Weekend Wrap for September 8, 2013

Latest COT Report Dates: August 28-September 3.

The USDA will release its World Agriculture Supply Demand report on Thursday, September 12.

Soybeans:

For the week, September soybeans advanced 13 cents, November +10.25. The COT report showed that managed money added 15,051 contracts to their long positions and liquidated 7,877 contracts of their short positions. Commercial interests liquidated 3,616 contracts of their long positions and added 24,738 contracts to their short positions. As of the latest report, managed money is long soybeans by a ratio of 7.14:1, which is up dramatically from the previous week of 5.00:1 and the ratio of 2 weeks ago of 3.15:1.

Soybean meal:

For the week, September soybean meal advanced $13.90, October +6.30, December +5.20. The COT report showed that managed money added 4,423 contracts to their long positions and liquidated 2,946 contracts of their short positions. Commercial interests liquidated 4,405 contracts of their long positions and also liquidated 2,797 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio 3.49:1, which is up from the previous week of 2.94:1 and the ratio of 2 weeks ago of 2.30:1.

The disparity between the net long position in soybeans versus soybean meal is remarkable when considering the performance of these two commodities. During the latest COT reporting period, November soybeans advanced 1.19% and soybean meal advanced 1.97% and on a year-to-date basis, November beans have advanced 4.99% while December meal has gained 16.99%, yet the long to short ratio of soybeans are twice that of soybean meal. This tells us it is likely that soybean meal will continue to outperform soybeans, and when both of these markets breakdown, there will be much more selling pressure in beans than meal.

Soybean oil:

For the week, September soybean oil lost 53 points, October -54, December -57. The COT report showed that managed money liquidated 170 contracts of their long positions and also liquidated 2,901 contracts of their short positions. Commercial interests liquidated 994 contracts of their long positions and added 733 contracts to their short positions. As of the latest report, managed money is short soybean oil by a ratio of 1.28:1, which is down from the previous week of 1.33:1 and the ratio of 2 weeks ago of 1.62:1.

Corn:

For the week, September corn lost 3.50 cents, December -13.75. The COT report showed that managed money added 4,519 contracts to their long positions and also added 5,957 contracts to their short positions. Commercial interests liquidated 12,640 contracts of their long positions and also liquidated 20,240 contracts of their short positions. As of the latest report, managed money is short corn by a ratio of 1.09:1, which is about the same as the previous week of 1.08:1, but down from the ratio of 2 weeks ago of 1.15:1.

Chicago wheat:

For the week, September Chicago wheat lost 8.25 cents, December -6.25. The COT report showed that managed money liquidated 3,314 contracts of their long positions and added 5,528 contracts to their short positions. Commercial interests liquidated 4,065 contracts of their long positions and also liquidated 10,170 contracts of their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.46:1, which is an increase from the previous week of 1.36:1, but slightly below the ratio of 2 weeks ago of 1.50:1.

Kansas City wheat:

For the week, September Kansas City wheat advanced 7.75 cents, December -8.00. The COT report showed that managed money liquidated 792 contracts of their long positions and also liquidated 994 contracts of their short positions. Commercial interests liquidated 817 contracts of their long positions and also liquidated 3167 contracts of their short positions. As of the latest report, managed money is long Kansas City wheat by a ratio of 1.56:1, which is slightly above the previous week of 1.53:1 and the ratio of 2 weeks ago of 1.49:1. The current ratio is the highest in in least a couple of months. Also, note that managed money is becoming increasingly bearish on Chicago wheat, but increasingly bullish on Kansas City wheat even though both are in down trends.

Although we are bullish the wheat market-Kansas City wheat in particular, the problem is that managed money has been aggressively increasing their net long exposure, but KC wheat has been declining. For example, from July 31 through September 3, which encompasses 5 COT periods, KC wheat has declined 9.25 cents, (December Chicago wheat declined 20.50 cents in the same time frame) but the net long position of managed money increased from 1.06:1 to 1.56:1. On the other hand, the commercial short ratio has increased from 1.96:1 on August 6 to 2.59:1 on September 3. In short, managed money has not been able to move KC wheat higher after 5 weeks and commercial selling is keeping a lid on prices. We think it is likely that managed money bulls will liquidate before the market takes off.

COT Report:August 28-September 3        Year to Date
September meal               +6.47%                       +24.83%
December meal                 +1.97%                       +16.99%
September beans              +1.52%                         +7.70%
November beans               +1.19%                         +4.99%
December KC wheat          -1.69%                       -20.20%
December corn                  -2.26%                         -21.93%
December Chicago wheat -2.49%                         -21.08%

 Cotton:

For the week, December cotton lost 46 points. The COT report showed that managed money liquidated 11,005 contracts of their long positions and added 766 contracts to their short positions. Commercial interests added 3,653 contracts to their long positions and liquidated 10,924 contracts of their short positions. As of the latest report, managed money is long cotton by a ratio of 4.98:1, which is down significantly from the previous week of 6.44:1 and the ratio of 2 weeks ago of 7.86:1.

Live cattle:

For the week, October live cattle lost 1.13 cents, December -1.45. The COT report showed that managed money liquidated 504 contracts of their long positions and added 1,382 contracts to their short positions. Commercial interests liquidated 3,241 contracts of their long positions and also liquidated 3,331 contracts of their short positions. As of the latest report, managed money is long live cattle by a ratio of 2.75:1, which is down slightly from the previous week of 2.90:1 and the ratio of 2 weeks ago of 2.62:1.

We examined open interest from the time that October cattle topped on August 16 at 1.29100 through September 5 when October cattle closed at 1.25225, and declined 3.875 cents from the August 16 high. During this time, open interest declined only 3,253 contracts and the long to short ratio of managed money is about the same as it was at the high. We think cattle prices are headed lower and will generate a short-term sell signal within a couple of days. It is apparent that managed money is digging in and refusing to liquidate, and we suspect this is because the fundamentals for cattle are quite bullish moving into the 4th quarter and the 1st quarter of 2014. As we said in last week’s report, the gap that existed during trading on August 7 and 8 would be filled, and this occurred on Thursday September 5

From the September 2 Weekend Wrap:

 “From the time cattle generated a short and intermediate term buy signal on August 8 through August 30, October cattle has declined 0.22%, despite the fact that managed money has doubled their net long position. Apparently, commercial interests are keeping a lid on prices because the net short position of commercial interests has increased from 2.66:1 on August 6 to 3.46:1 on August 27. Due to the massive increase in speculative long positions, the market remains vulnerable to more corrective action, which will serve to wash out weak longs. There is a gap of approximately 1 cent between the high on August 7 and the low of August 8. We  are confident this will be filled before cattle begins a move that takes out the August 16 high of 1.29050.” 

Crude WTI:

For the week, October crude oil advanced $2.88. The COT report showed that managed money liquidated 11,064 contracts of their long positions and added 805 contracts to their short positions. Commercial interests liquidated 9,074 contracts of their long positions and also liquidated 6,674 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 6.08:1, which is down from the previous week of 6.40:1 and the ratio of 2 weeks ago of 6.36:1.

It has been remarkable that as crude oil prices have advanced, the net long position of managed money has declined. For example, 7 weeks ago on July 23, October crude oil closed at $105.79 and on September 3 closed $108.54, or an advance of $2.75. On July 23, the long to short ratio of managed money stood at 11.16:1 and on September 3, 6.08:1 or a long position that has nearly been cut in half. On July 23, the long to short ratio for commercial interests stood at 1.13:1 and on September 3 it advanced somewhat to 1.14:1. Commercial interests have been net long crude oil for a number of months. In short, neither managed money nor commercial interests appear to be terribly bullish on crude oil during the past several weeks, but the market continues to move higher. At this juncture, we foresee the possibility of two scenarios going forward.

Scenario 1: Crude continues to rise and breaks above the high made on August 28 of $112.24 and all the trend followers jump on board and we see open interest ratcheting higher accompanied by an increase of volume, which sets up the final top. OIA will be monitoring open interest action along with price to determine when crude oil has been stretched to the limit. 

Scenario 2: Crude oil tests the August 28 high, and the rally fails. Monitoring open interest action with price  and volume will be critical during this period because it will convey the degree of enthusiasm of market participants. Remember, on August 28 when crude made its high of $112.24 and closed 1.09 higher, open interest declined by 560 contracts, which we considered to be very bearish and indicated so in our report. It is difficult to determine which scenario plays out because of the geopolitics of the Middle East, and US domestic politics along with the perception by market participants of a potential crisis in the region.

Heating oil:

For the week, October heating oil advanced 2.71 cents. The COT report showed that managed money added 878 contracts to their long positions and liquidated 1,887 contracts of their short positions. Commercial interests liquidated 5,536 contracts of their long positions and also liquidated 5,743 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 3.19:1, which is up from the previous week of 2.84:1 and the ratio of 2 weeks ago of 2.79:1. The current ratio is the largest net long position of managed money in at least a couple of months.

Gasoline:

For the week, October gasoline lost 3.64. The COT report showed that managed money added 4,294 contracts to their long positions and liquidated 113 contracts of their short positions. Commercial interests added 665 contracts to their long positions and added 5,344 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 9.03:1, which is up from the previous week of 8.40:1 and the ratio of 2 weeks ago of 7.06:1. The current ratio represents the largest net long position gasoline in at least a couple of months.

Natural gas:

For the week, October natural gas lost 5.1 cents. The COT report showed that managed money added 3,538 contracts to their long positions and also added 137 contracts to their short positions. Commercial interests liquidated 263 contracts of their long positions and also liquidated 3,464 contracts of their short positions. As of the latest report, managed money is equally long as they are short with a ratio of 1.00:1, which is slightly below the previous week, when managed money was short by a ratio of 1.01:1 and the ratio of 2 weeks ago when they were short 1.08:1.

COT Report:August 28-September 3   Year to Date
October natural gas      +2.51%                        -2.84%
October Brent                +1.24%                      +9.58%
September ethanol       +0.28%                    +22.03%
September WTI             -0.35%                      +17.78%
September heating oil  -0.68%                       +5.66%
September gasoline       -1.64%                       +9.25% 

Copper:

For the week, December copper advanced 2.85 cents. The COT report showed that managed money liquidated 2,192 contracts of their long positions and added 2,646 contracts to their short positions. Commercial interests liquidated 2,965 contracts of their long positions and also liquidated 6,587 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 1.34:1, which is down from the previous week of 1.61:1 and the ratio of 2 weeks ago of 1.65:1.

Palladium:

For the week, December palladium lost $27.00. The COT report showed that managed money liquidated 1,537 contracts of their long positions and added 418 contracts to their short positions. Commercial interests liquidated 142 contracts of their long positions and also liquidated 844 contracts of their short positions. As of the latest report, managed money is long palladium by a ratio of 15.92:1, which is down dramatically from the previous week of 23.42:1 and the ratio of 2 weeks ago of 25.63:1.

Platinum:

For the week, October platinum lost $31.40. The COT report showed that managed money liquidated 29 contracts of their long positions and also liquidated 318 contracts of their short positions. Commercial interests liquidated 1,795 contracts of their long positions and added 773 contracts to their short positions. As of the latest report, managed money is long platinum by a ratio of 9.34:1, which is up from the previous week of 8.65:1 and dramatically higher than the ratio of 2 weeks ago of 7.03:1. The current ratio is the highest in 5 to 6 months.

Gold:

For the week, December gold lost $9.60. The COT report showed that managed money added 2,111 contracts to their long positions and liquidated 2,900 contracts of their short positions. Commercial interests liquidated 19 contracts of their long positions and added 4,090 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 3.34:1, which is up from the previous week of 3.00:1 and the ratio of 2 weeks ago of 1.86:1. The current ratio is the highest in a couple of months.

Silver:

For the week, December silver advanced 37.8 cents. The COT report showed that managed money added 852 contracts to their long positions and liquidated 1,779 contracts of their short positions. Commercial interests liquidated 1,389 contracts of their long positions and also liquidated 2,475 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 2.75:1, which is significantly above the ratio of the previous week of 2.27:1 and the ratio of 2 weeks ago of 2.24:1. The current ratio is the highest in a couple of months. 

COT Report: August 28-September 3   Year to Date
October platinum             +0.74%                    -3.61%
December gold                   -0.19%                  -17.60%
December copper               -0.51%                   -11.59%
December silver                 -1.00%                   -21.49%
December palladium         -3.49%                      -1.11%

Canadian dollar:

For the week, the September Canadian dollar advanced 1.22 cents. The COT report showed that leveraged funds liquidated 3,553 contracts of their long positions and added 6,205 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.29:1, which is significantly above the previous week’s ratio of 1.82:1 and the ratio of 2 weeks ago of 1.40:1.

Australian dollar: On September 5, the September Australian dollar generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, the September Australian dollar advanced 2.93 cents. The COT report showed that leveraged funds liquidated 3,553 contracts of their long positions and added 6,205 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.15:1, which is about the same as the previous week of 2.13:1 and the ratio of 2 weeks ago of 1.97:1.

The Australian dollar is traditionally the favorite of managed money, and we expect the market to continue its rally up to the 93.30 area, where we think it will run into trouble. During its journey higher, it will be important to see managed money shorts get blown out before it is wise to initiate bearish positions.

This week, the strong currency was the New Zealand dollar, and it was the leader higher against a number of major currencies. See the table below.

08/30/2013 – 09/08/2013
Excel Spreadsheet

 Swiss franc:

For the week, the September Swiss franc lost 78 points. The COT report showed that leveraged funds liquidated 652 contracts of their long positions and also liquidated 1,683 contracts of their short positions. As of the latest report, leveraged funds are long the Swiss franc by a ratio of 1.92:1, which is up from the previous week of 1.64:1 and the ratio of 2 weeks ago of 1.71:1.

British pound:

For the week, the September British pound advanced 1.41 cents. The COT report showed that leveraged funds added 3261 contracts to their long positions and liquidated 90 contracts of their short positions. As of the latest report, leveraged funds are short the pound by a ratio of 1.41:1, which is down from the previous week of 1.54:1 and down substantially from the ratio of 2 weeks ago of 2.16:1.

Euro: 

For the week, the September euro lost 26 points. The COT report showed that leveraged funds liquidated 15,574 contracts of their long positions and added 4,389 contracts to their short positions. As of the latest report, leveraged funds are long the euro by a ratio of 1.41:1, which is down substantially from the previous week of 1.84:1 and the ratio of 2 weeks ago of 1.72:1.

Yen: On September 4, the September yen generated a short and intermediate term sell signal.

For the week, the September yen lost 110 points. The COT report showed that leveraged funds added 4,327 contracts to their long positions and also added 5474 contracts to their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.93:1, which is down somewhat from the previous week of 3.19:1 and the ratio of 2 weeks ago of 3.21:1.

Dollar index:

For the week, the September dollar index advanced 2 ticks, nearly unchanged on the week. The COT report showed that leveraged funds liquidated 7,259 contracts of their long positions and also liquidated 4,938 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by a ratio of 1.54:1, which is up from the previous week of 1.31:1 and the ratio of 2 weeks ago of 1.33:1. The current ratio is one of the highest seen in a couple of months.

 COT Report: August 28-September 3        Year to Date
September Dollar Index           +1.48%                      +2.56%
September Australian  $         +0.86%                      -9.95%
September British pound         +0.15%                     – 3.67%
September Canadian $            -0.44%                       -3.79%
September euro                         – 1.62%                        0.39%
September yen                           -2.40%                       12.89%   

 S&P 500 E mini:

For the week, the September S&P 500 E mini advanced 22.20 points. The COT report showed that leveraged funds added 25,166 contracts to their long positions and also added 40,936 contracts to their short positions. As of the latest report, leveraged funds are short the E mini by a ratio of 1.56:1, which is exactly the same as the previous week of 1.56:1 and slightly below the ratio of 2 weeks ago of 1.60:1.

For the past couple of weekend reports, we have commented on the divergence of the Dow Jones Industrial Average and the other major indices. During the month of September, the divergence was on full display with the Industrial Average under performing the NASDAQ +1.95%, Russell 2000+1.85%, New York Composite +1.82%, S&P 500 +1.36%, S&P 400+1.25% and the DJIA in last place with a gain of 0.76%.

When looking at 3rd quarter performance through September 6, it gets worse. For example, from July 1 through September 6 the NASDAQ Composite has advanced 7.54%, Russell 2000 +5.33%, New York Composite Index, +3.59%, S&P 400 +3.26%, S&P 500 +3.04%, DJIA +0.09%, or an increase of 13 points thus far in the third quarter. The S&P High Dividend Aristocrat ETF also underperformed the major averages by gaining just 1.92% in the 3rd quarter.

Based upon the severe underperformance of the Industrial Average and the high dividend ETF, we conclude there is rotation out of the high dividend stocks and into more speculative stocks comprising the NASDAQ Composite and the Russell 2000. In short, it appears that investors are chasing performance and piling into small caps while shunning large and mid-cap stocks. As Ralph Acampora has said: “Do not fight papa Dow.”

We think there is tremendous risk in the market, and recommend that clients consider fairly heavy bearish positions coupled with tactical  exits in the event there is a surprise appointment to the Federal Reserve and/or an announcement with respect to a major change in the anticipated Federal Reserve tapering program. It appears if Larry Summers is appointed as chairman of the Fed, the market would take this bearishly, while an appointment of Janet Yellen would be perceived to be bullish. Obviously, we have no idea when the fed appointment will be announced, but the administration has a lot on its plate with respect to the situation in Syria.

We want to bring to your attention that the Baltic Dry Index reached its highest level since January 2012 on September 6. Additionally, the Dow Jones US Coal Index is the top performing index of all sector and subsector indices tracked by Dow Jones since August 2 thru September 6, when the market topped. For example, since August 2 the Dow Jones US Coal Index has gained 13.62% and year to date has declined 22.35%. The coal ETF (KOL) has gained 10.26% since August 2 and has lost 21.80% year to date. The Baltic Dry Index has advanced 12.69% since August 2 and year to date has increased 82.98%. Since August 2, the Dow Jones Industrial Average has lost 4.70% while the S&P 500 cap weighted index has lost 3.19%. In short, it appears that global shipping economics are improving. If you want recommendations on the best candidates in the coal or shipping sectors, please call.