Humbled hedge funds placed better for corn plunge

by Agrimoney.com

Hedge funds appear to have avoided being wrong-footed by Friday's double bill of US sowings and stocks data as they were over the last batch, in March, when bets on rising prices turned "disastrous".

Managed money, a proxy for speculators, reduced its net long position in Chicago corn futures and options for a fourth successive week in the week to last Tuesday, to 70,701 lots, according to data from the Commodity Futures Trading Commission, the US regulator

The decline appears to have positioned hedge funds well for the slump of some 7% in prices since, fuelled by data on Friday showing that US farmers sowed 97.4m acres with corn – a little more than they had initially planned on.

Analysts had expected a sowings number of 95.3m tonnes, banking on the set spring preventing growers from planting with corn all fields they had allocated to the grain.

While July futures have risen by some 3.5% since Tuesday, this contract, with expiry imminent bringing the contract physical delivery implications, is thinly traded and not widely held by funds.

More short positions

Indeed, while managed money's allocation to corn of long positions - which benefit when prices rise - was, at some 256,000 contracts, close to the long-run average, the level of short positions – which profit when values rise - was, at about 185,000 contracts, near record levels.

The positioning represents a sharp contrast from that ahead of that in March, before the US Department of Agriculture's previous data on sowings crops, released - as on Friday - with separate statistics on the level of grains in US inventories.

Ahead of that report, hedge funds had ramped up their net long position to a 2013 high, including long bets of more than 300,000 contracts.

This left them badly caught out after statistics showing higher-than-expected corn inventories sent futures tumbling 13% in two sessions, a scenario termed "disastrous" for hedge funds by Ann Berg, former director at the Chicago Board of Trade, in a report for the UN Food and Agriculture Organization.

More upbeat on livestock

Despite a reduction in the net long position in corn, managed money raised its net long position in the top US-traded agricultural commodities overall, by nearly 20,000 contracts.

The increase reflected in part improving sentiment over cattle futures, which have shown some recovery from a mid-June low, helped by ideas that weakening corn prices and improved pasture conditions in many areas will encourage herd rebuilding, prompting competition between beef packers and ranchers for animals.

Hog prices have also been underpinned by the prospect of weaker grain prices, besides hopes for firm demand for pork, and in particular bellies, the basis of bacon.

While futures fell in the last session, in profit-taking ahead of a quarterly USDA report on the domestic hog and pig herd, many investors expect prices to open firm on Monday, after the briefing showed animals numbers little changed, at 66.647m head.

Analysts had expected the number to come in at 66.992m head.

Sugar shorts covered

Among soft commodities, managed money also undertook a massive covering of short positions in raw sugar, ahead of the expiration of New York's July lot, but also amid wet weather in Brazil's key Centre South region, hampering the cane harvest and lowering sugar levels in crop.

Data from Brazilian cane industry group Unica last week indeed showed the Centre South harvest slowing, although sugar output remained well above year ago levels.

Short positions on sugar have been a profitable bet for speculators, with futures down some 14% so far this year on a front contract basis.

However, hedge funds cut their net long exposure to New York-traded cotton futures and options, amid talk of improved weather in Texas, America's top producing state, and of potential reforms to a Chinese subsidy programme for its farmers which has been a major support to world values.

In arabica coffee, for which a decline in values has stalled amid ideas that they are well below production costs in many countries, hedge funds continued for a sixth successive week to build a net short position, but at a far slower rate.

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The Perfect Storm In Bonds

by Tyler Durden

The Fed has managed to remove some of the complacency in financial markets for now, but we would also argue that financial markets have managed to remove any complacency the Fed (and any other central banks) may have had regarding how easy the exit strategy from QE was going to be. As we discussed here, the market and the Fed are trapped in a prisoner’s dilemma, and, as Citi notes, the events over the past three weeks make it clear that 'collaboration' is the best strategy – i.e. a non-complacent market and no hawkish surprises from central banks. There is a big risk to this scenario though. As Citi explains, a risk that we fear not even the recent dovish messages by central banks may be able to do much about.

The recent sell-off has, unlike the previous sell-offs this year, managed to trigger outflows in funds and ETFs; as we mentioned above, our credit survey reports the first outflows since 2008. The negative feedback loop which has been triggered around fund and ETF outflows has gained a momentum of its own and the following four charts suggest bonds are in fact primed for the perfect storm.

Via Citi,

The credit market may have never been more vulnerable to rising Treasury yields.

MTM investors make up a much higher proportion of credit investors now than normal,

and MTM risk itself is near all-time high.

amid record low breakevens (i.e. a need to reach increasingly for yield)

and extremely crowded positioning

In the last few days, the market has calmed down, but the ball is not now so much in the Fed’s or institutional investors’ courts, but in those of retail investors.

Whilst institutional investors will likely be happy to “collaborate”, in our view, we’re not sure if retail investors will. They will likely be receiving their quarterly statements in the next few weeks – how will they react to the recent negative performance on their funds? If the outflows continue, we see more downside in cash (vs. in synthetics) and in low beta credits (vs. higher beta credits) – the proxy hedging via indices and unwinding of what investors perceive to be their riskiest trades we’ve seen so far would be overshadowed by selling down those positions which (i) make up most of investors’ portfolios and (ii) are easier to dispose of in a capitulating market

BUT -

What drew investor attention this week most notably - as we discussed all week was Cash lagging CDS. As Citi explains, in general, we are seeing cash bonds underperforming CDS in our sectors in the most recent market volatility. The rate-fear driven selloff, which led to substantial outflows in HY funds including ETFs, are putting more pressure on cash prices as investors are selling bonds to raise cash.

The bottom line is that we have 4 extreme charts that signal a perfect storm that is increasingly out of the hands of both institutional investors and the Federal Reserve as retail flows (once the darling of yield/spread compression) force unwinds in a vicious circle with hedging (via CDS) impossible given the redemptions.

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Stock Market SPX Kiss of Death

By: Anthony_Cherniawski

SPX made an irregular Wave [b] below support this morning with a retest of support-turned-resistance. A turn-down here is literally the “kiss of death” for the rally. In this case, we would not want to see SPX retesting the 50-day moving average, since it is still rising. However, the Short-term resistance and Lip of the Cup with Handle formation serve as a proxy.

GLD may have completed its minute Wave [iii] at 114.65 this morning, although a corrective Wave (b) could still go to the Orthodox Broadening Top target. At the moment, I am satisfied that GLD has made its target, while gold came very near its target of 1155.00 this morning as well. The Cycles Model calls for a turn over the weekend, so this is a day early.

TLT has yet another decline left in its Wave structure that may allow it to go to 100.00 by the end of next week. This may indeed be the catalyst for an abrupt and severe decline in stocks at the same time. 30-year yields may approach 4.00%, which haven’t been seen since July 2011. Seeing a 20% drop in bond values in two months may give investors pause that the Fed is no langer in control.

Agricultural commodities are starting the next major impulse down. This is yet another indication of deflation taking hold of our economic assets.

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Currency Positioning and Technical Outlook: Dollar Finishes Q2 on Firm Footing

by Marc to Market

The US dollar extended its advancing streak for the third consecutive week to close out the month and quarter. Federal Reserve officials have tried to clarify policy by noting that tapering is not tightening and the decision remains data dependent.

That may be fair and good, but it does not appear to have altered the calculation of investors. The US 10-year yield, for example, rose from 40 bp in response to FOMC statement, the updated forecasts and Bernanke's comments.  The assurance of the Fed officials saw the 10-year yield surrender about 20 bp, leaving the benchmark yield at still elevated levels, though other market segments have not corrected as much.

Yields rose more than the Federal Reserve expected.  Officials implicitly and often explicitly assumed that the market misunderstood what the Fed was trying to do.  Efforts to clarify could not return prices to status quo ante.  That would seem to suggest the Fed's hypothesis is wrong.  Rather than the market misunderstanding the Federal Reserve, it may be the Fed that misunderstood the markets.

Fed officials (and many observers) appear to be relying on some kind of fair value model of interest rates to deduce that the market has over-reacted.  However, there is another model, albeit less formal, that offers insight into the price action. It is not fair value, but internal market dynamics, such as positioning and liquidity, that explains the dramatic market response more than the discounting of net present value of some future expectation.  

Even if the fair valuation model is valid over the longer term, it seems perfectly reasonable and rational that in the shorter-term it is overwhelmed by position adjustments.  Sometimes, such is in the Treasury's Inflation Protected Securities (TIPS) and other thinner markets where the lack of liquidity and capacity on dealers balance sheets and internal risk limits can exaggerate the price action.   This has even become evident in the ETF space.   

Since the crisis began, there has been speculation about which country can normalize policy first.  Even taking on board the Fed's clarifications, the investment community now recognizes that the US is likely to be first, even if not immediately.  

Yes, the ECB's balance sheet is shrinking faster, as banks repay earlier borrowing from the ECB, which in part, reflects the lack of private sector demand for credit.  However, the risk remains that the ECB will have to do more, especially given that excess reserves are falling to levels that may not be consistent with near zero overnight rates and the tightening of monetary conditions caused by the sharp rise in interest rates. 

The new governor of the Bank of England was chosen to a large extent because he promises to deliver a more activist monetary policy.  The BOJ's massive QE program is not even three months old and has much room to run.  Should yields begin rising in Japan again, additional measures cannot be ruled out. 

As a consequence, the dollar's role as funding currency is being unwound and as this process unfolds, it takes a life on of its own. Recall that as recently as the June 17-19 period, the US dollar was at 4-month lows against the euro and sterling (which was also reflected in the Dollar-Index).  In the week ending June 18, the net speculative position in euro futures at the CME switched to long side for the first time since early March. 

Before the weekend, the Dollar Index set new highs for the move, while sterling and the Australian dollar recorded new lows.  The euro and Canadian dollar came within ticks of the lows set earlier in the week.  While there may be some consolidation ahead of the key events next week, which include several central bank meetings (RBA, Riksbank, BOE and ECB), the monthly PMIs and US employment data, the US dollar is likely to continue to strengthen.

The euro's attempt to recover in the second half of last week fizzled near $1.3100 and closed below the 200-day average (~$1.3075) for the third consecutive session.  This area will likely contain upticks.  We look for the euro to test the trend line drawn off the early April and mid-May lows.  It comes in near $1.2850 at the end of next week.   This translates into dollar gains into the CHF0.9540-70 area. 

Sterling finished the North American session lower for four consecutive sessions. The trend line drawn off the mid-March and late May lows comes in near $1.5080 at the end of next week and additional support is seen near $1.50.  Corrective bounces are likely to be capped in the $1.5285-$1.5320 band. 

The greenback appears to be breaking out to the upside from a wedge or pennant chart formation against the yen. The retracement objective we have discussed was near JPY100 and this still seems like the immediate target, but the pattern break suggests potential toward JPY102.

The technical tone of both the Canadian and Australian dollars is poor.  The US dollar held above the top of its previous range against the Canadian dollar on a closing basis over the past week.  It is found by connecting the early March and late May highs.  It comes in near CAD1.0450.  On the upside, the CAD1.06-CAD1.0650 is the next technical target. 

The key reversal that the Aussie posted at the start of last week failed to stick and the beaten up currency fell to new multi-year lows at the end of last week.  The next objective is $0.9000, while prior support near $0.9200 becomes resistance. 

The Mexican peso was best performing currency (major and emerging market) last week, gaining almost 2.7% against the US dollar. We continue to like the fundamental story in Mexico, and while the peso suffered during the initial position adjustment phase, the generally favorable macro story, including attractive interest rates and a reformist government, underpins the positive sentiment.     Support for the dollar is seen in the MXN12.88-MXN12.93 area.  Additional support is seen near MXN12.80.  

Observations of the speculative positioning in the CME currency futures:

1.   The past reporting period was largely characterized by the reduction of speculative positions than taking on new risk.  There were a few exceptions.  Gross long and short yen positions grew, though minimally.  Together they rose by less than 2.5k contracts.  Gross long Canadian dollar positions were extended, practically doubling to 27.2k contracts.  Gross short peso positions were grew by a minor 4k contracts.

2.  The other main characterization of the position adjustment was that it was largely minimal.  There were 8 of 14 gross positions were track that changed by 5k or less contracts.  There were 4 gross position adjustments that of above 10k contracts.  These include gross long and short sterling positions were cut, the gross long Canadian dollar position, as we noted, was increased, and the gross long peso position was pared. 

3.  There has been a dramatic clearing of positions in the peso.  It had been the largest gross long speculative currency futures position.  For most of the last several months, it has been the only currency futures we track that remained in which speculators remained net long.  The overcrowded positioning has now been alleviated.  The net long position was 121k contracts in late May.  At the end of the most recent reporting period it stood at 5k contracts. 

4.  Part of the sell-off in the euro since the reporting period ended likely reflects speculative longs liquidating. At the end of the last reporting period, the gross long euro position was more than twice the size of the gross long position in any of the other currency futures.

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The Week Ahead: Will the Rates Rally Fizzle Or Sizzle?

by Tom Aspray

Last week’s stock-market rally helped to erase the month’s sharp early losses, but probably made it more difficult for bondholders. The sharp drop in the last 15 minutes of trading on Friday did erase a good part of the week’s gains.

Importantly, mortgage rates jumped the most in over 26 years last week. While they are still at historically low levels, bondholders and the largest bond-fund managers remain nervous.

Last week started off with another jolt, as overnight lending rates in China spiked to well over 10% in an effort to clamp down on their hidden banking system. The chart reveals that this was a breakout from a yearlong trading range (line a).

Click to Enlarge

This action was in response to the high-risk activity of some banks, in what some have referred to as a “Ponzi scheme.” So it was not surprising that the Shanghai Composite plunged back to the late 2012 lows (line a), as it was down over 15% in June.

Many of the top bond managers have had a rough month. Up through last Monday, Pimco’s $285.2 billion Total Return Bond Fund (PTTAX) was down 3.8% for the month. But quite a few other bond funds actually did worse. In May, $1.32 billion flowed out of Pimco’s flagship fund, and early reports suggest these outflows have tripled in June.

Click to Enlarge

Pimco was not alone: in the week ending June 26, a staggering $23.3 billion was pulled out of a wide gamut of bond funds, including emerging market, mortgage backed, high yield and investment grade.

In a January 18 column, I warned not to buy the junk. Since then, the SPDR Barclays High-Yield Bond (JNK) is down 4.5%.

So what is a bondholder to do in this environment? The completion of the weekly reverse head-and-shoulders bottom formation in T-Bond yields at the end of May has an “upside target at 4%.” The yield is currently at 3.49%, but well below the week’s high.

The weekly yield chart below illustrates that from a technical perspective, yields have risen too far, too fast. Rates are still close to the weekly Starc+ band. This makes a pullback to the 3.29% to 3.40% area likely over the next several weeks. This target level is highlighted on the chart by the yellow box.

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This view is also consistent with the analysis of T-Note Futures, which violated important support (line b) two weeks ago. The futures dropped well below their Starc- band last week, before firming late in the week.

T-Notes are likely to rebound or at least move sideways in the coming weeks. The OBV did break key support at line c, so a rebound is likely to be followed by a further decline in T- Note prices.

Therefore, the rally in yields looks ready to fizzle in the coming weeks…but then probabilities favor a resumption of the uptrend in yields and even lower bond prices. The 30-year T-bond yield may not reach its 4% target until next year.

It has been a rough month for many of the markets, with selling especially heavy in the past few weeks. Gold is down more than $180 per ounce, so is not surprising that gold is the worst-performing asset class for the year, down over 26%.

Stocks have clearly been the only place to be. The Spyder Trust (SPY) is still up over 12% for the year. Next to stocks, bonds are the second-best performer of the four asset classes. TLT is down 8.8%, while the emerging markets, as represented by Vanguard FTSE Emerging Markets (VWO) is down 12.9% so far in 2013.

Click to Enlarge

If the US economy is going to get stronger as the year progresses, which is my view, then it would be surprising if all of the emerging-market economies got worse. The outflows in June from emerging markets (see chart) were the highest since January 2008.

The chart of VWO shows that it is testing its weekly Starc- band, with next important support in the $34 area (line a). The OBV has turned lower from resistance (line b) and has dropped below its WMA. I continue to think there will be some more opportunities in the emerging markets this year, as we did well with some of them in the first quarter.

Overall, the economic data was quite positive last week, and helped support the stock market. Early in the week, the Dallas Fed Manufacturing Survey beat expectations, as did numbers on durable goods, new home sales and consumer confidence. All show quite positive trends from a technical perspective.

The S&P Case-Shiller chart also shows a very strong uptrend. It previously gave a great sell signal in 2006 when it broke a 14-year uptrend.

The GDP was revised downward, and the Chicago PMI was lower than expected. Pending home sales remained strong, as did the University of Michigan’s Consumer Sentiment Index on Friday.

We will get a further look at manufacturing activity on Monday, with the PMI and ISM Manufacturing indexes. Also on Monday, we’ll see the latest data on construction spending, followed Tuesday by factory orders.

Just before the Fourth of July holiday, the ADP Employment Report and the ISM Non-Manufacturing Index will be released. And on Friday we get the monthly jobs report. Since the markets will be thin, the volatility may be quite high.

What to Watch
As I noted last week, the daily technical studies were negative. But the market was getting quite oversold, which made a rebound likely last week. The rally was quite impressive, and though prices just reached the expected upside targets, the internals did act better.

The daily studies improved to slightly positive after Thursday’s close, but as I tweeted before Friday’s opening, the market was ready for a pullback, or at least a pause.

It is now looking more likely that the lows from June 25 will hold. It will take a sharp down day with very negative market internals to reverse the improvement.

The seasonal pattern is a bit more positive for July and August, but then September is generally a problem.

The market did get oversold enough on the recent drop to support the resumption of the uptrend, as the number of NYSE stocks above their 50-day MAs dropped below 28 last week and has now risen to 40. In November 2012 it dropped below 22, and at the June lows was at 13 (see arrows below).

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As expected, sentiment numbers did turn a bit less bullish last week. Only 30% of individual investors are bullish according to AAII, down from 37.4%. Still, only 35% are bearish, and it would be good to see these numbers at more extreme levels.

The number of bullish financial newsletter writers also dropped from 46.8% to 41.7%, but at 25%, the number of bears is still quite low.

The number of new NYSE 52-week lows spiked to 546, which was a new high for the correction. The number of stocks making new highs still shows a pattern of lower highs.

The daily chart of the NYSE Composite shows that the former uptrend (line a) was tested on last week’s rally, and it was not able to move above the 20-day EMA at 9,188. First support is in the 8,900 to 9,000 area, and the correction has held above the 38.2% Fibonacci support at 8,757.

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The McClellan oscillator does show a pattern of higher highs (line b) and moved above the zero line late last week. As I discussed in last week’s Trading Lesson, this bullish divergence is consistent with a market low, but it needs to be confirmed by the A/D line.

The daily NYSE Advance/Decline line has moved back above its downtrend (line c) and its WMA. A pullback and then a move above last week’s high would complete the bottom formation. For July, the monthly pivot is at 9,143, with stronger resistance at 9,255 and then 9,412.

S&P 500
The daily chart of the Spyder Trust (SPY) shows a similar formation as the NYSE Composite, but the 20-day EMA, now at $161.75, was tested.

The July pivot is at $161.50, with further resistance at $162.90. The daily Starc+ band is at $164.18, and a close back above $166.04 would confirm that the correction is over.

The daily OBV was not impressive on the recent rally, as it appears to have stalled well below the declining WMA and the former uptrend (line f). It needs to overcome the resistance (line e) to turn positive.

The S&P 500 A/D line moved through resistance (line g), so the extent of any pullback will be important. The A/D line did form lower lows (line h), but acted stronger than prices.

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Dow Industrials
The SPDR Diamond Trust (DIA) moved above its 20-day EMA last Thursday, and then Friday’s decline closed below it. There is further resistance at $150.94 and then at $153.10.

There is initial support at $147.80, followed by the converging support (lines a and b). More important levels surround the doji low of $145.17. DIA did trigger a HCD last Tuesday.

The daily Dow Industrials A/D line is testing resistance now, and a strong breakout would be a very positive sign. The uptrend in the A/D line was tested last week.

Nasdaq-100
The PowerShares QQQ Trust (QQQ) was hit the hardest after the Bernanke comments. The 38.2% support at $69.73 was violated all the way down to a low of $69.15, which was just below our stop. Then, the rebound stalled below the still-declining 20-day EMA at $71.85. The daily downtrend (line d) sits at $73.27.

The Nasdaq-100 A/D line just slightly broke its long-term uptrend (line g) before turning higher. The downtrend (line f) was broken on last week’s rally, which is a positive sign. The A/D line should hold above its WMA on a pullback.

There is initial support now at $70.65, and then further levels at $69.81.

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SPY Trends and Influencers June 29, 2013

by Greg Harmon

Last week’s review of the macro market indicators suggested, heading into the first week of summer, the markets were continuing to look weak. The week might start with a bounce though as they have run down pretty fast. It looked for Gold ($GLD) to consolidate or bounce before continuing the downtrend while Crude Oil ($USO) moved lower in the prior broad channel. The US Dollar Index ($UUP) looked ready to continue higher while US Treasuries ($TLT) continued lower. The Shanghai Composite ($SSEC) and Emerging Markets ($EEM) were biased to the downside with risk of the Emerging Markets consolidating first. Volatility ($VIX) looked to keep drifting higher keeping the bias lower for the equity index ETF’s $SPY, $IWM and $QQQ. Their charts were in agreement with the IWM noticeably stronger than both the SPY and QQQ.

The week played out with Gold consolidating for a nanosecond before resuming lower while Crude Oil found a bottom and held near the recent range. The US Dollar continued higher while Treasuries made new lower lows before a week ending bounce. The Shanghai Composite made new lows as well while Emerging Markets caught a bid and retraced some of the down move. Volatility pulled back all week as the Equity Index ETF’s bounced off of lower lows made on Monday. What does this mean for the coming week? Lets look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

SPY Daily, $SPY

SPY Weekly, $SPY

The SPY printed a Spinning Top candle Monday which was confirmed higher Tuesday, signalling the bottom was in. But the Doji Tuesday, small body candle Wednesday after a gap and then a Shooting Star doji Thursday suggested some weakness in the move. The Shooting Star was confirmed lower Friday, with a candle that filled the gap lower. All of this happened under the 20 and 50 day Simple Moving Average (SMA) cross on the daily chart with a Relative Strength Index (RSI) that is continuing to trend lower and is turning back at the mid line and a Moving Average Convergence Divergence indicator (MACD) that is trying to improve. So many small body candles leading to confusion. Out on the weekly chart price retested the wedge breakout and held moving higher. The RSI has pulled back with a MACD that is falling. The divergence on the weekly chart is a bit troubling as well. There is resistance higher at 161.60, 163 and 166.50. Support comes lower at 159.70 and 157.10 before 153.50. If it breaks below 153.50 the uptrend is broken. A move back over 166.50 reignites the bull trend. Continued Rise in the Pullback in the Uptrend.

Heading into the Holiday shortened week the Equity markets look tired in their bounce. Look for Gold to consolidate or bounce in its downtrend while Crude Oil is biased higher in the consolidation. The US Dollar Index looks strong and ready to continue higher while US Treasuries may continue their bounce in the downtrend. The Shanghai Composite and Emerging Markets both look to bounce in their downtrends. Volatility looks to remain subdued but drifting higher keeping the bias lower for the equity index ETF’s SPY, IWM and QQQ. Their charts all look to be tired in upward move within their intermediate downtrends in the long term uptrend. Use this information as you prepare for the coming week and trad’em well.

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