Weekend Wrap for October 27, 2013

The COT report that was tabulated on October 1 has been released by the CFTC and clients can find the results in the October 6 Weekend Wrap.

Soybeans:

For the week, November soybeans advanced 8.75 cents, January +3.75, March -0.75. The COT report showed that managed money added 4769 contracts of their long positions and also added 4254 contracts to their short positions. Commercial interests added 816 contracts to their long positions and also added 9273 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 7.28:1, which is down from the previous week of 8.77:1 and the ratio of 2 weeks ago of 7.91:1.

Soybean meal:

For the week, December soybean meal advanced $13.40, January +8.50, March +5.80.The COT report showed that managed money added 3001 contracts to their long positions and liquidated 385 contracts of their short positions. Commercial interests liquidated 1357 contracts of their long positions and added 5096 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 3.72:1 , which is up slightly from the previous week of 3.50:1 but down from the ratio of 2 weeks ago of 3.94:1.

Soybean oil:

For the week, December soybean oil lost 95 points, January -96, March -1.00.The COT report showed that managed money added 3786 contracts to their long positions and liquidated 3369 contracts of their short positions. Commercial interests added 3417 contracts to their long positions and added 16,636 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.39:1, which is down from the previous week of 1.58:1 and the ratio of 2 weeks ago of 1.52:1.

Corn:

For the week, December corn lost 1.50 cents, March -2.00, May -1.50.The COT report showed that managed money added 4964 contracts of their long positions and added 10,372 contracts to their short positions. Commercial interests added 14,786 contracts to their long positions and also added 11,398 contracts to their short positions. As of the latest report, managed money is short corn by a ratio of 1.31:1, which is nearly the same as the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.34:1.

Chicago wheat:

For the week, December Chicago wheat lost 15.00 cents, March -12.75, May -9.00.The COT report showed that managed money added 4358 contracts to their long positions and liquidated 3006 contracts of their short positions. Commercial interests liquidated 3349 contracts of their long positions and added 1798 contracts to their short positions. As of the latest report, managed money is long Chicago wheat by a ratio of 1.35:1 , which is up from the previous week of 1.25:1 and the ratio of 2 weeks ago of 1.22:1.

Kansas City wheat:

For the week, December KC wheat lost 9.75 cents, March -7.25, May -8.75.The COT report showed that managed money added 906 contracts to their long positions and liquidated 1144 contracts of their short positions. Commercial interests added 916 contracts to their long positions and also added 986 contracts to their short positions. As of the latest report , managed money is long by a stratospheric 7.17:1, which is up from the previous week of 6.05:1 and the ratio of 2 weeks ago of 4.29:1.

Cotton:

For the week, December cotton lost 4.03 cents, March -3.71, May -3.51. The COT report showed that managed money liquidated 3389 contracts of their long positions and added 1612 contracts to their short positions.Commercial interestsadded 2915 contracts to their long positions and liquidated 5926 contracts of their short positions.As of the latest report,managed money is long cotton by a ratio of 3.88:1, which is down significantly from the previous week of 4.75:1 and the ratio of 2 weeks ago of 6.30:1.

Sugar #11 This is our first report on sugar.

For the week, March sugar declined 47 points, May -37, July -31. The COT report showed that managed money added 7481 contracts to their long positions and liquidated 3,384 contracts of their short positions.Commercial interests added 3231 contracts to their long positions and also added 15,531 contracts to their short positions.As of the latest report,managed money is long sugar by a ratio of 3.64:1, which is up from the previous week of 3.35:1 and the ratio of 2 weeks ago of 2.60:1.

On October 18, March sugar topped out at 20.16 on extremely heavy volume of 399,832 contracts. This was the heaviest volume day of 2013. On that day, open interest increased by 5,887 contracts. On October 1, total open interest open interest in all contracts reached its low point of 787,891 contracts before it started to climb beginning on October 2. On October 2, March sugar closed at 18.51 and total open interest was 794,083 contracts. On October 22, total open interest increased to 830,021 contracts, or an increase of 35,938 contracts from October 2. On October 24, total open interest stood at 826,193 contracts and March sugar closed at 18.97. In short, as of October 24, open interest had increased 35,938 contracts from October 2, but since then, March sugar advanced only 46 points through October 24.

Unfortunately, we do not have the COT stats for the most recent week to determine the extent to which managed money is long, but we would bet it is a significant number. The massive increase in volume on October 18, accompanied by an increase of open interest as the market made a new high for the move, tells us that a top or temporary top is in, which means that selling by speculative longs who have small profits is likely in the period just ahead.

From a technical point of view, sugar has some definite positives. For example, the 50 day moving average crossed above the 200 day moving average on the continuation chart and the term structure of the market is in backwardation. Trends in sugar can last for extended periods of time, and we may be seeing the nascent signs of the longer-term bull market. However, the market is overbought from a price stand point and closed on Friday at 19.03, which is above the 50 day moving average on the March chart of 17.96 and 17.62 on the continuation chart. A correction to the 50 day moving average would put March sugar on a short-term sell signal. After this, sugar would likely trade in a consolidation pattern, after which it may resume its uptrend. Our recommendation is to liquidate any long positions.

Live cattle:

For the week, October live cattle advanced 2.70 cents, December +95 points, February +15.The COT report showed that managed money added 4286 contracts to their long positions and liquidated 1256 contracts of their short positions. Commercial interests liquidated 1469 contracts of their long positions and added 1575 contracts of their short positions. As of the latest report, managed money is long cattle by a ratio of 4.21:1, which is up from the previous week of 3.85:1 and the ratio of 2 weeks ago of 3.22:1.

Lean hogs:

For the week, December lean hogs advanced 2.47 cents, February +2.67, April +3.95.The COT report showed that managed money liquidated 553 contracts of their long positions and also liquidated 1139 contracts of their short positions. Commercial interests liquidated 1756 contracts of their long positions and added 1809 contracts to their short positions. As of the latest report,managed money is long hogs by a ratio of 7.17:1, which is up from the previous week of 6.68:1 and the ratio of 2 weeks ago of 5.96:1.

Ethanol:

For the week, November ethanol advanced 5.30 cents, December +2.00, January +2.00.

WTI Crude oil:

For the week, December crude oil lost $3.26, January -3.04, February -2.90.The COT report showed that managed money added 11,742 contracts to their long positions and also added 1002 contracts their short positions. Commercial interests liquidated 15,225 contracts of their long positions and also liquidated 10,682 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 6.17:1, which is up from the previous week of 6.04:1 but down slightly from the ratio of 2 weeks ago of 6.29:1.

Heating oil:

For the week, November heating oil lost 12.57 cents, December -12.31, January -11.64.The COT report showed that managed money liquidated 524 contracts of their long positions and added 1986 contracts to their short positions. Commercial interests liquidated 791 contracts of their long positions and also liquidated 4490 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 1.76:1, which is down from the previous week of 2.01:1 and the ratio of 2 weeks ago of 1.90:1.

Gasoline:

For the week, November gasoline lost 8.61 cents, December -9.05, January -8.65.The COT report showed that managed money liquidated 133 contracts of their long positions and added 374 contracts to their short positions. Commercial interests liquidated 8853 contracts of their long positions and also liquidated 6287 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 3.83:1, which is down from the previous week of 3.99: 1 and down dramatically from a ratio of 2 weeks ago of 5.20:1.

Natural gas:

For the week, November natural gas lost 5.7 cents, December -8.5, January -9.9.The COT report showed that managed money liquidated 2229 contracts of their long positions and added 4222 contracts to their short positions. Commercial interests liquidated 1194 contracts of their long positions and also liquidated 96 contracts of their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.06:1 which is down from the previous week of 1.08:1 but a dramatic reversal from the ratio of 2 weeks ago when they were short by 1.09:1.

Copper:

For the week, December copper lost 3.00 cents.The COT report showed that managed money added 6860 contracts to their long positions and liquidated 7589 contracts of their short positions. Commercial interests liquidated 353 contracts of their long positions and added 2125 contracts to their short positions. As of the latest report, managed money is long copper by a ratio of 2.10:1, which is up dramatically from the previous week of 1.17:1 and the ratio of 2 weeks ago of 1.19:1.

Palladium:

For the week, December palladium lost $7.25.The COT report showed that managed money added 1625 contracts to their long positions and liquidated 757 contracts of their short positions. Commercial interests liquidated 240 contracts of their long positions and added 731 contracts to their short positions. As of the latest report, managed money is long palladium by a ratio of 23.87:1 , which is a dramatic increase from the previous week of 12.90:1 and the ratio of 2 weeks ago of 14.88:1.

Platinum:

For the week, January platinum advanced $17.70.The COT report showed that managed money liquidated 100 contracts of their long positions and also liquidated 1857 contracts of their short positions. Commercial interests liquidated 964 contracts of their long positions and added 202 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 3.36:1, which is in advance from the previous week of 2.78:1 and the ratio of 2 weeks ago of 2.90:1.

Gold:

For the week, December gold advanced $37.90.The COT report showed that managed money added 7748 contracts to their long positions and liquidated 6060 contracts of their short positions. Commercial interests liquidated 2254 contracts of their long positions and added 6935 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 2.73:1, which is significantly above the previous week’s ratio of 2.19:1, but below the ratio of 2 weeks ago of 3.71:1.

Silver:

For the week, December silver advanced 72.6 cents.The COT report showed that managed money added 2585 contracts to their long positions and liquidated 2227 contracts of their short positions. Commercial interests liquidated 1065 contracts of their long positions and added 2600 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 2.52:1, which is above the previous week’s ratio of 1.93:1 and the ratio of 2 weeks ago of 2.17:1.

From October 14 through October 25, December gold has been outperforming December silver and January platinum. For example, December gold in that time frame advanced 6.35%, December silver +5.99% and January platinum +5.56%. During the week of October 21, silver slightly outperformed gold by advancing 2.99% versus gold +2.75%. January platinum was in 3rd place with a gain of 1.13%. From October 16 through October 24, gold advanced $66.30 or 5.18% while open interest increased 15,229 contracts or approximately 4%. Silver, in the same time frame advanced $1.38 or 6.47% while open interest increased only 1,089 contracts or somewhat less than 1%.

On a year-to-date basis, platinum is by far the leader with January platinum declining 6.31% versus a decline of 25.84% in December silver and -19.83% for December gold.  However, all three precious metals are on the verge of generating a short-term buy signals, and we think  the catalyst for this may be a further decline in the dollar. If the cash dollar index breaks to 78.50, it would represent a new low for the move going back to March 2012, and a move to 78.00 takes the dollar index back to its lows of November 2011. It may take a sharp break in the dollar before the precious metals begin to move significantly higher. In any event, we think the path of least resistance is upward and it is only a matter of time before there is a breakout.

In addition to being close to generating short-term buy signals, both gold and silver on the verge of generating intermediate term buy signals. As we mentioned in Thursday’s and Friday’s reports, clients should be positioning themselves on the long side of gold and silver, and to use options as a way to control risk. Gold volatility (GVZ), which is based upon the ETF GLD is at its lowest level since April 2013 and is priced at the midpoint between the high of 35.39 and the low of 11.32, which means that options are reasonably priced. This will not be the case once gold begins to move higher. The volatility index for silver (VXSLV) is based upon the ETF SLV and is trading approximately at the midpoint (32.66 close) between the yearly high of 54.92 and the low of 20.47. In addition to purchasing calls, another strategy, is to write out of the money puts in gold and silver if these markets pull back. In this case, we would recommend writing puts in the February or April contracts that are significantly out of the money. If there is a reversal in trend, clients will have more than enough opportunities to liquidate positions with relatively small losses. If in fact, the precious metals are in the process of starting a new bull market as we think they are, out of the money puts in February and/or April may turn out to be a better than usual trade.  Option strikes should be based upon your risk tolerance.

Canadian dollar:

For the week, the December Canadian dollar lost 1.45 cents. During the 4th quarter through October 25, the December Canadian dollar has lost 1.36% and year to date lost 4.14%. Taking the fourth-quarter and year to date performance, the December Canadian dollar is one of the worst performing currencies among the majors that we follow.The COT report showed that leveraged funds liquidated 685 contracts of their long positions and also liquidated 6778 contracts of their short positions. As of the latest report , leveraged funds are short by a ratio of 1.47:1, which is down from the previous week of 1.76:1 but slightly above the ratio of 2 weeks ago of 1.41:1.

Australian dollar:

For the week, the December Australian dollar lost 79 points. During the 4th quarter through October 25, the December Australian dollar has been the best performer gaining 2.94%, however year to date it lost 5.77%.The COT report showed that leveraged funds added 4048 contracts to their long positions and also added 1708 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by a ratio of 1.50:1, which is down from the previous week of 1.70:1 and the same as 2 weeks ago of 1.51:1. 

Swiss franc:

For the week, the December Swiss franc advanced 53 points. During the 4th quarter through October 25, the December Swiss franc has gained 1.25% while year to date it has advanced 1.78%.The COT report showed that leveraged funds added 355 contracts to their long positions and also added 196 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 1.96:1 which is the same as the previous week (1.96:1) and above the ratio of 2 weeks ago of 1.76:1. 

British pound:

For the week, the December British pound advanced 15 points. During the 4th quarter through October 25, the December British pound lost 0.56% and year to date is almost unchanged with a loss of 0.35%.The COT report showed that leveraged funds liquidated 6889 contracts of their long positions and also liquidated 3707 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 3.62:1 which is above the previous week of 3.42:1 and the ratio of 2 weeks ago of 3.33:1.

Euro:

For the week, the December euro advanced 1.26 cents. During the 4th quarter through October 25, the December euro has gained 2.07% while year to date it has advanced 4.23%, which makes the euro the best performing currency year to date of currencies listed in this report. The 50 day moving average of the Euro/Chf cross has moved below its 200 day moving average and has been weak since late May.The COT report showed that leveraged funds added 7660 contracts to their long positions and also added 2188 contracts of their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 3.18:1 , which is about the same as the previous week of 3.16:1, but below the ratio of 2 weeks ago of 3.61:1.

Yen:

For the week, the December yen advanced 53 points. During the 4th quarter through October 25, the December yen advanced 0.86% and year to date has lost 11.30%.The COT report showed that leveraged funds liquidated 11,908 contracts of their long positions and added 3068 contracts to their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 3.30:1, which is a dramatic increase from the previous week of 2.02:1 and the ratio of 2 weeks ago of 2.00:1.

Dollar index:

For the week, the December dollar index lost 48 points. During the 4th quarter through October 25, the December dollar index has lost 1.33% and year to date -1.27%.The COT report showed that leveraged funds added 4076 contracts to their long positions and also added 2444 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by a ratio of 1.49:1, which is down from the previous week of 1.71:1, but slightly above the ratio of 2 weeks ago of 1.44:1.

S&P 500 E mini:

For the week, the December S&P 500 E mini advanced 17.40 points.The COT report showed that leveraged funds added 32,946 contracts to their long positions and also added 3483 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.27:1, which is down from the previous week of 1.35:1 and the ratio of 2 weeks ago of 1.39:1. The current ratio is the lowest that we’ve seen in several months .

From October 10 through October 24, (final data not in for October 25) the December E mini advanced 99.75 points or 6.05% while the NASDAQ advanced 6.83%  Russell 2000+7.22% New York Composite Index +5.60%, DJIA +4.77%. During this time, open interest has increased by a total of 18,539 contracts. This is terrible performance for an 11 day rally, and to put this number in perspective, it would be healthy to see open interest increase at least 18,000 plus contracts per day on a rally of this magnitude. In our view, the 11 day open interest increase of less than 20,000 contracts is symptomatic of speculators who are very skittish about holding positions for any extended period of time. During the 11 day rally, volume averaged 1,639,818 contracts per day versus September 2013 average daily volume of 1,987,613 contracts and average daily volume year to date of 1,864,386. In short, volume during the move into new high territory for the Emini (and other majors with the exception of the DJIA) has resulted in average volume per day that is approximately 200,000 contracts fewer than the year to date numbers.

The preliminary stats for October 25 show that open interest increased by 31,311 contracts on total volume of 1,256,262 contracts, which relative to volume is average. This would be the largest open interest increase since the beginning of the rally on October 10. Conceivably, this may signal a top or short-term top. The degree of bullishness at the current stratospheric level is unnerving to say the least and the 50 day moving average of 1680 is approximately 74 points away from Friday’s close, which makes the E mini vulnerable to a correction.

According to Barrons Magazine in this week’s issue (“The Rally That Won’t Quit by Kopin Tan), the major stock indices have gone 519 days without a 10% correction. Furthermore, Mr. Tan compares this to the period between March 2003 and October 2007 when the market went 1,153 days without a correction and 1,767 days without a correction from October 1990 through October 1997.

As much as I admire Barrons for some of their excellent reporting over the years, the piece in this week’s magazine omitted one very important point. That is, from March 3, 2003 through October 31, 2007 the S&P 500 cash index advanced 708 points or 84.20% in a period of 1,174 trading days. From March 2, 2009 through October 25, 2013 during 1,171 trading days, the S&P 500 cash index has advanced 1,024 points or 139.4%. During October 1990-October 1997, his sources claimed the market went 1,767 days without a correction (we assume a 10% correction though this was not specified). OIA calculated the S&P 500 cash index advanced 599.68 points or 190.41% in this period.

In order to compare the performance of March 3, 2003 – October 31 2007 (1174 trading days) to March 2, 2009- October 2013 (1171 trading days) we used the same number of trading days beginning on October 1, 1990, which gave us an end date of June 1, 1995, or 1,171 days. During this time, the S&P 500 cash index advanced 218.55 points or 69.39%. In short, the advance of the S&P 500 from March 2009 through October 2013 is unparalleled when comparing it to identical time frames for the two other bull markets. The performance of the March 2009-October 2013 market versus the October 1, 1990 through June 1, 1995 bull market is 100% greater and compared to the March 2003-October 2007 is 66% greater. The current bull market in a class by itself when looking at its duration and performance.

The major difference between the current market and the market of the 1990s and 2003- 2007 is the economy.  There is no modern  parallel for the current economy, which has shown consistent subpar growth and high unemployment. The main driver of this rally has been the unbridled injection of liquidity by the Fed into the US economy through their quantitative easing programs. The question remains, how long the disconnect continue between the moribund economy and ever rising stock prices last. We continue to advise clients who hold long equity positions to have long put protection.

Investors continue to get more bullish as the American Association of Individual Investors survey shows.