Weekend Wrap for October 20, 2013

The Weekend Wrap will be truncated because the COT report has not been issued by the CFTC.

The COT stats were added on November 1 when they were released by the CFTC.

Soybeans:

For the week, November soybeans advanced 24.50 cents, January +23.50, March +18.75. The COT report showed that managed money added 912 contracts to their long positions and liquidated 1,802 contracts of their short positions. Commercial interests added 13,295 contracts to their long positions and also added 14,348 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 8.77:1, which is up from the previous week of 7.91:1 but down from the ratio of 2 weeks ago of 10.33:1.

Late Friday, the USDA released export sales figures for the week of September 26. Sales of soybeans came in at 860.69 thousand tons and  total commitments for the 2013-2014 season, which began on September 1 is 975.8 million bushels, versus at USDA export projections of 1.385 bb for the season.

Currently, November soybeans are on a short-term sell signal, but an intermediate term buy signal. The November 2013-January 2014 spread closed at 1.50 cents premium to November on October 18. The spread has traded as low as 8 cents premium to January on April 22, 2013 (November close 12.02 3/4) and as high as 5 cents premium to November on August 27, 2013. On that date November beans closed at $13.70 1/2. In short, the spread is trading a mere 3.50 cents from its high of the last several months, and though beans are not as close to generating a short-term buy signal as soybean meal, it wouldn’t take much of an upside move for this to occur. Do not short soybeans.

The action in the November 2013-March 2014 spread is not as favorable. For example, the spread closed at 18.50 cents on October 18 and the spread has been as high as 36.50 cents premium to November on August 26 (November close 13.89 1/2) to the low of 15 cents premium March on April 23, 2013 (November close 11.96 1/4). In short, the March contract is holding up much better than the January contract. This suggests that spreaders should be long November 2013 and short January 2014.

Soybean meal:

For the week, December soybean meal advanced $6.70, January +4.70, March +70 cents.The COT report showed that managed money added 133 contracts to their long positions and also added 2,288 contracts to their short positions. Commercial interests liquidated 2,351 contracts of their long positions and also liquidated 2,705 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.50:1, which is down from the previous week of 3.94:1 and the ratio of 2 weeks ago of 4.70:1.

For the 2012-2013 season the USDA reported that 10.84 thousand tons were sold bringing total commitments to 10,084.06 thousand metric tons versus USDA projections of 10,070 thousand tons. Export sales for 2012-2013 were the best since 2007-2008.

Although soybean meal remains on a short-term sell signal, but an intermediate term buy signal, the spread action between the December-January and March contracts is confirming an upward bias. For example, the December 2013 -January 2014 spread closed at $4.50 premium to December on October 18 and the high for the spread going back to April 16, 2013 has been $5.50.The low for the spread from April 16 through October 18 was $2.00 premium to January on May 7, 2013.

The December 2013 -March 2014 spread closed on October 18 at $15.28 premium to December. The high for the spread occurred on September 13 at $17.30 premium to December. The low took place on May 7, 2013 at $5.10 premium to March. In short, the spread is trading at the very high-end of its range for the past several months, and it would take very little upside movement for soybean meal to generate a short-term buy signal, which would reverse the short-term sell signal generated on October 10. Do not short soybean meal.

 Soybean oil:

For the week, December soybean oil advanced 1.40 cents, January +1.38, March +1.39.The COT report showed that managed money liquidated 3,750 contracts of their long positions and also liquidated 2,924 contracts of their short positions. Commercial interests added 2,988 contracts to their long positions and also added 4,558 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.58:1 , which is slightly above the previous week of 1.52:1 and the ratio of 2 weeks ago of 1.51:1.

For September 26, export sales totaled 1.48 thousand tons and total commitments for the 2012-2013 season as of the most recent reporting date is 964.63 thousand tons versus the USDA projection of 975.2 thousand tons.

We pride ourselves about notifying clients when we see a possible change in trends long before others see them. We want to call your attention to the recent strength in soybean oil, which has been outperforming soybeans and soybean meal since October 3. For example, from October 3 through October 17, December soybean oil has gained 5.84% versus November soybeans gaining 1.37% and December soybean meal losing 0.39% in the same time frame. This is not to say that soybean oil is close to generating a short-term buy signal, and it is a long way from generating an intermediate term buy signal. However, ever since it bottomed on October 2 at 39.20, open interest has been rising. For example, from October 3 through October 17, open interest increased by 13,377 contracts or approximately 4 1/2%. Of the days that prices rose from October 3 through October 16, open interest increased on 4 days while open interest decreased on 3. This works out to be a net increase of 5,978 contracts on days when prices advanced.

Unfortunately, we do not have COT reports for the past 3 reporting periods. However based upon the short to long ratio of 1.46:1 from the last report tabulated on September 24, we have reason to believe the number of net short positions has increased. From September 25 through October 18, December soybean oil has declined 41 points or 0.97%, therefore it is highly likely the number of managed money shorts is at a fairly high level. That open interest has been rising substantially on the rally (not counting preliminary stats on Friday showing a 8,355 increase) and liquidation has been minimal, leads us to believe prices are headed higher. Speculative shorts will provide additional fuel for the rally.

On October 2, December soybean oil reached its low of 39.20, which is the lowest price on the continuation chart since the low of 39.35 on August 24, 2010. In short, prices are rebounding from multi-year lows, and it shouldn’t be difficult for December soybean oil to rally to its 50 day moving average of 42.35. If open interest continues to rise, bean oil should have the momentum to generate a short-term buy signal. In any event, we advise clients against shorting the market, and if short, cover these positions.

Corn:

For the week, December corn advanced 8.25 cents, March +7.75, May +7.75.The COT report showed that managed money added 7,924 contracts to their long positions and also added 816 contracts to their short positions. Commercial interests added 9,118 contracts to their long positions and also added 8,322 contracts of their short positions. As of the latest report, managed money is short corn by a ratio of 1.30:1 , which is down from the previous week of 1.34:1 but up slightly from the ratio of 2 weeks ago of 1.27:1.

For the week of September 26, the USDA reported that 775.2 thousand tons were sold, which was the highest of the season, which began on September 1. Total commitments are 576.2 million bushels on September 26 versus the USDA projection of 1.225 bb.

Chicago wheat:

For the week, December Chicago wheat advanced 13.50 cents, March +13.50, May +13.75.The COT report showed that managed money liquidated 1,208 contracts of their long positions and also liquidated 2,783 contracts of their short positions. Commercial interests added 5,717 contracts to their long positions and also added 4,599 contracts to their short positions. As of the latest report, managed money is long Chicago wheat by a ratio of 1.25:1, which is slightly above the previous week of 1.22:1 and the ratio of 2 weeks ago of 1.01:1.

Kansas City wheat:

For the week, December Kansas City wheat advanced 8.50 cents, March +7.25, May +7.25.The COT report showed that managed money added 5,506 contracts to their long positions and liquidated 2,068 contracts of their short positions. Commercial interests liquidated 1,397 contracts of their long positions and added 4,251 contracts to their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 6.05:1 , which is up dramatically from the previous week of 4.29:1 and the ratio of 2 weeks ago of 2.73:1.

For the week of September 26, 837.8 thousand tons were sold in all wheat categories. This is the highest number in 11 weeks for the 2013-2014 season that began on June 1. Total commitments as of September 26 are 680.8 million bushels versus USDA projections for the season of 1.100 bb. As of September 26, 62% of total USDA projected sales have already been committed. Export sales are the best since the 2007-2008 season.

Reports circulating on Friday attributed the large price increase of wheat to the announcement by Argentina that they estimated the wheat crop at 8.8 million metric tons, which is down dramatically from the USDA estimate of 12 mmt. The fact that the Argentine crop was coming in lower than estimated was no secret and it is well-known that Brazil has been a large buyer of US hard red winter wheat. The concern is Argentina would slap an export restrictions on wheat, which would further decrease world supply. A worst case scenario would be a halt of exports entirely. Long before wheat prices began advancing, we were informing clients that a move higher was imminent.

In addition to the reduced harvest in Argentina, there have been severe rains in Russia which is delaying the harvesting of corn and soybeans. The poor weather is also holding up Russia’s relatively narrow fall plantings, which means the winter wheat harvest could come in lower than expected and could be cut drastically. The shortfall is consistent with reports of abysmal conditions that have not been conducive to planting and which may result in winter wheat plantings that may be as much as 20% below the number targeted by the government. The next 2 weeks will tell the story about winter wheat plantings, and based upon current conditions, it appears that the world balance sheet of stocks to usage is shrinking. Since the black sea region is a major wheat exporter, the United States may find itself as the most desirable origin for obtaining high-quality wheat for the next 6 months.

Cotton:

For the week, December cotton lost 26 points, March +8, May +35.The COT report showed that managed money liquidated 10,181 contracts of their long positions and added 1,099 contracts to their short positions. Commercial interests added 3,413 contracts to their long positions and liquidated 9,205 contracts of their short positions. As of the latest report, managed money is long cotton by a ratio of 4.75:1, which is down from the previous week of 6.30:1 and the ratio of 2 weeks ago of 6.34:1.

The spread between December 2013 and March 2014 continues to widen and on Friday closed at 1.21 cents premium to March, which is the largest premium to December since January 10, 2013 when it closed at 1.30 premium to March. On that date, December cotton closed at 79.09, which is approximately 4 cents below Friday’s close. In the paragraph below, which was written on October 6, we warned about the narrowing inversion of the spread and our views on the imminent decline of cotton prices. On September 27, December cotton generated a short and intermediate term sell signal.  

From the October 6 report:

 “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 advanced 1.07 cents, December -45 points, February -25.The COT report showed that managed money added 8405 contracts to their long positions and liquidated 2642 contracts of their short positions. Commercial interests liquidated 1,869 contracts of their long positions and added 5,811 contracts to their short positions. As of the latest report, managed money is long cattle by a ratio of 3.85:1, which is above the previous week’s ratio of 3.22:1 and the ratio of 2 weeks ago of 2.78:1.

As mentioned in the October 17 report, we said we would perform an open interest analysis of cattle because the open interest increase on October 17 was extremely negative when cattle fell nearly 1 1/2 cents. Open interest did not decline as would be expected because open interest had been increasing during the month when cattle rallied. Preliminary stats show that open interest increased by 1,904 contracts on low volume of 34,477 contracts on October 18.

The rally began on September 18 and continued until October 16. During this time, open interest increased by 21,139 contracts or 7.2%. On September 24, which is the last date we have COT stats for, the long to short ratio of managed money stood at 1.79:1. From September 25 through October 16 December cattle advanced 2.03 cents or 1.54%. Even though we do not have the current COT stats, we have good reason to believe the long to short ratio of managed money has increased from September 25 through October 16. As a result of this conclusion, we believe there is a significant amount of selling pressure that will assert itself as prices continue to correct, which they should, based upon the magnitude of the rally. We see cattle declining to its 50 day moving average of 1.30560.

 Crude oil:

For the week, November crude lost $1.21, December -95, January -86.The COT report showed that managed money liquidated 2,626 contracts of their long positions and added 1,280 contracts to their short positions. Commercial interests liquidated 9,074 contracts of their long positions and also liquidated 11,047 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 6.04:1, which is down from the previous week of 6.29:1 and the ratio of 2 weeks ago of 6.28:1.

Heating oil:

For the week, November heating oil gained 5 points, December +4, January +4.The COT report showed that managed money liquidated 391 contracts of their long positions and also liquidated 1,123 contracts of their short positions. Commercial interests added 4,119 contracts to their long positions and also added 2,173 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 2.01:1, which is up from the previous week of 1.90:1 and the ratio of 2 weeks ago of 1.83:1.

Gasoline:

For the week, November gasoline advanced 51 points, December +51 January +76.The COT report showed that managed money liquidated 3,819 contracts of their long positions and added 1,683 contracts to their short positions. Commercial interests added 4,231 contracts to their long positions and also added 1,379 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 3.99:1, which is down substantially from the previous week of 5.20:1 and the ratio of 2 weeks ago of 4.86:1.

Natural gas:

For the week, November natural gas lost 1.2 cents, December -3.2, January -3.8.The CO2 report showed that managed money liquidated 305 contracts of their long positions and also liquidated a massive 43,794 contracts of their short positions. Commercial interests added 19,835 contracts to their long positions and also added 36,158 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.08:1, which is a dramatic switch from the previous week when they were short by a ratio of 1.09:1 and the previous week when they were short by 1.09:1.

Copper:

For the week, December copper advanced 3.00 cents.The COT report showed that managed money added 870 contracts to their long positions and also added 1,201 contracts to their short positions. Commercial interests added 2,031 contracts to their long positions and liquidated 3,559 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 1.17:1 , which is down from the previous week of 1.19:1 and the ratio of 2 weeks ago of 1.35:1.

Palladium:

For the week, December palladium advanced $27.35.The COT report showed that managed money liquidated 10 contracts of their long positions and added 238 contracts to their short positions. Commercial interests added 10 contracts to their long positions and liquidated 302 contracts of their short positions. As of the latest report, managed money is long palladium by a ratio of 12.90:1, which is down from the previous week of 14.88:1 and the ratio of 2 weeks ago of 20.31:1.

Platinum:

 For the week, January platinum advanced $62.20.The COT report showed that managed money liquidated 1,967 contracts of their long positions and also liquidated 253 contracts of their short positions. Commercial interests liquidated 280 contracts of their long positions and added 828 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 2.78:1, which is down from the previous week of 2.90:1 and the ratio of 2 weeks ago of 3.90:1.

Gold:

For the week, December gold advanced $46.40.The COT report showed that managed money liquidated 593 contracts of their long positions and added 18,173 contracts to their short positions. Commercial interests added 2,778 contracts to their long positions and liquidated 2,638 contracts of their short positions. As of the latest report, managed money is long gold by a ratio of 2.19:1 , which is a dramatic reduction from the previous week of 3.71:1 and the ratio of 2 weeks ago of 2.69:1.

Silver:

For the week, December silver advanced 65.4 cents.The COT report showed that managed money added 284 contracts to their long positions and also added 1,696 contracts to their short positions. Commercial interests added 941 contracts to their long positions and also added 265 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.93:1, which is down from the previous week of 2.17:1 , but up slightly from the ratio of 2 weeks ago of 1.85:1.

Canadian dollar:

For the week, the December Canadian dollar advanced 46 points.The COT report showed that leveraged funds liquidated 5,314 contracts of their long positions and also liquidated 682 contracts of their short positions. As of the latest report, leveraged funds are short the Canadian dollar by a ratio of  1.76:1 , which is up from the previous week of 1.41:1 and the ratio of 2 weeks ago of 1.05:1.

Australian dollar:

For the week, the December Australian dollar advanced 2.01 cents.The COT report showed that leveraged funds added 656 contracts to their long positions and also added 5,128 contracts to their short positions. Commercial interests added 2,523 contracts to their long positions and also added 411 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 1.70:1, which is up from the previous week of 1.51:1 and the ratio of 2 weeks ago of 1.61:1.

Swiss franc:

For the week, the December Swiss franc advanced 1.08 cents.The COT report showed that leveraged funds added 1,355 contracts to their long positions and liquidated 463 contracts of their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 1.96:1, which is up from the previous week of 1.76:1 and the ratio of 2 weeks ago of 1.77:1.

British pound:

For the week, the December British pound advanced 2.01 cents.The COT report showed that leveraged funds added 361 contracts to their long positions and liquidated 757 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 3.42:1, which is up in the previous week of 3.33:1 , but down slightly from the ratio of 2 weeks ago of 3.44:1.

Euro:

For the week, the December euro advanced 1.24 cents.The COT report showed that leveraged funds liquidated 8,195 contracts of their long positions and added 2,141 contracts to their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 3.16:1 , which is down from the previous week of 3.61:1 and the ratio of 2 weeks ago of 3.29:1.

Yen:

For the week, the December yen advanced 64 points.The COT report showed that leveraged funds liquidated 1,662 contracts of their long positions and also liquidated 2,835 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.02:1 , which is up slightly from the previous week of 2.00:1 but down dramatically from the ratio of 2 weeks ago of 2.82:1.

Dollar index:

For the week, the December dollar index lost 73 points.The COT report showed that leveraged funds liquidated 8,472 contracts of their long positions and also liquidated 7,668 contracts of their short positions. According to the latest report, leveraged funds are short the dollar index by a ratio of 1.71:1, which is up from the previous week of 1.44:1 and the ratio of 2 weeks ago of 1.52:1.

S&P 500 E mini:

For the week, the December S&P 500 E mini advanced 37.50 points.The COT report showed that leveraged funds added 19,731 contracts to their long positions and also added 5,458 contracts to their short positions. As of the latest report, leveraged funds are short the S&P 500 E mini by a ratio of 1.35:1, which is down from the previous week of 1.39:1 and the ratio of 2 weeks ago of 1.55:1.

We continue to be concerned about the performance of the major market indices, and the S&P 500 E mini in particular. In previous reports, we commented on the relatively poor performance of the Dow Jones Industrial Average versus other key indices such as the New York Composite Index, S&P 500 and the NASDAQ. The performance divergence is rather remarkable. Consider the period from September 20 through October 18 when the DJIA was rebalanced with 3 new issues after removing 3 issues from the index. During this time, the S&P 500 cash index advanced 2.02%, the New York Composite Index advanced 2.20%, NASDAQ +3.70%, S&P 500 equal weight +2.17%, S&P 100 index +1.70%, Russell 2000+3.92%, but the Dow Jones Industrial Average lost 0.33%. From October 1 through October 18, the S&P 500 equal weight advanced 3.63% and there were 17 stocks in the DJIA that underperformed the equal weight index in this time frame. All 17 stocks are members of the S&P 500. In short, during the rally of the past two weeks, a majority of stocks in the DJIA under performed the equal weight index 

The small and mid-cap indices continue to outperform big cap indices such as the S&P 100 S&P 500 and the DJIA. Many in the financial press laud the performance of the small-cap sector as healthy for the overall market. However, we see this differently. Our view is that it indicates investors are becoming less worried about the return of their money and more concerned about the return on their money. It appears there is a shift out of high dividend paying stocks and into more speculative issues.

Another potential danger sign is the perception by institutional and retail investors that stocks will continue to rise because the Fed taper program appears to be off the table for now. We view this is a very dangerous mindset, and generally speaking when everyone thinks the same way, a major shift is likely to occur. There is absolutely nothing to prevent the market from having a nasty correction without a tapering program.

At the end of the day, for stocks to move higher, there have to be market participants willing to pay ever higher prices. A good analogy to the current situation occurred in the real estate market before it crashed. It was inconceivable to many (especially those in the real estate business) that real estate prices could go down. The prevailing belief at the time was housing prices could not go down unless unemployment rose sharply and/or interest rates started climbing to levels that shut off mortgage financing.  All of us know how that turned out.

Another major concern of ours is the performance of the NYSE Bullish Percent Index. The bullish percent index measures the percentage of stocks on a point and figure buy signal. The original concept was created by Charles Dow and refined over the years. On May 20, 2013, the index stood at 76.05% and on October 18, 68.88%. During this time, the NASDAQ advanced 11.95%, Russell 2000 + 11.71%, S&P 500 equal weight+5.88%, S&P 500 cap weighted+4.69%, New York Composite Index +4.14%,  DJIA+0.42%.

In other words, the major market indices (with the exception of the Dow) had fairly healthy advances and yet the number of stocks on a point figure buy signal declined from approximately 76% on May 20 to nearly 69% on October 18. On August 30, the bullish percent reversed into O’s and remains in this configuration. From August 31 through October 18, the Russell 2000 advanced 10.28%, NASDAQ+9.04%, New York Composite Index+7.70%, S&P 500 equal weight index+7.60%, S&P cash index +6.83%, DJIA+3.98%. The bullish percent made its recent low on October 9 at 65.365% and closed on Friday at 68.777%

We are seeing a consistent pattern of major indices advancing strongly, but the bullish percent is either declining or has tepid advances. For  the index to reverse from O’s into X’s, the bullish percent must rise to 72%. Even if this occurred, it would be below the 76% figure of May 20 when the December E mini closed at 1652.75. The e mini closed at 1736.50 on October 18.