There were a number of interesting developments in the markets for the week just ended January 13.
Thursday and Friday were catastrophic days for the longs. Beginning on December 30 through January 11, 68,583 contracts were added. The price range during that period was a low of 6.35 1/4 to a high of 664 1/4. In other words, all 68,583 contracts were transacted between those prices during the December 30 through January 11 timeframe. On Friday, corn closed at 599 1/2. On Thursday, January 12, open interest only declined by 11,086 contracts. This means that as of the close of business Thursday, all of the new buyers from the December 30 through the January 11 time frame have significant losses. As a result, we should see some fairly heavy liquidation at some point as distressed longs are forced to liquidate at lower and lower prices. The recent increase in open interest is supported by the commitment of traders report. Released on Friday, January 13, the managed money category added 27,766 longs and shorts fell by 5,611. As of this report, managed money is long versus short corn by a ratio of 4:1
Last week, I reported that the spreads between nearby crude and the back months had changed from backwardation to contango. The February-July crude spread last week was at a $.94 discount with February under July. This discount has increased to $1.11 with February under July. Also last week, I quoted the February-October crude spread with February selling at a discount of $.31 under the October crude. This week that spread has widened to $.98. The continued widening of the discount to the back months is a bearish signal. Certainly the market can go lower, but at this juncture, I would suggest that a stand aside posture is best at this point. The commitment of traders report showed that as of January 10 there was a decline of 2804 longs and a decline of 6,858 shorts.
Gasoline is showing excellent relative strength against crude oil. For example, since crude oil reached a high of 103.74 on January 4, it has declined $4.52 to close at 98.70 or approximately 5% lower. On January 4 gasoline made a high of 2.7891 and closed at 2.7342 on January 13. This represents a decline of approximately 2%. Another interesting fact is that for the week ending January 13, February gas was down 1.74 cents and April was down 3.44 cents. Backwardation increases the further forward you go. It is positive whenever a market declines in the back months more than the front months during an overall decline in the market. For example, on Monday January 9, the April- August spread was 7.54 cents premium to April. On Friday January 13, the same spread yielded 8.64 cents premium to April, or an increase of one cent in the spread. Remember, during the week of January 9 April gas fell 3.44 cents and August declined 4.79 cents. Also, on January 12 gasoline hit $2.824, which was the highest price for February gas since September 8, 2011 when gas reached $2.834. The remarkable aspect of gasoline’s price action is that it is reaching 4 1/2 month highs during the slowest driving period of the year. From a seasonal standpoint, gasoline tends to get if stronger as we move forward from mid-February through April and May. Next week, I will do an open interest analysis on gasoline. The commitment of traders report, which was published on January 13, but tabulated as of January 10 shows that in the managed money category, 3,364 longs were added and there was a decline of 623 shorts. The number of net long positions was the highest since July 26, 2011. Gasoline is a very volatile commodity and if traded one should be very conservative. One way to participate in gasoline is through the ETF, UGA. It is premature to enter this market. When we get closer to an entry point, I will publish it.
The Commitment of Traders Report issued on Friday, but tabulated as of Tuesday, January 10, indicates a continued buildup of short interest on the part of both large and small speculators. It is important to know that the lows seen this week: 1.2673 on January 9, 1.2664 on January 11 and 1.2627 on January 13, dovetail with weekly lows seen in August and September of 2010. After the market saw its low of 1.1874 the week of June 11, 2010, it rallied to a high of 1.3307 during the week of August 13. The market subsequently declined to 1.2587 during the week of August 27, 2010, then tested the low of 1.2623 the following week of September 3, 2010. The last retest occurred during the week of September 10, 2010 when the euro made its final low at 1.2643. The market then rallied $.15 to a high of 1.4156 during the week of October 15. When taking into account the massive short positions of speculators and that the euro is at lows made 18 months ago, plus the fact that much has already been discounted, it doesn’t make sense to be short at these levels. If short, positions should be covered immediately. At the very least, protective buy stops should already be in place.
S&P 500 E Mini:
The Santa Claus rally that began on December 20 through January 12 is a fascinating study in how a market loses momentum. I have divided the rally into two eight day segments. The first segment covers the rally from December 20 through December 30. The second phase covers the rally from January 3 through January 12.
December 20 through December 30: During this phase of the rally, March S&P 500 E mini was up by 53.25 points, or 4.44%. During this period, open interest increased by 69, 529 contracts. Of those eight days, there was only one day that open interest declined and that was by a minuscule 396 contracts on December 28.
January 3 through January 12: In the second phase of the rally, the March S&P 500 E-mini was up by 39.75 points or 3.17%. However, open interest declined by 12, 838 contracts. Even though phase one covered a major holiday period, in which volume declined dramatically, open interest was up sharply. On the other hand, in the second phase of the rally, despite significantly higher volume and higher prices for the index, open interest declined.
As bad as that is, there is another confirmation that the market is losing steam. The number of new 52-week highs on the New York Stock Exchange, reached its peak of 270 on December 27, 2011. On December 20 at the beginning of the rally, new 52-week highs stood at 158. In other words, during the period of December 20 through December 27, 112 additional stocks reached new 52-week highs. It was during this period that the S&P 500 E mini had its biggest gain of 60.50 points or 5.04%. From December 28 to January 3, the S&P 500 E mini was up 12.25 points, or .97%. New highs as of January 3 was 267 stocks, or three fewer stocks than on December 27. From January 4 to January 10, the market rallied an additional 14.00 points, or 1.10%. Again, the number of stocks reaching new 52-week highs declined to 200. From January 11 to January 13, the S&P 500 E mini moved another 3.00 points higher, or .23% and new 52-week highs dropped to 166. To sum up all of this, new 52-week highs on the New York Stock Exchange reached their height on December 27 at 270 and through January 13 dropped to 166, even though the S&P 500 E mini was 29.25 points higher than on December 27. The number of new 52-week highs on January 13 (166) is nearly equal to the number of new 52-week highs of 158 made on December 20, yet the S&P 500 E mini is up 89.75 points, or 7.48%
The American Association of Individual Investors latest survey shows that 49.1% are bullish, 17.2 are bearish, and 33.7 are neutral. The number of bulls has inched up a bit and the reading of 49.1% is a very high number, which is another sign of caution. In the latest commitment of traders report, managed money liquidated 1,559 contracts and also liquidated 59, 885 short positions.
The market that everyone should be watching on the sidelines is Sugar#11. Since November 25, 2011, it appears that this market is forming a base. It made a low of 22.71 on November 25 and then made a fractionally lower low at 22.62 on December 15. Since December 15 through January 12 open interest has increased by 65, 771 contracts and price has advanced by 52 points, or 2.29%. A close over 24.95 would be very positive and it would be a buy signal if the low was above 24.95. Sugar is a very difficult market to trade and it routinely fakes out traders. One way the trade sugar is through the ETF ticker symbol SGG. I will continue to monitor developments in sugar and report them as they occur.
Gold And Silver:
There is nothing compelling to report on gold and silver that hasn’t already been said. Commitment of traders data was not revealing with both longs and shorts declining somewhat in gold and silver added 101 longs and 2181 shorts declined. The 50 day moving average for gold is 1680.60 and this week we will see the 50 day moving average cross under the 150 day moving average. The first buy signal would occur with a close above 1695 and a secondary confirmation would be if the low for the day is at least 1695. Another confirmation would be if gold penetrates 1730. What is important is that if the rally picks up steam and is for real, it has to be accompanied by increasing open interest and increasing volume. Since the rally began on December 30 we have seen a low volume rally with declining open interest. For example, gold closed at 1540.90 on December 29 and on January 12 gold closed at 1647.70, which is a $107.00 rally from the low. However, open interest from December 30 through January 12 declined by 3407 contracts. This is bearish.
10 Year Treasury Notes:
Although we are at historic highs in the note market, it appears that the market wants to go higher. As my daily open interest stats show, open interest has been increasing dramatically. This is supported by the latest commitment of traders report, which indicates that managed money added 47,806 contracts to their long positions and 1,665 contracts were added to the short side. Although the market should be traded from the long side, the note market is at historically high levels and should be approached with caution. It is especially important to have protective sell stops in place.