas advanced 9 ticks, May +1.7 cents, June +2.1. The COT report revealed that managed money liquidated 5,176 contracts of their long positions and added 14,010 contracts to their short positions. Commercial interests liquidated 2,556 contracts of their long positions and also liquidated 6,430 contracts of their short positions. As of the latest report, managed money is long natural gas by ratio 2.04:1, which is down from the previous week of 2.30:1 and down substantially from the ratio of 2 weeks ago of 2.50:1.

Year to date April ethanol is the leader with a gain of 32.91% followed by April natural gas +12.57%, May WTI crude oil +4.01%, April gasoline +0.16%, April heating oil – 1.30%, May Brent crude oil -1.59%

Copper:

For the week, May copper lost 10.50 cents. The COT report revealed that managed money added 1,043 contracts to their long positions and also added 5,049 contracts to their short positions. Commercial interests added 892 contracts to their long positions and liquidated 517 contracts of their short positions. As of the latest report, managed money is short copper by ratio 1.07:1, which is a dramatic shift from the previous week when managed money was long by ratio 1.05:1.  Two weeks ago, managed money was short by a ratio of 1.28:1.

Apparently, managed money has been having a difficult time deciding which side of the market to trade. However, we think minds were changed this week, especially on Friday when May copper declined 13.55 cents and made a new contract low at $3.0770. This takes the May contract below prices in June and July 2013. The preliminary stats released by the exchange for Friday’s trading show that open interest increased massively by 10,494 contracts. While preliminary stats for open interest are unreliable, we have no doubt that a significant increase occurred on heavy volume of 105,688 contracts. If final stats show a massive increase of open interest, copper will continue to make new contract lows.

From the March 2 Weekend Wrap:

“Surprisingly, managed money increased their net long position despite a lower week for copper prices. As we stated in last week’s report, we thought copper would struggle to move above OIA’s pivot point and the 50 day moving average and this proved to be correct. The March contract held up fairly well, which reflects near term tightness in refined copper. With the increase of new longs, we think a test of the November 19 low of $3.1500 is inevitable.”

Palladium:

For the week, June palladium advanced $37.35. The COT report revealed that managed money added 3,262 contracts to their long positions and liquidated 165 contracts of their short positions. Commercial interests liquidated 2,358 contracts of their long positions and also liquidated 1,319 contracts of their short positions. As of the latest report, managed money is long palladium by ratio of 5.46:1, which is up from the previous week of 4.55:1 and the ratio of 2 weeks ago of 4.32:1.

Platinum:

For the week, April platinum advanced $36.80. The COT report revealed that managed money added 2,753 contracts to their long positions and liquidated 1,990 contracts of their short positions. Commercial interests added 1,404 contracts to their long positions and also added 2,739 contracts to their short positions. As of the latest report, managed money is long platinum by ratio of 6.24:1, which is up substantially from the previous week of 4.21:1 and the ratio of 2 weeks ago of 4.15:1.

As pointed out in last week’s reports, speculators are increasing their net long exposure as the market trades to its highest level in a couple of months. This makes platinum vulnerable to a correction.

Gold:

For the week, April gold advanced $16.60. The COT report revealed that managed money added 1,072 contracts to their long positions and liquidated 3,839 contracts of their short positions. Commercial interests liquidated 1,433 contracts of their long positions and added 5,129 contracts to their short positions. As of the latest report, managed money is long gold by ratio of 4.72:1, which is up from the previous week of 4.10:1 and more than double the ratio of 2 weeks ago of 2.26:1.

As we have pointed out in previous weekend reports, the net long position of manage money is increasing, not by adding new long positions, rather by the liquidation of short positions. This underscores the skepticism held by speculators, which leads us to believe gold prices will continue to head higher. In essence, before gold has a major correction, it should have a strong increase of new longs, who will provide selling pressure during the decline.

Silver:

For the week, May silver lost 31.3 cents. The COT report revealed that managed money added 47 contracts to their long positions and also added 1,184 contracts to their short positions. Commercial interests liquidated 4,670 contracts of their long positions and also liquidated 2,773 contracts of their short positions. As of the latest report, managed money is long silver by ratio 3.39:1, which is down from the previous week of 3.81:1, but above the ratio of 2 weeks ago of 2.66:1.

Year to date April gold is the leader with a gain of 11.19% followed by June palladium +9.06%, April platinum +8.19%, May silver +7.83%, May copper -8.94%

Canadian dollar:

For the week, the March Canadian dollar lost 26 pips. The COT report revealed that leveraged funds added 5,090 contracts to their long positions and also added 2,186 contracts to their short positions. As of the latest report, leveraged funds are short the Canadian dollar by ratio of 8.60:1, which is down from the previous week of 10.20:1, but up from the ratio of 2 weeks ago of 7.48:1.

Australian dollar:

For the week, the March Australian dollar advanced 1.42 cents. The COT report revealed that leveraged funds added 1,969 contracts to their long positions and also added 8,749 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by ratio of 4.62:1, which is about the same as the previous week of 4.66:1 but down from the ratio of 2 weeks ago of 6.00:1.

Swiss franc:

For the week, the March Swiss franc advanced 9 ticks. The COT report revealed that leveraged funds added 2,178 contracts to their long positions and also added 2,299 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by ratio of 1.33:1, which is down from the previous week of 1.39:1, but up from the ratio of 2 weeks ago of 1.20:1.

British pound:

For the week, the March British pound lost 32 pips. The COT report revealed that leveraged funds liquidated 1,033 contracts of their long positions and also liquidated 1,448 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by ratio 3.56:1, which is up slightly from the previous week’s ratio of 3.47:1 and the ratio of 2 weeks ago of 3.25:1.

Euro:

For the week, the March euro advanced 50 pips. The COT report revealed that leveraged funds added 13,806 contracts to their long positions and also added 4,147 contracts to their short positions. As of the latest report, leveraged funds are long the euro by ratio of 1.99:1, which is up from the previous week of 1.86:1 and the ratio of 2 weeks ago of 1.7:1.

Yen:

For the week, the March yen lost 144 pips. The COT report revealed that leveraged funds added 5,709 contracts of their long positions and also added 2,337 contracts to their short positions. As of the latest report, leveraged funds are short the yen by ratio of 1.87:1, which is down from the previous week of 2.06:1 and the ratio of 2 weeks ago of 1.90:1.

Dollar index:

For the week, the March dollar index was unchanged. The COT report revealed that leveraged funds added 6,048 contracts to their long positions and also added 92 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 2.36:1, which is down substantially from the previous week of 4.36:1 and the ratio of 2 weeks ago of 4.10:1.

Year to date the March Australian dollar is a leader with a gain of 2.03% followed by the March yen +1.87%, March Swiss franc +1.26%, March British pound +1.01%, March euro +0.61%, March dollar index -0.71%, March Canadian dollar -4.09%.

S&P 500 E mini:

For the week, the March S&P 500 E mini gained 20.50 points. The COT report revealed that leveraged funds added 28,595 contracts to their long positions and also added 48,377 contracts to their short positions. As of the latest report, leveraged funds are short the E mini by ratio of 1.75:1 which is the same as the previous week (1.75:1) and slightly below the ratio of 2 weeks ago of 1.83:1.

While the esteemed members of the financial press are celebrating the 5 year anniversary of the bull market that began on March 6, 2009, we wanted to remind our readers that the current bull market as of Friday is exactly as old as the previous bull market. The previous bull market began on October 10, 2002 and ended on October 11, 2007, or 5 years and one day. We are providing returns for the major indices during the 2002-2007 bull market and comparing them to the current bull market which began on March 6, 2009.

October 10, 2002-October 11, 2007 performance              March 6, 2009-March 7, 2014 performance

S&P 500 cap weighted +750.48 points  +   93.35%………………. +1194.66 points + 174.82%                    
S&P 400 cap weighted + 522.10 points-  +134.33%………………..+980.82 points + 240.32%
Dow Industrial Average + 6481.17 points + 86.03%…………….. + 9825.78 points + 148.27%
Russell 2000……………. +498.81 points  + 148.38%………………. + 852.28 points + 242.78%
NASDAQ 100…………… + 1291.35 points +152.00%…………….. + 2638.70 points, + 247.84%       

Looking at the stats, it is easy to see the extent to which equity markets are overbought. There are two  distinctive differences between the two bull markets. First, during 2002 through 2007, the economy was firing on all cylinders, consumer spending was robust, unemployment was low and housing was booming. Interest rates on the 10 year treasury note increased 27.47 percent in this time frame.

Second, in the current bull market, the interest rate on the 10 year note declined by 1.34%.The economy has been struggling and has been characterized by high unemployment, poor consumer spending, and a housing market that has been in a depression. Though sales have revived during the past year, they are nowhere near the level of the previous bull market. The one major difference between the current bull market and the previous one has been the massive amount of money printing by the Federal Reserve and the world’s central banks. We posit that the massive overbought condition of the current bull market compared to the previous one is the result of money printing.

In our view, the best way to determine the overbought condition of the current market is to subtract the appreciation of the prior bull market from the current one. This is a reasonable way of valuing the current market and provides clients with a frame of reference where the indices could trade if quantitative easing continues to taper. The stats are an approximation of the overbought condition of the present market.

S&P 500 cap weighted is overbought by 444.18 points, (1194.66 – 750.48 = 441.18) S&P 400 cap weighted overbought by 458.72 points, Dow Jones Industrial Average overbought by 3344.61 points, Russell 2000 overbought by 353.47 points, NASDAQ 100 overbought by 1347.35 points.

On March 7, the S&P 500 cap weighted index closed at 1878.10, DJIA 16,448, NASDAQ 100 3704.25, S&P 400 midcap 1388.95, Russell 2000 1203.32.

In order to determine fair value for the current market indices, we subtract the excess return (overbought) of the current bull market from the previous one, which represents a robust economy without money printing. For example, we subtract 441.18 points from the March 7 close (1878.10) to arrive at the approximate fair value for the S&P 500 cap weighted index.

Current fair value for the indices based upon our hypothesis: S&P 500 1436.92, DJIA 13,106.39, NASDAQ 100 2356.90, S&P 400 midcap 930.23, Russell 2000 849.85.

When we compare the fair value for the indices in the current market, most come in below the highs made in October 2007. The highs made during October 2007 for the indices are as follows: S&P 500 1576.09, DJIA 14,166.90, NASDAQ 100 2239.23, S&P 400 midcap 924.07, Russell 2000 852.06.

Note that the S&P 400 midcap and NASDAQ 100 are above the highs made in October of 2007 after subtracting the excess return in order to arrive at current fair value.

When evaluating broad market risk, it is imperative to keep the above numbers in mind. In our view, it is mandatory for clients who hold long equity positions to make sure they have sufficient protection in place to mitigate any damage from index reversion to fair value.

FTSE 100 and DAX 30:

We want to call readers attention to the fact that the FTSE 100 and DAX 30 appear to have made double tops. The FTSE made its major high on January 21 at 6867.42, and a secondary high on February 25 at 6866.25 and closed on Friday at its 50 day moving average.

The DAX 30 made its high on January 21 at 9794.05 and a secondary high on February 26 at 9720.66. On Friday, the DAX closed below its 50 day moving average.

10 year Treasury Note: On March 7, the June 10 year treasury note generated a short-term sell signal, but remains on an intermediate term buy signal.

AAII Index                      Recent week    2 weeks ago      3 weeks ago
  Bullish 40.5% 39.7% 42.2%
  Bearish 26.6 21.1 22.8
  Neutral 32.9 39.2 35.0
Source: American Association of Individual Investors