In the September 2 Weekend Wrap, just before soybeans topped out, we reported that the long to short ratio in soybeans was 24.54:1. In order to provide perspective on the future trading parameters for soybeans, we examined longer-term moving averages. The 100 week moving average for soybeans on the continuation chart is $13 82 3/4 and the 150 week moving average is 12.67 3/8. On November 16, January soybeans closed at 13.83 1/4. The only violation of the 150 week moving average occurred during late November to mid-December 2011. In the Weekend Wrap of November 11, we listed the lows that were made in December, and the low last year occurred on December 14, when soybeans traded beneath the 150 week moving average. Previous to December 2011, the last time soybeans traded under the 150 week moving average was October 2010.

Based upon the work in the November 11, and November 18 Weekends Wrap, we have developed 2 important parameters for evaluating soybeans going forward: price and time. The 150 week moving average price of 12.67 3/8, and the mid-December timeframe provide us with useful data for evaluating when it may be optimal to enter long positions. This is not to say that we are prejudging market action, and making a decision beforehand, rather we are employing two useful protocols that provide us with a frame of reference during the next 20 trading days. It is unlikely in our view that soybeans will reach its 150 week moving average, but this allows us to evaluate the current price of soybeans in the mid-December timeframe, when recent history shows that soybeans tend to bottom.

Another indicator that clients should keep their eye on is the soybean-corn ratio. The ratio in its most simplistic form is calculated by dividing the price of soybeans by the price of corn. There is more involved in calculating the ratio, but for our purposes the simplistic explanation should suffice. As of Friday, the ratio closed at 1.871, which is not far from its August 6 low of 1.816. Prior to August 6, the previous low occurred during the week of November 7, 2011 when it reached 1.781. This low held going back to December 2010. Although the importance of the ratio becomes more acute when planting decisions are being made for corn and soybeans, it does provide us with another frame of reference for determining the value of soybeans compared to corn on a historical and contemporaneous basis.   

Soybean meal:

For the week, December soybean meal lost $25.10, January -26.40, March -27.30. The COT report showed that managed money liquidated 9,746 contracts of their long positions and added 3,613 contracts to their short positions. Commercial interests liquidated 84 contracts of their long positions and also liquidated 13,136 contracts of their short positions. As of the latest report, managed money is long by a ratio of 3.15:1, which is down significantly from the previous week of 4.91:1 and the ratio of 2 weeks ago of 5.46:1. This week’s ratio was the lowest in several months.

 In the September 2 Weekend Wrap, we reported that the long to short ratio in soybean meal was 40.13:1. This was just prior to the market topping out on September 4. This provides perspective on how much selling has occurred since meal’s high.

It is interesting to compare the long to short ratios in soybeans and soybean meal and then examine their performance in different time frames. For example, the latest COT report was compiled from November 7-November 13. During this time, January soybeans lost $1.07 1/2, or 7.09% versus December soybean meal losing $39.60 or 8.38%. Although, soybean meal lost more on a percentage basis, on a dollar basis, soybeans lost much more at $5,375 versus soybean meal losing $3960 during the COT reporting period. Yet, the long to short ratio in soybean meal is half of what it is for soybeans even though meal exports are outpacing beans.

The table a couple of paragraphs below show how soybeans and soybean meal and the other grains have performed during the most recent week and on a year-to-date basis. Surprisingly, wheat is outperforming soybeans on a year to date basis, and soybean meal is dramatically outperforming soybeans, yet soybeans has the highest long to short ratio of all listed below. Surprisingly, the long to short ratio in soybeans is higher than corn, yet corn has significantly outperformed soybeans. In the next paragraph, we show the performance of soybeans soybean meal corn and wheat from the time that soybeans and soybean meal topped out on September 4. Based upon the relative high long to short ratio in soybeans versus soybean meal, corn and wheat, we conclude that more managed money selling is on its way for soybeans.

Performance September 4-November 16
January beans     – $3.67 3/4     -21.00%
December meal    -108.80          -20.40%
December corn     -72.75               -9.10%
December wheat   -51.50               -5.79% 

Corn:

For the week, December corn lost 11.75 cents, March -11.00, May -12.00. The COT report showed that managed money liquidated 17,628 contracts of their long positions and added 3,414 contracts to their short positions. Commercial interests added 19,345 contracts to their long positions, but liquidated 6,000 contracts of their short positions. As of the latest report, managed money is long corn by a ratio of 5.80:1, which is down from the previous week of 6.61, and the ratio of 2 weeks ago of 7.23:1. The long to short ratio for this week is one of the lowest in several months.

 The 100 week moving average for corn on the continuation chart is $6.81 3/8, and the 150 week moving average is $5.97. Unlike soybeans, corn closed (7.27) significantly above it’s 100 week moving average while soybeans closed just slightly above it.

Wheat: On November 16, December wheat generated an intermediate term sell signal.

For the week, December wheat lost 48.50 cents, March -47.75, May -47.75. The COT report showed that managed money added 7,967 contracts to their long positions, but added 3,580 contracts to their short positions. As of the latest report, managed money is long wheat by a ratio of 1.72:1, which is slightly higher than the previous week of 1.69:1 and the ratio of 2 weeks ago of 1.68:1.

The 100 week moving average for wheat on the continuation chart is $7 32 1/2, and the 150 week moving average is 6.83 3/4. On November 16, December wheat closed at 8.38, which is somewhat more than a dollar over its 100 week moving average and $1.50 over its 150 week moving average. Relative to its 100 and 150 week moving averages, wheat is the strongest compared to soybeans and corn. 

Performance November 12-November 16    Year to Date
December meal      -5.58%                                      +38.84%  
December wheat    -5.47%                                      +16.39%
January beans       -4.60%                                      +14.04%
December corn      -1.59%                                      +24.01%
December bean oil -1.51%                                      – 10.84%

Crude oil:

For the week, January crude oil gained 37 cents. The COT report showed that managed money liquidated 18,171 contracts of their long positions and added 1,462 contracts to their short positions. Commercial interests massively liquidated 34,281 contracts of their long positions and also liquidated 22,653 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 1.87:1, which is down from the previous week of 2.10:1, and the ratio of 2 weeks ago of 2.06:1.

Heating oil:

For the week, January heating oil lost 1.65 cents. The COT report showed that managed money liquidated 1,639 contracts of their long positions, but added 1,877 contracts to their short positions. Commercial interests added 3,669 contracts their long positions, but liquidated 6,769 contracts of their short positions. As of the latest report, managed money is long heating oil by a ratio of 3.27:1, which is down from the ratio of the previous week of 4.09:1 and 2 weeks ago of 3.44:1.

Natural gas:

For the week, December natural gas gained 28.7 cents and the December 2013 contract gained 18.1. It is positive to see the front month(s) gain on back months. The COT report showed that managed money liquidated 25,234 contracts of their long positions and also liquidated 6,367 contracts of their short positions. Commercial interests liquidated 5,999 contracts of their long positions and also liquidated 3,936 contracts of their short positions. As of the latest report, managed money is now short by a ratio of 1.01:1, which is a change from the previous week when managed money was long by a ratio of 1.08:1, and long 2 weeks ago by a ratio of 1.17:1.

 As we have mentioned in previous reports, natural gas has been acting in a strongly bullish fashion.It is interesting that managed money got net short during the most recent COT reporting period (November 7-November 13) when December natural gas advanced 14 cents, or 3.88%. This increases the likelihood that natural gas prices will continue to advance, despite burdensome stocks. For example, according to the latest report from the Energy Information Administration, natural gas currently in storage is more than 5% above the five-year average and there has been an increase over 100 billion cubic feet (bcf) of natural gas put in storage during the past couple of weeks. Yet, natural gas continues to march upward. The narrative of increasing supply, along with projections of normal to above normal temperatures in the coming weeks undoubtedly is increasing the number of bears. Whenever faced by price contradicting a narrative,  generally rely on price as being the more reliable indicator. It is bullish when a market goes up on negative news. A more conservative way to trade natural gas, would be to wait for a setback and write out of the money puts.   

Copper:

For the week, December copper gained .0060 cents. The COT report showed that managed money liquidated 1,937 contracts of their long positions, but added 966 contracts to their short positions. Commercial interests liquidated 3,858 contracts of their long positions and also liquidated 5,531 contracts of their short positions. As of the latest report, managed money is now short by a ratio of 1.03:1, which is a change from the previous week when managed money was long by a ratio of 1.07:1, and the ratio of 2 weeks ago when managed money was long by a ratio of 1.24:1.

Gold: 

For the week, December gold lost $16.20. The COT report showed that managed money added 9,304 contracts to their long positions and liquidated 457 contracts of their short positions. Commercial interests added 715 contracts to their long positions and also added 16,037 contracts to their short positions. As of the latest report, managed money is long by a ratio of 10.58:1, which is up from the previous week of 9.53:1, and slightly lower than the ratio of 2 weeks ago of 10.70:1.

Silver:

For the week, December silver lost 22.9 cents. The COT report showed that managed money added 436 contracts to their long positions and also added 56 contracts to their short positions. Commercial interests liquidated 13 contracts of their long positions, but added 1,403 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 5.79:1, which is nearly equal to the previous week of 5.76:1, but down significantly from the ratio of 2 weeks ago of 6.58:1.

Australian dollar:

For the week, the December Australian dollar declined by .0053. The COT report showed that leveraged funds added 6,909 contracts to their long positions and also added 1769 contracts to their short positions. According to the latest report, leveraged funds are long by a ratio of 1.78:1, which is up slightly from the previous week of 1.71:1 and the ratio of 2 weeks ago of 1.53:1.

The Australian dollar looks like it may be in the process of rolling over versus the US dollar. The 50 day moving average of 1.0360 is converging with the 200 day moving average of 1.0337. The December Australian dollar closed at 1.0309. The reason the Australian dollar is a compelling trade is based upon economic weakness in China. Australia is a major exporter of coal, iron ore and copper to China, and the Shanghai Composite Index, which closed at 2014.73, is a mere 15 points from its nearly 4 year low of 1999.48. The Shanghai Composite Index is telling the world that all is not well in China. In short, if China sneezes Australia catches a cold.

Although the Australian dollar has not generated a short or intermediate term sell signal, it looks like this will occur in the near term. The 50 and 200 day moving averages tell us that the 1.03 area is a short and longer-term value, but it appears only a matter of time before the 50 day crosses below the 200 day. Although the Australian dollar is not part of the dollar index, other currencies that comprise it are showing significant weakness against the dollar. With the euro showing persistent weakness, it appears the dollar is headed much higher. In essence, a short Australian Dollar vs.US Dollar position is a bet on continued dollar strength and Chinese economic weakness. Seasonally, the Australian dollar should see some strength during the next month, however this would be an opportunity to implement short call positions. We will keep clients apprised of any new developments.

Euro:

For the week, the December euro gained 14 points. The COT report showed that leveraged funds liquidated 753 contracts of their long positions, but added 11,969 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 3.82:1, which is higher than the previous week of 3.28:1, and about the same as 2 weeks ago of 3.70:1.

S&P 500 E mini:

For the week, the S&P 500 E mini lost 15.90 points. The COT report showed that leveraged funds added 102,497 contracts to their long positions, and also added 6,985 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 1.28:1 which is down from the previous week of 1.50:1 and the ratio of 2 weeks ago of 1.61:1.

Although OIA has been recommending long puts ever since the S&P 500 topped out at 1468, clients should keep in mind that we are entering the strongest seasonal period for the stock market. The American Association of Individual Investors is showing one of the largest bearish readings in quite a while, and is 20 percentage points higher than the bullish consensus. The last Federal Reserve meeting of 2012 will occur on December 12. If the market continues on its southerly route, one has to think the Federal Reserve will use some of its remaining bullets, to pump up the stock market. Since 2000, the first 15 days of November 2012 is the third worst performing. However, during the second half of the month performance is positive with the exception of the year 2000. The two worst performing years in the first 15 days in November, had positive performance during the second half.

Performance Nov 1-Nov15, 2000-2012            Performance Nov 16-Nov 30 
2002 -0.09%                                                               +2.98%
2000-2.98%                                                                 -5.45%
2012-3.98%                                                                    n/a
2007-6.29%                                                                 +1.76%
2008-10.90%                                                               +3.78%

American Association of Individual Investors
                  Last wk    2 wks ago    3 wks ago
Bulls         28.8%       38.5%         35.7%
Bears        48.8%       39.9%         41.0%
Neutral     22.4%       21.6%         23.3%

Based upon our evaluation of a variety of different commentary both on the left and the right, it appears there is a conciliatory attitude between the parties about coming to an agreement, even if temporary. Combine this with the Federal Reserve meeting on December 12, seasonal strength in December and January, along with the extreme bearishness, and there are all the ingredients of a good-sized rally.

On the other hand, with 460 of the 500 companies in the S&P 500 reporting, third-quarter earnings for the group were down 2.2% versus the third quarter of 2011 and total revenue was down 3.6% compared to a year earlier. Unless global economic activity picks up substantially, there is a likelihood that earnings will have to be reduced significantly for the 4th quarter of 2012 and the 1st quarter of 2013. Combine this with potential heavy selling by investors who want to capture capital gains tax rates for 2012, and you have a countervailing force that will act to put a lid on any rally in 2012.