Weekend Wrap for November 17, 2013

The reporting period for the current COT report is from November 6 through November 12.

We want to bring your attention the apparent deflationary cycle engulfing the commodity markets in general. The Greenhaven Continuous Commodity index (ticker symbol GCC) is trading at its lowest level since June 2010. We prefer using GCC because it is an equal weighted index comprised of 17 commodities, which cover precious metals, grains, petroleum and softs. The deflationary trend will likely be exacerbated by rising interest rates and strength in the dollar. Although many dispute the trend of interest rates, we think they are headed higher and as proof consider that the 50 week moving average of interest rates on the 10 year note will likely cross above the 150 week moving average next week.

In our view, this is a major event and indicates that interest rates are headed higher, certainly in the longer-term. Although the Federal Reserve may be able to control the short end of the curve, we think the long end will march to the beat of a different drummer. A stronger dollar makes US commodities more expensive and this will negatively impact upon sales of US grain because with global surpluses, US grain will not be competitive on the world market. At risk for further downside moves is crude oil and precious metals.

We think it is likely that farmland prices in the Midwest will top out to reflect decreasing profits on productive farmland. Also, rising interest rates will make it far more difficult for new buyers to enter the market, which will in effect lock-in buyers who massively overpaid for farmland during the boom years.

Soybeans:

For the week, January soybeans lost 15.50 cents, March -11.00, May -7.75. The COT report showed that managed money added 9,892 contracts to their long positions and liquidated 8,470 contracts of their short positions. Managed money liquidated 7,684 contracts of their long positions and added 18,022 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 6.24:1, which is a significant increase from the previous week of 4.31:1 and slightly below the ratio of 2 weeks ago of 6.52:1.

Soybean meal:

For the week, December soybean meal lost $11.80, January -9.20, March -6.30. The COT report showed that managed money added 5,127 contracts to their long positions and liquidated 2,541 contracts of their short positions. Commercial interests liquidated 2,781 contracts of their long positions and added 11,764 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.44:1, which is up from the previous week of 2.84:1, but down from the ratio of 2 weeks ago of 3.95:1.

Soybean oil:

For the week, December soybean oil gained 23 points, January +19, March +14. The COT report showed that managed money added 926 contracts to their long positions and also added 4,312 contracts to their short positions. Commercial interests added 7,437 contracts to their long positions and also added 3,983 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.43:1, which is above the previous week’s ratio of 1.37:1 and the ratio of 2 weeks ago of 1.33:1.

Corn:

For the week, December corn lost 4.75 cents, March -8.00, May -8.50. The COT report showed that managed money added 2,603 contracts to their long positions and liquidated 23,812 contracts of their short positions. Commercial interests liquidated 8,900 contracts of their long positions and added a massive 45,977 contracts to their short positions. As of the latest report, managed money is short corn by a ratio of 1.24:1, which is down from the previous week of 1.35:1 and the ratio of 2 weeks ago of 1.37:1.

Chicago wheat:

For the week, December Chicago wheat lost 5.25 cents, March -7.00, May -9.50. The COT report showed that managed money added 3,683 contracts to their long positions and added a hefty 33,295 contracts to their short positions. Commercial interests added 17,838 contracts to their long positions and liquidated 6,125 contracts of their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.55:1, which is up significantly from the previous week of 1.23:1, and a complete reversal from 2 weeks ago when managed money was long Chicago wheat by a ratio of 1.16:1.

Remarkably, the short to long ratio in Chicago wheat (1.55:1) is higher than the short to long ratio in corn (1.24:1). To put the performance of Chicago wheat and corn in perspective consider that from October 1 through November 15 March Chicago wheat is trading 4.73% lower while March corn is trading 5.28% lower. Additionally, year to date March corn is down 29.37% while March wheat has lost 21.31%.

For some strange reason, managed money has gotten extremely bearish on Chicago wheat and we see signs that the bearish play in Chicago wheat is in the process of dissipating. For example, on November 8, March Chicago wheat made a low of $6.55 and made a subsequent lower low of 6.53 1/4 on November 13. From November 8 through November 14 (the last date of final open interest), open interest has increased by 35,501 contracts, but during this time March Chicago wheat lost only 6.25 cents. In other words, massive amounts of new short selling over a period of several days is not moving prices much lower.

Kansas City wheat:

For the week, December Kansas City wheat lost 10.25 cents, March -11.00, May -12.25. The COT report showed that managed money liquidated 2,603 contracts of their long positions and added 6,309 contracts to their short positions. Commercial interests added 4,230 contracts to their long positions and liquidated 5,375 contracts of their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 3.52:1, which is a dramatic decline from the previous week of 7.14:1 and the ratio of 2 weeks ago of 8.25:1.

From a price performance standpoint is absolutely mystifying why managed money is heavily short Chicago wheat and are substantially long Kansas City wheat when both have performed poorly since late October. From November 1 when both Chicago and KC wheat generated short-term sell signals, through November 15, Chicago wheat that is outperforming KC by losing only 3.71% versus KC losing 4.86%. Our conclusion: There is more selling ahead in KC wheat and Chicago wheat is likely close to a bottom. From a fundamental point of view, there is much to like about Kansas City wheat, because it is a high protein wheat and as a consequence is in high demand. Additionally, the spread action has been very favorable with the inversion of the March contract against May and July. From November 8 through November 15, March KC wheat lost 11.00 cents, however the March-July 2014 spread widened from 4.75 cent premium to March to 9.50 premium to March. This is bullish spread action relative to the overall price decline. After large numbers of managed money longs have been shaken out of the market, the market will be ripe for a turnaround.

Cotton:

For the week, December cotton gained 24 points, March -44, May -62. The COT report showed that managed money liquidated 4,447 contracts of their long positions and added 1,200 contracts to their short positions. Commercial interests liquidated 9,006 contracts of their long positions and also liquidated 9,672 contracts of their short positions. As of the latest report, managed money is long cotton by a ratio of 1.20:1, which is down from the previous week of 1.41:1 and the ratio of 2 weeks ago of 1.63:1.

Coffee:

On May 20, 2013, OIA announced that coffee had generated a short-term sell signal and had already been on an intermediate term sell signal. See the OIA website and look for “What We Do For Clients” and the subhead “Diagrams of Two False Buy Signals.” In this series of extracts, we diagram how a false buy signal was generated in coffee and the resulting short-term sell signal that subsequently occurred. Although we didn’t and couldn’t know at the time, the short-term sell signal, which confirmed the intermediate term sell signal proved to be the top of the coffee market over the past several months.

On November 6, December coffee made its low of $1.0100. We are writing about this in order to bring your attention to long term support for the coffee market going back several years. The last time coffee was near the level of November 6 occurred on March 9, 2009 when it made a low of $1.0330 on the continuation chart. You undoubtedly remember that March 9, 2009 was the day the major indices made their bottom. Prior to 2009, the previous low occurred on December 5, 2008 when coffee made a low of 1.0170 on the continuation chart. Prior to the December 5, 2008 low, the previous low occurred on May 1, 2007 at $1.0035. Prior to the 2007 low, coffee made a low at $1.0090 on October 19, 2006 on the continuation chart. In short, the last time coffee traded below $1.0000 was in early August 2006.

Although we have no way of knowing whether the November 6 low will hold, we do know that coffee prices are at their lowest levels in several years, which makes it all the more likely that coffee prices will move higher at some point in the future. Undoubtedly, there is going to be a significant amount of back and fill over a period of many months, but once a base is built, which will probably take a period of several months, coffee prices will likely move higher in the coming year(s). We are not advocating bullish positions, but wanted to make clients aware that coffee prices are at historical lows. Keep in mind the 520 week moving average on the continuation chart is $1.3900, which means coffee is trading approximately 30 cents below its 10 year moving average. As a result, we think short positions should be covered in anticipation of a rally, which can can occur at any time. Bear market rallies in coffee can be devastating if you are on the wrong side of the market.

Sugar #11:

For the week, March 2014 sugar lost 53 points, May -45, July -35.The COT report showed that managed money liquidated 27,559 contracts of their long positions and also liquidated 8,403 contracts of their short positions. Commercial interests added 4,928 contracts to their long positions and liquidated 13,888 contracts of their short positions. As of the latest report, managed money is long sugar by a ratio of 3.93:1, which is above the previous week’s ratio of 3.84:1 and about the same as the ratio of 2 weeks ago of 3.91:1. Three weeks ago (October 22) the ratio stood at 3.64:1.

Remarkably, from October 22 when the long to short ratio stood at 3.64:1 through November 12 when the ratio made a high of 3.93:1, March sugar has declined 1.58 cents or 8.12%. Despite this, managed money continues to hold a significant long position. As of November 12, managed money is net long 156,946 contracts while “Other Reportables” are net long by 22,104 contracts. In short, there remains significant fuel for the downside, and we expect prices to continue to move lower. From October 18 when March sugar made its high at 20.16, there has only been 4 days out of 20 trading days (not counting October 18) when sugar closed positively. While the market remains oversold and is due for a bounce, we do not believe rallies will get far due to the large number of speculators who will be looking to trim their losses.

Live cattle:

For the week, December live cattle advanced 1.00 cents, February +85 points, April +22. The COT report showed that managed money liquidated 1,413 of their long positions and added 618 contracts to their short positions. Commercial interests added 2,219 contracts to their long positions and also added 2,991 contracts to their short positions. As of the latest report, managed money remains long live cattle at a ratio of 5.74:1, which is slightly below the previous week 6.01:1 (which is the high ratio thus far), but above the ratio of 2 weeks ago of 4.84:1.

We have made this point before, but we think it’s worth emphasizing again. From October 29, when the long to short ratio was 4.84:1 through November 12 when the ratio increased to 5.74:1, February 2014 cattle prices declined 70 points, or – 0.52%. During this time frame, open interest increased 7,101 contracts. In short, managed money continues to increase their long position, and this is not moving prices higher. Additionally the increase of open interest of 7,101 contracts, which is the total increase of participants in all categories is not providing a boost to prices, and in fact is weighing on prices. We continue to think higher prices are in store in the first quarter, but we think a wash out is on the horizon, after which cattle will resume its move higher.

Lean hogs:

For the week, December lean hogs lost 2.22 cents, February – 1.80, April -1.25. The COT report showed that managed money liquidated 4,208 contracts of their long positions and also liquidated 805 contracts of their short positions. Commercial interests liquidated 2,147 contracts of their long positions and also liquidated 7,428 contracts of their short positions. As of the latest report, managed money is long hogs by a ratio of 8.65:1, which is above the previous week of 8.41:1 and the ratio of 2 weeks ago of 7.20:1.

Crude oil:

For the week, December WTI crude oil lost 76 cents. The COT report showed that managed money added 999 contracts to their long positions and also added 8,287 contracts to their short positions. Commercial interests liquidated 12,227 contracts of their long positions and also liquidated 15,690 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 4.22:1, which is down from the previous week of 4.82:1 and the ratio of 2 weeks ago of 5.81:1. The current ratio is the lowest that we have seen in several months.

Heating oil:

For the week, December heating oil advanced 6.70 cents. The COT report showed that managed money added 129 contracts to their long positions and also added 5,902 contracts to their short positions. Commercial interests added 5,776 contracts to their long positions and also added 1,401 contracts to their short positions. As of the latest report, managed money is short heating oil by a ratio of 1.28:1, which is above the previous week’s ratio of 1.06:1, and a complete reversal from 2 weeks ago when managed money was long heating oil by a ratio of 1.07:1.

Gasoline:

For the week, December gasoline advanced 10.43 cents. The COT report showed that managed money liquidated 1,189 contracts of their long positions and also liquidated 2,598 contracts of their short positions. Commercial interests added 5,769 contracts to their long positions and also added 5,045 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 3.37:1, which is above the previous week’s ratio of 2.88:1, but below the ratio of 2 weeks ago of 4.30:1.

Natural gas:

For the week, December natural gas advanced 10.1 cents. The COT report showed that managed money liquidated 3,858 contracts of their long positions and added 10,758 contracts to their short positions. Commercial interests added 9,944 contracts to their long positions and also added 6,659 contracts to their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.37:1, which is up from the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.08:1.

Copper:

For the week, December copper lost 8.30 cents. The COT report showed that managed money liquidated 3,379 contracts of their long positions and added 12,682 contracts to their short positions. Commercial interests added 4,122 contracts to their long positions and liquidated 3,379 contracts of their short positions. As of the latest report, managed money is short copper by a ratio of 1.29:1, which is a complete reversal from the previous week when they were long by a ratio of 1.21:1 and the ratio of 2 weeks ago when they were long by 1.50:1.

Palladium:

For the week, December palladium lost $25.25. The COT report showed that managed money added 1,175 contracts to their long positions and also added 332 contracts to their short positions. Commercial interests added 308 contracts to their long positions and also added 957 contracts to their short positions. As of the latest report, managed money is long palladium by a ratio of 15.68:1, which is down from the previous week of 18.56:1 and the ratio of 2 weeks ago of 18.94:1.

Platinum:

For the week, January platinum lost $4.00. The COT report showed that managed money liquidated 79 contracts of their long positions and also liquidated 166 contracts of their short positions. Commercial interests liquidated 892 contracts of their long positions and added 990 contracts to their short positions. As of the latest report, managed money is long platinum by 10.18:1, which is up from the previous week of 9.67:1 and the ratio of 2 weeks ago of 5.54:1.

The massive long position of managed money when prices are moving lower is another cautionary sign that platinum is likely headed south. From October 29, when the long to short ratio stood at 5.54:1 through November 12 when it increased to 10.18:1, January platinum lost $26.20 or -1.79%. In this time frame, open interest increased by 1,078 contracts, which means that new short sellers were in control. Corroborating this is the short to long ratio by commercial interests, which went from 6.09:1 on October 29 to 9.01:1 on November 12. In other words, commercial interests were taking advantage of higher prices to increase their short positions.

Year to date, January platinum is trading 7.24% lower and the 50 day moving average of 1432.40 is below the 150 day moving average of 1451.50 and the 200 day moving average of 1490.90. The bearish moving average configuration also is in evidence on the continuation chart. Although platinum remains on a short and intermediate term buy signal, we think it is imminent that short and intermediate term sell signals will be generated. The abysmal performance of gold and silver and the general deflationary trends in commodities are other factors dragging down platinum prices, even though automobile sales have been fairly robust. A more conservative way of trading platinum is to write out of the money calls in the January contract which expires on December 18. Strike prices should be based upon your risk tolerance. The erosion of the time value of the option begins to work for the benefit of the option seller in addition to any declines in price.

Gold:

For the week, December gold advanced $2.80. The COT report showed that managed money liquidated 4,247 contracts of their long positions and added a massive 27,730 contracts to their short positions. Commercial interests added 1,287 contracts to their long positions and liquidated 7,434 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 1.84:1, which is less than half of the previous week’s ratio of 3.90:1, and dramatically below the ratio of 2 weeks ago of 5.17:1.

Silver:

For the week, December silver lost 59 cents. The COT report showed that managed money liquidated 526 contracts of their long positions and added 7,595 contracts to their short positions. Commercial interests added 2,138 contracts to their long positions and also added 553 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.49:1, which is down dramatically from the previous week of 2.47:1 and the ratio of 2 weeks ago of 2.58:1.

Canadian dollar:

For the week, the December Canadian dollar advanced 39 points. The COT report showed that leveraged funds added 1,239 contracts to their long positions and also added 725 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.77:1, which is down from the previous week of 1.83:1 and the ratio of 2 weeks ago of 1.91:1.

Australian dollar:

For the week, the December Australian dollar lost 10 points. The COT report showed that leveraged funds liquidated 2,533 contracts of their long positions and added 8,899 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 2.12:1, which is up dramatically from the previous week of 1.57:1 and the ratio of 2 weeks ago of 1.55:1.

Swiss franc:

For the week, the December Swiss franc gained 87 points. The COT report showed that leveraged funds liquidated 9,656 contracts of their long positions and also liquidated 5,206 contracts of their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 1.47:1, which is down from the previous week of 1.64:1 and the ratio of 2 weeks ago of 2.03:1.

British pound:

For the week, the December British pound advanced 1.11 cents. The COT report showed that leveraged funds liquidated 3,356 contracts of their long positions and also liquidated 81 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.30:1, which is down from the previous week of 2.39:1 and the ratio of 2 weeks ago of 3.08:1.

Euro:

For the week, the December euro advanced 1.34 cents. The COT report showed that leveraged funds liquidated 13,277 contracts of their long positions and added 1,042 contracts to their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 1.64:1, which is down from the previous week of 1.98:1 and almost 50% of the ratio of 2 weeks ago of 3.04:1.

Yen:

For the week, the December yen lost 108 points. The COT report showed that leveraged funds added 1,706 contracts to their long positions and also added 22,952 contracts to their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.95:1, which is up significantly from the previous week of 2.40:1 and the ratio of 2 weeks ago of 2.57:1.

Dollar index:

For the week, the December dollar index lost 49 points. The COT report showed that leveraged funds liquidated 3,266 contracts of their long positions and also liquidated 169 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 3.40:1, which is up dramatically from the previous week of 2.38:1 and the ratio of 2 weeks ago of 1.61:1.

S&P 500 E mini:

For the week, the December S&P 500 E mini gained 27.40 points. The COT report showed that leveraged funds added 10,770 contracts to their long positions and liquidated 4,970 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.21:1, which is down from the previous week of 1.24:1 and the ratio of 2 weeks ago of 1.30:1.