October 13, 2013 Weekend Wrap

The Weekend Wrap will be truncated due to the closure of the government. There is no COT report from the CFTC, nor energy reports from the EIA this week.

We added the COT data on October 29, when it was released by the CFTC.

Soybeans:

For the week, November soybeans lost 28.25 cents, January -28.75 March -25.25. The COT report showed that managed money liquidated 3146 contracts of their long positions and added 4256 contracts to their short positions. Commercial interests added 16,113 contracts to their long positions and also added 8681 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 7.91:1, which is down from the previous week of 10.33:1 and the ratio of 2 weeks ago of 9.52:1.

Soybean meal:

For the week, October soybean meal lost $9.30, December -15.00, January -12.80.The COT report showed that managed money liquidated 2713 contracts of their long positions and added 2291 contracts to their short positions. Commercial interests liquidated 3129 contracts of their long positions and added 2766 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.94:1, which is down from the previous week of 4.70:1 and the ratio of 2 weeks ago of 4.94:1. Note that the long to short ratio in soybean meal is approximately half that of soybeans. 

Soybean oil:

For the week, October soybean oil gained 12 points, December +4, January +5.The COT report showed that managed money liquidated 505 contracts of their long positions and also liquidated 332 contracts of their short positions. Commercial interests liquidated 1847 contracts of their long positions and also liquidated 1553 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.52:1, which is about the same as the previous week of 1.51:1 and slightly above the ratio of 2 weeks ago of 1.46:1.

Corn:

For the week, December corn lost 10.00 cents, March – 9 75.The COT report showed that managed money liquidated 6091 contracts of their long positions and added 8254 contracts to their short positions. Commercial interests added 10,098 contracts to their long positions and liquidated 1028 contracts of their short positions. As of the latest report, managed money is short corn by a ratio of 1.34:1, which is above the previous week’s ratio of 1.27:1 and the ratio of 2 weeks ago of 1.20:1.

Chicago wheat:

For the week, December Chicago wheat advanced 5.25 cents, March +4.75, May +1.00.The COT report showed that managed money added 7320 contracts to their long positions and liquidated 10,429 contracts of their short positions. Commercial interests liquidated 526 contracts of their long positions and added 13,635 contracts to their short positions. As of the latest report, managed money is long Chicago wheat by a ratio of 1.22:1,which is up significantly from the previous week when they were long by a ratio of 1.01:1 and dramatically above the ratio of 2 weeks ago when managed money was short by a ratio of 1.40:1.

Kansas City wheat:

For the week, December Kansas City wheat advanced 10.00 cents, March +9.50, May +7.25.The COT report showed that managed money added 1309 contracts to their long positions and liquidated 5364 contracts of their short positions. Commercial interests liquidated 2064 contracts of their long positions and added 4608 contracts to their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 4.29:1, which is up dramatically from the previous week of 2.73:1 and the ratio of 2 weeks ago of 1.61:1.

After reviewing a variety of reports over the weekend, we have concluded it is likely the grain complex with the exception of wheat will be heading lower in the week ahead due to the information vacuum created by the government shutdown. It seemed there was a consensus that the shutdown would end much sooner and with the prospect of an extended shutdown, we think the tendency will be for speculators to move to the sidelines. There are numerous reports of surprisingly high yields for both corn and soybeans, and we are in the midst of the period when prices tend be depressed because of the impending harvest.

When you add all this together, we expect rallies to be muted, and with farmers storing large amounts of grain because of generous carry charges, the market knows there is an overhang of supply that will have to be sold at some point. We think soybeans could be the big surprise on the downside because we believe there are many speculative longs that have yet to liquidate. Ironically, the market may bottom during the time that the shutdown ends because it will have discounted the worst aspects of the USDA reports that were not released. Another factor to keep in mind is that once the government resumes operations, there will be a lag time on the release of reports because personnel will have to begin compiling them once they return to work. If the shutdown is resolved by the end of this week, reports by the USDA may not be released until at least a week later in many cases. This means a bottoming of grains could occur in late October early November if the shutdown ends later this week.

Cotton:

For the week, December cotton lost 3.81 cents, March -2.91, May -2.54.The COT report showed that managed money added 1534 contracts to their long positions and also added 303 contracts to their short positions. Commercial interests added 7294 contracts to their long positions and also added 3484 contracts to their short positions. As of the latest report, managed money is long cotton by a ratio of 6.30:1 , which is slightly down from the previous week of 6.34:1 but up from the ratio of 2 weeks ago of 5.56:1.

In last weekend’s report, we wrote with specificity about the change in cotton spreads and how these were indicating lower prices ahead. This week, the December 2013-March 2014 cotton spread closed at 85 points premium to March. This is the first time December has sold at a discount to March since late May-early June 2013. Additionally, December cotton is selling at the largest discount to March since February 11, 2013 when the spread closed at 94 points premium to March.

On October 8, December cotton generated a short and intermediate term sell signal. Unfortunately, we have not seen a decent size rally, which would enable clients to get on the bearish side of the trade, without exposing them to countertrend risk. As of Friday’s close, the key moving averages for cotton are as follows: On the cotton continuation chart 50 day MA 85.81, 150 MA 85.65, 200 day MA 84.35. On the December cotton chart, the key moving averages are as follows: 50 day MA 85.77, 150 day MA 85.72, 200 day MA 84.73. Heavy resistance should be expected at these moving averages. We see cotton headed to the 82.43 area, which was the low on August 30 and then 82.00, the low on May 31. After this, there is no support until the November 8, 2012 low of 74.35. If we had the COT stats, we could better calibrate the current position of managed money, but we have no idea what extent managed money remains long. We do know that open interest declines have been minor and as a result, think more liquidation is ahead.

From the October 6 Weekend Wrap:

“Unfortunately, we are unable to determine to what degree managed money expanded their long positions due to the closure of the government and therefore there is no COT report to guide us. However, there has been a very important development with respect to spread action in the near versus deferred months. For example, the December 2013-March 2014 spread closed on Friday at 5 points premium to December. This is the lowest close for the spread since June 11 when the spread closed at 5 point premium to March. On August 19, the December 2013- March 2014 spread topped out at 3.28 cents premium December. On August 19 December cotton closed at 93.32. In short, the inversion continues to narrow, and it is only a matter of time before December sells at a discount to March. In our view, the impending change in trend of the spread is bearish for cotton prices. In our experience, spreads often foretell the direction of the market.

Live cattle:

For the week, October live cattle gained 75 points, December +5, February -18.The COT report showed that managed money added 3745 contracts to their long positions and liquidated 3319 contracts of their short positions. Commercial interests liquidated 8627 contracts of their long positions and added 8819 contracts to their short positions. As of the latest report, managed money is long cattle by ratio 3.22:1, which is up from the previous week of 2.78:1 and up dramatically from 2 weeks ago when the ratio stood at 1.79:1.

WTI crude oil:

For the week, November WTI crude oil lost $1.82, December -1.47, January -97.The COT report showed that managed money liquidated 30 to 76 contracts of their long positions and also liquidated 565 contracts of their short positions. Commercial interests added 356 contracts to their long positions and also added 2930 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 6.29:1 , which is the same as the previous week of 6.28:1 , but below the ratio of 2 weeks ago of 6.86:1.

This week, the November-December 2013 spread collapsed with November selling at a 4 cent discount to December for the first time since December 11, 2012. On that date, November 2013 crude oil closed at 89.22 and January 2013 crude closed at $85.79. Last week, we wrote about the narrowing of the spread and said this was definitively bearish. We continue to recommend that clients hold short futures positions, and lower their buy stops originally recommended slightly above $104.38. Although crude oil is in a downtrend, if there is a surprise development with respect to the debt ceiling and government closure, a rally would not be unexpected, though it would be short-lived.

From the October 6, 2013 Weekend Wrap:

“The spread action in crude oil has been distinctly bearish, and on October 4 the spread closed at $1.99 premium to November. The last time the spread closed near this level occurred on June 21, 2013 at $1.91 premium to November. On that date, November crude oil closed at $92.74. Like cotton, we think the spread is telling us that lower prices are ahead. Additionally, crude generated a short-term sell signal on September 23 and gasoline is on a short and intermediate term sell signal, while heating oil is on a short-term sell signal.”

Heating oil:

For the week, November heating oil advanced 3.59 cents, December +3.82, January +4.09.The COT report showed that managed money liquidated 1324 contracts of their long positions and also liquidated 1420 contracts of their short positions. Commercial interests added 6253 contracts to their long positions and also added 6198 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 1.90:1, which is up slightly from the previous week of 1.83:1 but down from the ratio of 2 weeks ago of 2.22:1.

Gasoline:

For the week, November gasoline advanced 6.05 cents, December +5.64, January +5.43.The COT report showed that managed money added 723 contracts to their long positions and liquidated 462 contracts of their short positions.Commercial interests liquidated 5906 contracts of their long positions and also liquidated 5635 contracts of their short positions.As of the latest report, managed money is long gasoline by a ratio of 5.20:1, which is above the previous week of 4.86:1, but down from the ratio of 2 weeks ago of 6.28:1.

 Natural gas: On October 10, November natural gas generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, November natural gas advanced 27.00 cents, December +25.5, January +23.8.The CO2 report showed that managed money liquidated 3947 contracts of their long positions and also liquidated 3496 contracts of their short positions. Commercial interests liquidated 3355 contracts of their long positions and also liquidated 5846 contracts of their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.09:1 which is the same ratio as the previous week of 1.09:1 , but above the ratio of 2 weeks ago of 1.02:1.

Natural gas is at a major inflection point. For the November contract to generate an intermediate term buy signal, the daily low must be above $3.779. If this occurs, we would recommend that short options positions be liquidated.  It is likely the market will pull back once the intermediate term buy signal is generated, especially if natural gas does not pull back prior to this. Upside targets on the continuation chart include the September 19 high of $3.82 when the market made a spike high and then closed essentially unchanged on heavy volume of 486,993 contracts while open interest declined by 5,560. The second target is the July 18 high of $3.840 and after this, the June 18 high of 3.950.

The preliminary stats issued by the exchange show that open interest increased by 9,052 contracts on volume of 352,075 contracts. The open interest increase represents an average increase relative to volume, and it is respectable considering the relatively narrow range (6.6 cents) and the modest advance of 5.3 cents. Is important keep in mind that preliminary open interest stats are unreliable, but volume stats rarely change from preliminary to the final report. October 11 would be the second day in a row that prices and open interest have advanced, which indicates that demand is entering the market and overcoming supply issues reflected by declines of open interest during the beginning of the rally (October 7). In our view, the market must generate an intermediate term buy signal before we are convinced that natural gas has the power to move to the $4.000 level. There is a seasonal tendency for natural gas prices to peak in October and then decline into November and December.

Copper:

For the week, December copper lost 3.20 cents.The COT report showed that managed money liquidated 2315 contracts of their long positions and added 1101 contracts to their short positions.Commercial interests liquidated 562 contracts of their long positions and also liquidated 886 contracts of their short positions.As of the latest report,managed money is long copper by a ratio of 1.19:1, which is down from the previous week of 1.35:1 and the ratio of 2 weeks ago of 1.22:1. 

Palladium:

For the week, December Palladium advanced $11.35.The COT report showed that managed money liquidated 524 contracts of their long positions and added 391 contracts to their short positions. Commercial interests added 333 contracts to their long positions and liquidated 1 contracts of their short positions. As of the latest report , managed money is long Palladium by a ratio of 14.88:1, which is down dramatically from the previous week of 20.31:1 and the ratio of 2 weeks ago of 15.33:1.

Platinum:

 For the week, January platinum lost $12.40.The COT report showed that managed money liquidated 700 contracts of their long positions and added 2637 contracts to their short positions. Commercial interests added 590 contracts to their long positions and liquidated 1176 contracts of their short positions. As of the latest report, managed money is long platinum by a ratio of 2.90:1, which is down from the previous week of 3.90:1 and the ratio of 2 weeks ago of 5.83:1.

Gold:

For the week, December gold lost $41.70.The COT report showed that managed money added 142 contracts to their long positions and liquidated 10,031 contracts of their short positions. Commercial interests liquidated 3207 contracts of their long positions and added 4476 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 3.71:1, which is up from the previous week of 2.69:1 and the ratio of 2 weeks ago of 2.83:1.

Silver:

For the week, December silver lost 49.3 cents.The COT report showed that managed money added 653 contracts to their long positions and liquidated 1775 contracts of their short positions. Commercial interests liquidated 287 contracts of their long positions and added 1553 contracts to their short positions. As of the latest report, managed money is long silver by a ratio 2.17:1, which is up from the previous week of 1.85:1 and the ratio of 2 weeks ago of 1.85:1.

Canadian dollar:

For the week, the December Canadian dollar lost 39 points.The COT report showed that leveraged funds liquidated 9899 contracts of their long positions and also liquidated 1157 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.41:1 , which is up from the previous week of 1.05:1 and the ratio of 2 weeks ago of 1.06:1.

Australian dollar:

For the week, the December Australian dollar advanced 42 points.The COT report showed that leveraged funds added 1859 contracts to their long positions and also added 900 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.51:1 which is down somewhat from the previous week of 1.61:1 and the ratio of 2 weeks ago of 1.81:1.

Swiss franc:

For the week, the December Swiss franc lost 52 points. The COT report showed that leveraged funds added 2033 contracts to their long positions and also added 1230 contracts to their short positions.As of the latest report,leveraged funds are long by a ratio of 1.76:1, which is about the same as the previous week of 1.77:1, but below the ratio of 2 weeks ago of 2.00:1.

British pound:

For the week, the December British pound lost 65 points.The COT report showed that leveraged funds added 12,118 contracts to their long positions and also added 4641 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by a ratio 3.33:1, which is down from the previous week of 3.44:1 but up slightly from the ratio of 2 weeks ago of 3.14:1.

Euro:

For the week, the December euro lost 1 point.The COT report showed that leveraged funds added 3200 contracts to their long positions and liquidated 2351 contracts of their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 3.61:1, which is up from the previous week of 3.29:1 and the ratio of 2 weeks ago of 2.91:1.

Yen:

For the week, the December yen lost 111 points.The COT report showed that leveraged funds added 4476 contracts to their long positions and liquidated 15,684 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.00:1, which is down substantially from the previous week of 2.82:1 and the ratio of 2 weeks ago of 2.79:1.

Dollar index:

For the week, the December dollar index advanced 23 points.The COT report showed that leveraged funds added 4420 contracts to their long positions and also added 4558 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by a ratio of 1.44:1 , which is down from the previous week of 1.52:1 and the ratio of 2 weeks ago of 1.64:1.

S&P 500 E mini:

For the week, the December S&P 500 E mini advanced 14.20 points.The COT report showed that leveraged funds added 59,917 contracts to their long positions and also added 9028 contracts to their short positions. As of the latest report, leveraged funds are short the S&P 500 E mini by a ratio of 1.39:1, which is down from the previous week of 1.55:1 and the ratio of 2 weeks ago of 1.67:1.

Ever since the market topped out on September 19, we have been advocating long put protection, especially for those clients who hold long equity positions. We see a number of important trends that indicate longer term weakness in equities. First, the 50 day moving average of new highs minus new lows for all US stocks is trading below its 200 day moving average, and this trend began in late July long before the E mini made its high. On October 11, the December E mini closed at 1699.00, which is its highest close since September 20 (1702.50). On September 19, the December E mini made its high at 1726.75 and closed at 1717.50. On September 18, new highs minus new lows stood at 897 issues and on October 11 closed at +377, which is below the 200 day moving average of + 395 issues. Despite the current move near to the all-time high on October 11, the net number of stocks advancing versus declining is nowhere close to the September 18 high and the August 1 high of + 888 issues.

Additionally, another very important reading is the New York bullish percent, which measures the percentage of stocks on a point figure buy signals. As of the close on October 11, the bullish percent stood at 66.075%. Compare this to the 2013 highs of 76.04% made on March 15 and 76,05% made on May 20. On August 1, the high for the bullish percent stood at 72.03%.

In short, though the market has been making new highs during 2013, the percentage of stocks on point figure buy signals has declined fairly substantially. Additionally, the 50 day moving average of stocks on a point figure buy signal moved below the 200 day moving average in mid August. Though the financial press and their guests speak positively about the overall condition of the market, there are some important signs the internals of the broad market as defined by stocks trading on the New York Stock Exchange are weakening. This trend started long before the government shutdown.

According to the latest survey by the American Association of Individual Investors, the bullish figure (41.3%) is the highest since the week ending September 20, 2013 when the bullish number was 45.1% and the major indices were at their highs. In our view, this shows a great deal of complacency, which bodes ill for further upside. Also, the preliminary stats from the exchange show that open interest declined by 2,949 contracts on volume of 1,562,532 contracts. The December E mini gained 14.00 points on October 11 and even if we assume that open interest may increase somewhat in the final report, the open interest action for the past 2 days has been abysmal after the E mini advanced 50.25 points.

Also, volume on Friday was the lowest since October 4 when 1,519,276 contracts were traded when the E mini advanced 15.00 points and open interest declined 24,469 contracts. During the past 2 days of the rally, volume has been below October 9 (2,495,030) S&P 500 E mini -1.75 points and October 8 (2,356,965 contracts) S&P 500 E mini -17.25 points. On October 10, the E mini advanced 36.25 points, but volume was only 2,295,217 contracts and open interest declined by 22,260 contracts. To put the current volume in perspective, consider that the average daily volume during September 2013 was 1,987,613 contracts and average daily volume year to date is 1,864,386 contracts. In short, we are seeing volume expand on the downside and shrink on the upside. This is bearish.