On July 12, the USDA will release its monthly WASDE report at 11:00 a.m. central daylight time.
August soybeans advanced 32.75 cents on light volume of 190,137 contracts. Volume declined dramatically from July 7 when the August contract lost 51 cents on volume of 290,551 contracts and total open interest increased by 5,190. Additionally, volume was the weakest since July 1 when the August contract lost 10.00 cents on volume of 186,499 contracts and total open interest declined by 5,347. In other words, the light volume on the advance indicates that many would-be participants were sitting on the sidelines.
On July 8, total open interest increased only 295 contracts, which again reinforces the lack of enthusiasm for the upside move. The July and August contracts lost a total of 1,240 of open interest and there were barely enough open interest increases in the forward months to offset the decline in the two delivery months and increase total open interest fractionally. All in all, the volume and open interest acts confirm there is no enthusiasm for the upside in soybeans.
The COT stats released on Friday revealed that managed money liquidated 15,160 of their long positions and added 9,402 to their short positions. Commercial interests liquidated 102 contracts of their long positions and also liquidated 25,301 of their short positions. This leaves managed money long by ratio of 8.19:1, down substantially from the previous week of 17.09:1 (a record high ratio) and substantially below the ratio two weeks ago a 14.04:1.
On July 6, OIA announced that August, September and November soybeans generated short-term sell signals and continue to be on intermediate term buy signals. An intermediate term sell signal will occur if the daily high is below OIA’s key pivot point for July 11 of 10.58 1/8. As we pointed out in the July 6 report, after the generation of the short-term sell signal, markets tend to rally from 1-3 days before resuming their downtrend. As this report is being compiled on July 11, the August contract is rallying for the second day and is currently trading 6.25 cents above Friday’s close and has made a daily high of 11.01, the highest print since 11.17 1/4 made on July 7.
Due to the USDA releasing its monthly report tomorrow, we recommend that clients stand aside with respect to new speculative positions. Another reason is that the soybean volatility index is trading at its 52 week high of 36.35 on July 11. This means that options are extremely expensive and that the report tomorrow may create some major fireworks.
September corn advanced 13.25 cents on volume of 310,644 contracts. Surprisingly, volume was below that of July 7 when the September contract gained 0.25 cent on volume of 346,920 contracts and total open interest increased by 4,620. Additionally, volume was below that of July 6 when the September contract lost 9.25 cents on volume of 359,027 contracts and total open interest declined by 10,015. The most surprising aspect of volume traded on Friday was that it was the lowest since May 24 when total volume traded was 301,015 contracts and the September contract closed at 4.00.
On July 8 total open interest increased by 8,532 contracts, which relative to volume is average. The July 2016, September 2016 and July 2017 contracts lost a total of 5,104 of open interest, and the big open interest increase occurred in the December contract with a gain of 11,130. The COT report revealed that managed money liquidated 52,425 contracts of their long positions and added 29,757 to their short positions. Commercial interests added 14,730 to their long positions in liquidated 69,713 of their short positions. According to the latest report, managed money is long corn by a ratio of 1.72:1, down sharply from the previous week of 2.88:1 and the ratio two weeks ago a 3.12:1. Three weeks ago, managed money was long by a record high for 2016 ratio of 4.62:1.
Although the total open interest increase on Friday’s advance was positive, it was accompanied by extremely low volume and unless we begin to see a pattern of open interest increases on price advances, we view Friday’s open interest action as anomalous. As this report is being compiled on July 11, the September contract has reversed course and trading 9.25 cents lower on the day and has made a daily low of 3.44, which is above Friday’s print of 3.42, and above the contract low of 3.39 made on July 6. On June 22, OIA announced that September corn generated a short-term sell signal and an intermediate term sell signal on June 30. We have no recommendation.
Heating oil: On July 8, August and September heating oil generated short-term sell signals, but remain on intermediate-term buy signals.
Brent Crude: On July 8, September/October Brent crude generated intermediate sell signals after generating short term sell signals on June 16.
WTI crude oil: On July 8, August and September WTI crude oil generated intermediate term sell signals after generating short-term sell signals on June 16.
August WTI crude oil gained 27 cents on volume of 1,049,165 contracts. Total open interest declined 5,694. The August contract accounted for a loss of 39,946 of open interest.The COT report revealed that managed money added 2,239 to their long positions and also added 9,485 to their short positions. Commercial interests added 10,175 to their long positions and also added 3,397 to their short positions. As of the latest report, managed money is long WTI crude oil by a ratio of 2.10:1, down from the previous week of 2.24:1 and a substantial reduction from the ratio two weeks ago of 2.84:1.
As this report is being compiled on July 11 the August contract is trading 55 cents below Friday’s close and has made a new low for the move of 44.53, which is the lowest print since $44.12 made May 10.In the June 20 report, we recommended short call positions in WTI and the trade continues to work extremely well. The position should continue to be held until expiration or until OIA notifies you to liquidate.
The September British pound advanced 53 pips on volume of 103,605 contracts. Total open interest increased by 2,349 contracts, which relative to volume is approximately 10% below average, but a total open interest increase indicates that new buyers were pushing the pound higher, not short-sellers. The COT report released on Friday show that leveraged funds piled into the short side of the pound, which is not a big surprise and the stats revealed that leveraged funds added 3,024 to their long positions, but added a massive 18,065 to their short positions. As of the latest report, leveraged funds are short the pound by a ratio of 1.75:1, up from the previous week up 1.40:1 and the ratio two weeks ago of 1.41:1.
We are somewhat conflicted about the pound’s direction in the immediate term. While everyone is bearish and we certainly understand this, it nonetheless makes us nervous. Everyone is expecting the Bank of England will lower interest rates and if for some reason this does not occur, the pound could experience a substantial short covering rally. For this reason we recommend a stand aside posture with respect to bearish positions and strongly advise against bullish positions.
S&P 500 E-mini: On July 8, the September S&P 500 E-mini generated a short-term buy signal along with the S&P 500 cash index. Both remain on intermediate-term buy signals.
The September S&P 500 E-mini advanced 28.50 points on unimpressive volume of 1,966,470 contracts. We say unimpressive because during the month of June the average daily volume was 2,208,316 contracts and the year to date average daily volume is 2,011,349. This is troubling because the labor department released a very positive employment report on Friday. It is further concerning that the open interest increase on July 8 was substantially below average and increased only 17,612, which is approximately 55% below average.
As this report is being compiled on July 11 the September contract is trading 13.75 points above Friday’s close and has made a new all-time high of 2136.75. Again, this is occurring on very low volume and volume for the September contract, just two hours before the close is a fraction below 1,100,000 contracts. In the July 7 report, we wrote about our concern about three markets that were contradicting the price in advance in the S&P 500 E-mini.
We have reprinted the extract (see below) and on a positive note in trading on July 11 the September 10 year treasury notice trading sharply lower, down 18 points and the September Japanese yen is trading sharply lower, down 234 pips or -2.34%. Additionally, though gold made an attempt in the early going to take out the July 6 contract high of 1377.00 it was unable to break through and currently is trading $2.00 lower.
Now that the S&P 500 E-mini is on a short-term buy signal, we should begin to see the usual 1-3 day pullback, and the ability of the September contract to resume its uptrend after the pullback will determine whether the market is ready to take a new leg higher. We have written extensively about our concern for a contagion in the European bank system precipitated by a major meltdown of Italian banks and spreading throughout the continent and affecting one of the biggest banks in Europe, Deutsche bank which has trillions of derivative exposure.
For this reason, if you are long equities, we recommend that long dated puts out of the money be purchased to hedge your positions. As this report is being compiled, the VIX is trading at 13.41, which is near a 30 day low down sharply from the high reading of June 27 of 26.72, which means that option prices are relatively inexpensive due to substantially reduced volatility. We have no speculative positions to recommend at this juncture.
From the July 7 research note on the S&P 500 E-mini:
“Despite the giddiness associated with today’s advance, we want to caution clients to keep an eye on three markets: First, the Japanese yen is advancing against the dollar, when it should be declining. Second, gold should be declining sharply when in fact it has been firm all day. Third, the 10 year note should be declining and in fact is trading very firmly. These three markets may indicate there is something on the horizon that currently is being ignored by the equity markets. We have written extensively about the problems in the Italian banking system and our concern about the financial condition of Deutsche bank, the largest bank in Germany. We have no recommendation at this juncture.”