November soybeans lost 1 cent on volume of 226,083 contracts. Total open interest declined by 2,814 contracts, which relative to volume is approximately 45% less than average. The November contract accounted for loss of 9,798 of open interest. As this report is being compiled on October 23, November beans are trading 15 cents higher and January +13.50. The November contract has taken out the high of $13.17 made on September 30 and the November 2013-January 2014 spread has widened to over 6 cents premium to November.
From the October 20 report:
“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.”
December soybean meal gained 40 cents on volume of 63,384 contracts. Total open interest increased by 647 contracts, which relative to volume is approximately 50% below average. The December contract accounted for loss of 845 of open interest. As this report is being compiled on October 23, December soybean meal is trading $8.60 higher while January is +7.10. December meal is trading at its highest price since September 19 when it made a high of $431.30. Soybean meal will definitely generate a short-term buy signal on October 23, which will reverse the short-term sell signal generated on October 10. In yesterday’s report, we suggested that clients initiate long calls in the January or March contracts. When the market pulls back, we would suggest adding to the position. Our target for December meal is the September 13 high of 451.20.
December corn lost 5.75 cents on volume of 147,769 contracts. Total open interest increased by 12,269 contracts, which relative to volume is approximately 230% above average, meaning that new longs and shorts were aggressively entering the market and the shorts were in control driving prices lower. The December contract added 5,358 of open interest. As this report is being compiled on October 23, December corn is trading 5.50 cents higher and has made a high of $4.46 1/4, which is the highest price since October 18 when corn reached 4.47 3/4. Undoubtedly, the strong movement in wheat and the soybean complex is helping to drive corn prices higher. We have been cautioning clients about being short corn at this juncture. Perhaps the market is going lower, but it is highly likely this will not occur immediately. Without having the COT stats, we have no idea to what extent managed money is short, but it is a safe guess the number may be at near record levels. Corn remains on a short and intermediate term sell signal. Stand aside.
December Chicago wheat advanced 1 cent on very light volume of 49,454 contracts. Total open interest increased by 2,860 contracts, which relative to volume is approximately 130% above average meaning that new longs and shorts were aggressively entering the market, but longs were able to move wheat only fractionally higher. The December contract lost 309 of open interest, which makes the total open interest increased more impressive (bullish). Kansas City wheat advanced 4.50 cents on volume of 14,618 contracts and total open interest increased by 845 contracts, which relative to volume is approximately 120% above average, meaning that new longs were aggressively entering the market and pushing prices higher.
The Commonwealth Bank of Australia cut their wheat forecast by 1.6 million tons to 23.6 million tons for Australia’s wheat crop. Australia is the second-largest exporter of wheat with the United States being number one. The crop in western Australia appears to be in good shape, however the eastern part is causing the shortfall. On a fairly consistent basis, we are seeing the global balance sheet for wheat declining and demand increasing. We are bullish wheat and expect prices to continue to rise through the end of the year. As this report is being compiled on October 23, December Chicago wheat is trading 4.75 cents higher while KC is +7.50. Neither has taken out the high of $7.11 1/4 and 7.74 made on October 21. Wheat remains on a short and intermediate term buy signal.
December cotton lost 61 points on light volume of 11,898 contracts. Total open interest declined by 119 contracts, which relative to volume is approximately 50% less than average. December cotton closed at 82.44, which is the lowest close since September 5 when it closed at 82.30. On September 5, total open interest was 170,339 contracts and on October 22 open interest totaled 202,364 contracts. In short, cotton is trading at the lowest level since September 5, yet open interest is approximately 32,000 contracts higher than it was on September 5. This difference represents contracts that have yet to be liquidated.
In order to provide more perspective on the potential downside in cotton consider the following: Total open interest as of October 22 is back to the level of September 30 and October 1 of 200,436 and 203,616 respectively. The close on September 30 was 87.21 and on October 1 closed at 86.60. Again, December cotton closed more than 4 cents lower than it did on September 30 and October 1 yet total open interest on October 22 is at the same approximate level. This is another data point that confirms there is considerable liquidation ahead. As this report is being compiled on October 23, December cotton is trading 1.61 cents lower and has made a new low for the move at 80.52. On October 18, we suggested to clients who were inclined to short cotton maintain a buy stop at the 84.40 level, which was the high on October 18. Stay with the short position and lower the stop to breakeven.
December live cattle advanced 1.075 cents on light volume of 35,531 contracts. Total open interest increased by a massive 3,391 contracts, which relative to volume is approximately 275% above average meaning that new longs were aggressively entering the market and pushing cattle prices sharply higher. The October contract lost 427 of open interest which makes the total open interest increase much more impressive (bullish). We have recommended that clients stay on the sidelines because we think cattle has more backing and filling to do before it can take another leg higher. As this report is being compiled on October 23, December cattle is trading 17 points lower after making a new high for the move at 1.33750, which is shy of the high of 1.34000 made on October 17. Stand aside.
December crude oil lost $1.38 on heavy volume of 774,795 contracts. Volume was the highest since October 17 when 873,513 contracts were traded and crude oil lost $1.62 while open interest declined 15,532 contracts. On October 22, total open interest declined by 6,767 contracts, which is 60% below average. The November contract lost 19,874 of open interest. On October 22, December crude made a new low for the move at $98.11 and as this report is being compiled on October 23 has made another new low of 96.16. On September 23, crude oil generated a short-term sell signal and on October 21 generated an intermediate term sell signal. For those of you who took our advice on September 30 and shorted out of the money calls, stay with this position.
The Energy Information Administration reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.2 million barrels from the previous week. At 379.8 million barrels, U.S. crude oil inventories are above the upper range for this time of year. Total motor gasoline inventories decreased by 1.8 million barrels last week, but are near the top of the average range. Finished gasoline inventories and gasoline blending component inventories both decreased. Distillate fuel inventories increased by 1.5 million barrels last week but remain near the lower limit of the average range for this time of year. Propane/propylene inventories fell 0.5 million barrels last week and are in the middle of the average range. Total commercial petroleum inventories increased by 3.7 million barrels last week.
November natural gas lost 8.7 cents on volume of 374,803 contracts. Volume was the highest since October 16 when 375,654 contracts were traded and November natural gas declined 2.1 cents while open interest declined 8,952 contracts. On October 22, total open interest declined by 7,785 contracts, which relative to volume is approximately 20% less than average. As of August 23, natural gas has not generated a short-term sell signal, which would reverse the short-term buy signal generated on October 10. Natural gas remains on an intermediate term sell signal.
December silver advanced 51.2 cents on fairly light volume of 47,947 contracts. Volume increased approximately 13,000 contracts from October 21 when December silver advanced 36.5 cents and total open interest increased by 2,655 contracts. On October 22 total open interest declined by 61 contracts, which is negative. October 22 was the first day since October 16 that open interest action relative to price was negative. On October 16, December silver advanced 17.4 cents and open interest declined by 2,323 contracts. Although it is come close, December silver has not generated a short or intermediate term buy signal as of October 23.
The December euro advanced 1.05 cents on volume of 197,045 contracts. Total open interest increased by 4,271 contracts, which relative to volume is approximately 15% below average. The euro made a high of 1.3795, which is the exact high on October 23. The euro is massively overbought, and we suggest clients stand aside and wait for correction before contemplating bullish positions.
The December Australian dollar advanced 49 points on volume of 77,475 contracts.Volume was the highest since October 17 when 78,154 contracts were traded and the December Australian dollar advanced 82 points while open interest declined 16 contracts. On October 22, open interest increased by 1,229 contracts, which relative to volume is approximately 40% less than average. We been advising clients to wait for correction, and it appears that one is underway on October 23 with the December Australian dollar losing 89 points on heavy volume. Stand aside.
S&P 500 E mini:
The S&P 500 E mini advanced 11.25 points on heavier than normal volume of 1,852,132 contracts.Volume was the highest since October 15 when 1,878,707 contracts were traded and the E mini declined 12.25 points while open interest increased by 1,430 contracts. On October 22, open interest increased by a minuscule 3,796 contracts, which is dramatically below average. In numerous reports, we have been talking about the abysmal volume and tepid increase of open interest. From October 16 through October 22, the E mini has advanced every day (5 days) with a total advance of 57 .50 points. Total open interest in this time frame has increased 42,548 contracts, or an average of 8509 contracts per day. While it is positive to see open interest increase when price advance, the fact remains that the average open interest increase per day is dramatically below average. In short, the minor increase of open interest indicates a lack of confidence on the part of market participants. The below average daily volume compared to September 2013 and year to date shows there are large numbers of potential participants on the sidelines. As we have said before, if prices are to continue moving higher, there must be a sufficient number of participants willing to pay ever higher prices. The tepid open interest increase as the market was rallying solidly for 5 days shows the number of participants willing to make commitments is at a very low-level.
Another major concern of ours is the poor performance of the Japanese Nikkei. As this report is being compiled on October 23, the December Nikkei is trading 435 points lower and has made a low of 14260. A chart of the Nikkei reveals that it has made a triple top, which in our view is ominous because the Japanese government has been printing money at an incredible rate. In our view, this shows at some point money printing ceases to pump markets higher and then the market decides which is the path of least resistance. We think it is important for holders of long equity positions to have long put protection.