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  • Stocks continue to move higher
  • Strength in precious metals as palladium and rhodium prices explode to the upside
  • Selling in crude oil and natural gas- Natural gas falls to the lowest price since 2016 at $1.83 per MMBtu
  • Copper falls below $2.80 per pound
  • Sugar continues to rise, cocoa trades over $2800 per ton, but coffee slips towards $1.10 per pound

 

The summary of trade recommendations for the coming week are as follows:

A more detailed picture is available on the spreadsheet that is linked below.

 

Summary and highlights:

 

The US and China signed the “phase one” trade agreement on January 15. On the same day, the US House of Representatives sent two articles of impeachment against President Trump over the Senate as the trial will begin over the coming days. Meanwhile, a bearish inventory report from the EIA when it comes to oil products weighed on the price of NYMEX crude oil futures and sent them to a new short-term low. The EIA reported that the US daily output of the energy commodity rose to a new record high of 13 million barrels per day for the week ending on January 10.

I was traveling on business from Wednesday, January 15 through the weekend. On Monday, January 20, most markets were closed for the MLK birthday holiday. On Tuesday, January 21, stocks moved lower on the back of weakness in Boeing shares with the DJIA leading the way on the downside. The S&P 500 and NASDAQ posted smaller losses on the session, but the Russell 2000 was the leading loser with an over 1% loss on the session. March US 30-Year Treasury Bond futures moved 1-10 higher to the 158-19 level. The dollar index was little changed at 97.294 on the March contract. Grains were mixed with a 13.75 cents loss in soybean futures, while corn fell 1.75 cents per bushel. However, wheat moved 11 cents higher. Crude oil edged lower towards the $58 per barrel level, and products declined, but gasoline continued to outperform distillates. Natural gas plunged after last week’s bearish reversal, and the price fell to a new low of $1.83 per MMBtu before settling at $1.895 on the February futures contract, a new low and the lowest level since 2016. February futures eft a gap on the weekly chart from $1.97 to $1.994. Gold, silver, and platinum prices declined, but palladium and rhodium moved higher. Rhodium moved to a midpoint price of over $9000 per ounce. Copper edged lower and settled below the $2.80 per pound level. Hogs and feeder cattle were a touch lower, while live cattle futures posted a marginal gain. Cotton fell below 70 cents per pound, FCOJ, coffee, and lumber prices declined. Sugar and cocoa prices moved higher on the session. Bitcoin was $175 lower to $8750 per token.

On Wednesday, the DJIA slipped marginally with the Russell 2000, but the S&P 500 and NASDAQ posted small gains on the session. March 30-Year Treasury Bond futures edged 0-08 higher, while the March dollar index was stable at the 97.295 level. The grain futures markets were quiet with small losses in soybeans and wheat and a gain in corn. Crude oil moved sharply lower to under the $57 level on the March futures contract. Oil products moved to the downside with a greater loss in gasoline than heating oil futures. Natural gas edged a touch higher to $1.905 per MMBtu on the February futures contract on NYMEX. Gold and silver posted modest gains, platinum was higher, and palladium was explosive, with the price rising to a new high of $2372.90 per ounce on the March futures contract. Palladium was over $100 per ounce higher on the session. Rhodium moved significantly above the $9000 level as it continues to storm towards its all-time peak at just over $10,000 per ounce. Meats were stable with a small gain in hogs, while live cattle fell marginally, and feeder cattle underperformed the live cattle. Coffee and cocoa were slightly lower on the session, but cotton, sugar, FCOJ, and lumber prices moved higher. FCOJ put in a bullish reversal on the daily chart on Wednesday. Bitcoin was $70 lower to the $8680 per token level.

 

Weekly Spreadsheet:

 

 

Stocks and Bonds

The signing of the “phase one” trade deal between the US and China and the passage and signing of the USMCA that is set to replace NAFTA for trade with Canada and Mexico caused stocks to move higher since last week’s report. The stock market has ignored the impeachment trial now going on in the US Senate.

 

The S&P 500 moved 1.18% higher since the previous report, while the NASDAQ climbed 1.43% to the upside. The DJIA posted a 0.85% gain since the last report. The bull market in stocks continues to take the leading indices to new highs as the good news for investors keeps on coming.

Chinese stocks moved lower since last week as the leading ETF product underperformed US indices.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $43.47 level on Wednesday, which was 3.01% lower than the closing level on January 14. Technical support is at $37.66 per share from August 14. FXI traded to a new high of $45.29 on January 13, which now stands as technical resistance. Further progress towards a “phase two” and comprehensive trade protocol between the US and China should lift Chinese stocks and the FXI ETF product.  Above the most recent peak, the next level of resistance is at the early April high of $45.96 per share.

US 30-Year bonds moved a higher from last week. On Wednesday, January 22, the March long bond futures contract was at the 157-27 level, up 0.53%. The odds of any changes in Fed monetary policy in 2020 are low as it is an election year in the US. The Fed is an apolitical body and will exercise patience and restraint when it comes to any changes in interest rates that could impact the results of the election in November. The US central bank will likely remain on the sidelines over the coming months unless there is a severe political or economic shock to the system.

Open interest in the E-Mini S&P 500 futures contracts rose by 2.28% since January 13. Open interest in the long bond futures rose by 4.36% over the past week. The VIX moved higher since the previous report even though the stock market climbed to higher highs. The volatility index was at the 12.91 level on January 22, 4.20% higher over the period.

The current level in the volatility index limits its downside potential. I continue to look for buying opportunities that offer 2:1 reward versus risk opportunities using the VIX futures or VIXY-related products like VIXY or VIXX. The risk of a correction in the stock market will continue to rise with the prices of the leading indices. While I will continue to trade the volatility instruments from the long side, I will employ tight stops to limit risk and allow for entry at lower levels. Small losses could lead to far more significant gains if a correction occurs, which would lift the prices of VIX-related products.

 

The dollar and digital currencies

The March dollar crawled higher since January 14. The contract posted a 0.21% gain since last week. The index settled at 97.295 on Wednesday. Interest rate differentials between the US currency and the euro continue to provide support for the dollar index. The dollar index traded to its lowest level since July 2019 when it fell to 96.02 on December 31, which is now the technical support level, while resistance is at 98.045, the November 29 high on the March futures. Continuous contract support stands at 95.365 with resistance at the 99.33 level. The dollar index moved to the bottom end of its range at the end of 2019, but it has bounced during the early weeks of 2020. Bullish and bearish factors are pulling the dollar in opposite directions. While interest rate differentials are bullish for the greenback, Brexit and trade agreements could weigh on the dollar index. At the same time, the 2020 US election could inject uncertainty over the future of US policy into currency markets throughout most of this year. Not much has changed in the currency markets since last week.

The euro currency was 0.37% lower against the dollar since January 14 on the March futures contract. Since the euro accounts for 59.5% of the dollar index, we could see some euro and pound-related volatility as the deadline for Brexit is at the end of this month. Over the past week, the pound rose 0.81%. Technical support is at the $1.30 level against the dollar. We could see another rally in the pound and the euro against the dollar at the end of this month when Brexit occurs, and the UK separates from the EU. I expect more volatility in currency markets in 2020 compared to 2019 based on the contentious nature of the November 2020 US Presidential election.

 

Bitcoin edged lower since January 14. Bitcoin was trading at the $8,662.60 level as of January 22, as it moved 1.41% lower than the value on January 14. Ethereum rose by 2.33% and was at $168.13 per token on Wednesday. The market cap of the entire asset class moved 0.11% higher as it outperformed the price action in Bitcoin. The number of tokens increased by 20 to 5051 tokens since January 14. The rise in the number of digital currencies continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $239.694 billion. Open interest in the CME Bitcoin futures rose by 3.84% since last week after a significant increase in the metric in the previous report. Bitcoin futures hit a high of $9085 on January 17. The rise in open interest over the recent weeks is a sign that Bitcoin and the other cryptocurrencies are attracting more interest in 2020. Rising price and increasing open interest tend to be a bullish sign. The first target on the upside is around the $10,000 level in Bitcoin. An ETF product in 2020 could cause even more interest and higher prices for the digital currency asset class.

The Canadian dollar moved 0.66% lower since last week. Open interest in C$ futures rose by 1.33% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. I expected the currency to continue making higher lows against the US dollar, which is a pattern that has been in place since late 2018. The support level for the Canadian currency is at just above $0.75 against the US dollar on the active month March futures contract.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. Tragic fires in Australia could be weighing on the nation’s currency. The A$ fell by 0.90% since the January 14 report as the progress on trade provided a boost for the Australian currency, but the fires could be presenting economic challenges down under.

The British pound posted a 0.81% gain since the previous report. The pound rose to just over $1.35 after the December 12 election, the highest level since May 2018, but pulled back to the $1.30 level. I continue to believe the pound could be heading for higher levels and would be a buyer against the dollar and the euro on any dips. We could see more action in the pound as the UK exits the EU at the end of this month.

The Brazilian real moved lower against the US dollar since January 14, as it fell by 0.99%. The real remains not far above its multiyear lows and in a long-term downtrend. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. Meanwhile, supply concerns over the Brazilian coffee and sugar crops caused the soft commodities to work to higher levels over the past months. Coffee pulled back from recent highs at around the $1.40 per pound level, but sugar recently rose to a higher high than in October 2018 at over 14.24 cents per pound.

 

Precious metals that trade on the COMEX and NYMEX exchanges all posted gains over the past week. The Platinum group metals continued to lead the charge on the upside, but gold and silver prices also moved higher. The rise in gold continues to be a commentary on the decrease in the value of all fiat currencies around the world, including the US dollar.

 

Precious Metals

Gold and silver prices posted gains since January 14, but the real action on the upside was platinum, palladium, and rhodium markets. The best-performing sector of 2019 continues to shine during the first month of 2020.

Gold rose by 0.78% since last week, while silver was 0.49% higher. The price of February gold was just over the $1555 per ounce level on Wednesday, while March silver was over $17.80 per ounce. February gold futures reached a peak at $1613.30 on January 8, and March silver climbed to $18.895 on the same day at the height of the Iranian missile attack on Iraqi airbases. Gold made a new multiyear high, but silver did not reach the September 2019 peak of $19.54 on the continuous futures contract during the rally earlier this month.

The price of April platinum rose by 3.44% since last week was at $1021.30 per ounce. The level of technical resistance is at $1046.70, the January 16 high on the April futures contract. Support in platinum is at $1000 per ounce. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium surged higher since the end of 2019. The midpoint price of the metal was at $9350 per ounce on January 22, $1750 per ounce higher than on January 14. Palladium rose by 10.0% since the previous report. The price traded to a new peak at $2357.80 on January 22 on the March futures contract and closed at the $2335.60 per ounce level on Wednesday. Palladium suffered a sharp correction on December 20, but the move to below $1800 per ounce gave way to an over $500 per ounce rally. Palladium moved over $100 higher on January 22.

Open interest in the gold futures market moved 0.25% lower over the past week. The metric reached a new record peak of 799,541 contracts on January 15. The metric moved 2.03% higher in platinum while it was 3.02% higher in the palladium futures market. Silver open interest fell by 0.51% over the period. The bullish trend in the oversold sector remained intact as of January 22.

The silver-gold ratio moved a bit higher since January 14 as gold underperformed silver.

Source: CQG

The daily chart of the price of February gold divided by March silver futures shows that the ratio was at 87.40 on Wednesday, up 0.54 from the level on January 14. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4, 2019, on the active month contracts when silver moved to its most recent high. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets.

We are long the gold mining stock ETF products GDX and GDXJ, which outperformed gold since the last report.

Gold moved up by 0.78%, while the GDX was 2.09% higher since January 14, and GDXJ rose by 2.44% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. Over recent weeks, GDX and GDXJ underperformed gold in a departure from the normal price behavior, but it returned to the normal pattern this week. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.24% gain since January 14, which underperformed the price action in the silver futures market. I continue to believe that both gold and silver prices will head higher over time. However, the potential for periodic corrections will rise with prices.

Platinum and palladium moved in appreciably higher since January 14. March Palladium was trading at a premium over January platinum with the differential at the $1314.30 per ounce level on Wednesday, which widened significantly from January 14 to yet another record level. April platinum was trading at a $535.40 discount to February gold at the settlement prices on January 14, which narrowed since the previous report as platinum outperformed gold but underperformed palladium since last week.

The price of rhodium, which does not trade on the futures market, was a rocket ship over the past week and was at $9,350 per ounce on Wednesday. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. Some analysts projected that the price of the rare metal was heading for the $10,000 per ounce level, and the price action is taking the metal to that level. Markets rarely move in a straight line, and spreads are likely to widen the higher rhodium prices climb. The spread between the bid and offer rose to $700 per ounce at the current price level. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Rhodium vaulted higher during the first three weeks of 2020.

We are long the PPLT platinum ETF product, which moved 3.05% higher since January 14 as it slightly underperformed the price action in the futures. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move and take out the $1200 resistance level to break to the upside on a technical basis.

We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $11.16 on January 22, down 1.33% since the last report as mining shares underperformed the silver futures market.

I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” My outlook has not changed over the past week. Low interest rates and increased interest in precious metals should contain any corrections. Risk will continue to rise with prices, but any pullbacks in prices could be golden buying opportunities. The case for higher highs in gold and silver remains compelling.

 

Energy Commodities

Crude oil moved lower over the past week. Brent continued to outperform WTI crude oil futures, given the tensions in the Middle East. Oil products and crack spreads moved to the downside since January 14. Natural gas fell to a new low of $1.83 per MMBtu level for the first time since 2016. Ethanol posted a loss, and the price of coal moved to the downside.

February NYMEX crude oil futures rolled to March and fell 2.44% since the previous report. March Brent futures moved 1.94% lower since January 14. March gasoline was 4.42% lower, and the processing spread in March posted a 13.58% loss since January 14 as gasoline underperformed the price of crude oil over the period. March heating oil futures moved 5.27% lower since the previous report, and the heating oil crack spread fell 12.57% since the last report.

Technical resistance in the March NYMEX crude oil futures contract is at $65.40 per barrel level, the high from January 8, with support close by at the $54.85 level. Volatility in crude oil increased over the first weeks of 2020. Crude oil open interest fell by 3.11% over the period. The price of crude oil will be highly sensitive to the news cycle. Any hostilities between the US and Iran or Iran and Saudi Arabia could push the price to the recent peak or higher. However, any signs of negotiations and movement towards a nuclear nonproliferation agreement could push the price of NYMEX futures to the lower end of the trading range at $50 per barrel. I expect lots of price variance in the oil futures arena in the coming weeks, be careful when approaching the energy commodity when it comes to any risk positions.

I continue to expect oil-related equities to outperform the commodity in 2020. Last year, the underperformance on a percentage basis should limit the downside potential for ETFs like the XLE, VDE, and OIH as well as for many of the stocks that make up those products. The dividend yields in the oil patch continue to be attractive. The energy equities did not show any signs of a recovery over the past week.

Iran poses the most significant threat to oil supplies from the Middle East. Even though the tensions between the US and Iranians seem to have calmed since the January 8 missile attack on Iraqi airbases, the rhetoric between Teheran and Washington remains a clear and present danger to stability in the part of the world that is home to half the world’s crude oil supplies.

Meanwhile, the prospects for changes in US energy policy will hinge on the outcome of the November Presidential election. The US is currently the world’s leading producer of both crude oil and natural gas. OPEC is hoping that the US production of crude oil begins to decline in 2021. The oil cartel will review its current production cut in early March. Based on the recent price action, OPEC is likely to keep the cuts in place throughout 2020. We could see the price of oil and gas begin to move with the political polls in the US later this year once the Democrats decide on a challenger to President Trump.

The spread between Brent and WTI crude oil futures in March drifted higher to the $6.49 per barrel level for Brent, which was 27 cents above the level on January 14. The spread moved to a high of $6.70 on January 8 as Iranian missiles attacked Iraqi airbases that house US troops. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May, but the March contract reached a high at a lower level at $7.11 on the high in late April when it comes to the spread. The spread found what looks like a significant bottom at $3.93 on September 3. Tensions in the Middle East should keep a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil remains at $50 per barrel and $66.60 on the upside.

US daily production rose to a new high of 13 million barrels per day as of January 10, according to the Energy Information Administration. As of January 10, the API reported a rise of 1.10 million barrels of crude oil stockpiles, while the EIA said they fell by 2.50 million barrels for the same week. The API reported a rise of 3.20 million barrels of gasoline stocks and said distillate inventories rose by 6.80 million barrels as of January 10. The EIA reported an increase in gasoline stocks of 6.70 million barrels and a rise in distillates of 8.20 million barrels. Rig counts, as reported by Baker Hughes, rose by 14 last week to 673 rigs in operations as of January 17, which is 179 below the level operating last year at this time. The recent decline in the number of rigs with daily output at 13 million barrels per day level is a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The inventory data from both the API and EIA was bearish for the price of oil as product stocks continued to rise substantially.

OIH and VLO shares fell since January 14. OIH fell by 6.40%, which underperformed the action in NYMEX crude oil over the period. VLO moved 6.06% lower since January 14 as crack spreads declined. Strength in gasoline crack spreads over the coming weeks and months would be supportive of the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. OIH was trading at $12.13 per share level on Wednesday. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will consider adding to the position on further price weakness. Oil services stocks did much worse than other oil-related equities in 2019. I will wait before adding any more shares to the position in OIH. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in the report over the past weeks, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.”

ERX was 11.75% lower since last week’s report. I continue to use tight stops on long positions in the ERX product. Oil-related equities moved lower over the past week in a continuation of the 2019 trend.

February natural gas futures were at $1.905 on January 22, which was 12.89% lower than on January 14. The futures contract traded to a high of $2.926 on November 5. Natural gas traded at its lowest price since 2016, when it hit $1.83 on January 21.

Source: CQG

As the chart shows, nearby NYMEX natural gas put in a bearish reversal on the weekly chart, and the price followed through on the downside.
A recovery in natural gas is overdue, but there are only around ten weeks left until the 2020 injection season begins in late March.

Source: EIA

The EIA reported a slightly higher than expected withdrawal of 109 bcf, bringing the total inventories to 3.039 tcf as of January 10. Stocks were 19.4% above last year’s level and 5.2% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019. With around ten weeks to go until inventories begin to climb, we would need to see an average withdrawal of 193.2 bcf to reach last year’s low in stockpiles, which is more than unlikely. This week the consensus expectations are that the EIA will report a withdrawal of 92 bcf from storage for the week ending on January 17. The EIA will release its next report on Thursday, January 23, 2020.

Open interest rose by 6.42% over the past week. Increasing open interest and falling price tends to be a technical validation of a bearish trend in a futures market. More shorts have been piling into the natural gas futures market with the bearish price action that took the price below the psychological $2 level. Technical resistance is at $2.255 per MMBtu level on the February futures contract with support at $1.83. The $1.611 per MMBtu level from March 2016 stands as technical support on the continuous futures contract. The island reversal on the daily and weekly charts is from $2.781 to $2.786 and $2.738 to $2.753, respectively, are currently the critical technical levels on the upside, but they have faded in the market’s rearview mirror. A new gap between $1.97 and $1.994 emerged on the weekly chart at the start of this week. Price momentum and relative strength on the daily chart crossed lower and are back in oversold conditions. The price action suggests that sellers are lurking above looking to take advantage of any attempts at a price recovery. A rally to $2.255 on January 14 and declined to under $2 on January 17 created the bearish reversal on the weekly natural gas chart at the midpoint of the winter season that pushed the price to the $1.83 level.

The GASL ETF product was trading at $6.55per share on January 22, 26.57% lower than on January 14. I have been on the sidelines in GASL after taking profits that covered losses in natural gas in late 2019.

February ethanol prices moved 2.47% lower over the past week. Open interest in the thinly traded ethanol futures market moved 14.08% higher over the past week. With only 604 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell 6.38% compared to its price on January 14, and the price of February coal futures in Rotterdam fell by 6.54% over the past week.

Late Wednesday, the API reported a 1.57-million-barrel rise in crude oil inventories for the week ending on January 17. Gasoline stocks rose by 4.50 million barrels, while distillate stockpiles increased by 3.50 million barrels over the period. The EIA report will come out on Thursday morning, one day delayed, because of the MLK holiday on Monday. The API inventory report was bearish for the price of the energy commodity.

The potential for high volatility in the oil futures market has increased in 2020. Without any fresh news from the Middle East, the price is likely to follow inventory data over the coming weeks.

In natural gas, despite feeble attempts at a recovery, the price action continues to be bearish for this time of the year.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price at $1.905 in February on the settlement price on January 22, was 0.282 cents per MMBtu lower than on January 14. With March futures at $1.90, if the current trend continues, we could see a test of the $1.611 per MMBtu low. Meanwhile, the oversold condition of the market presents a chance for a technical recovery rally. Keep in mind that price action tends to fill the gaps created by the island reversals on the daily and weekly charts. The top end of the gaps is an eventual target for the price action, but it could be quite some time before prices reach those levels. Time is not on the side of natural gas bulls. As I wrote last week, “The longer the price takes to recover, the lower the chances of any significant move to the upside. Sellers are likely to take advantage of any price recovery over the coming days and weeks. The rise in open interest could be a sign of increasing short positions, which could lead bears to push the price of the energy commodity lower as the winter season has not come with below-average temperatures across the US.” The price action over the past week continued to be bearish.

I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. Since January 14, the price of BG shares moved 0.50% higher to $55.88 per share on January 22. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ have attracted lots of volume over the past week as the price of natural gas fell to new lows. I expect volatility to continue in both energy commodities.

We are holding a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 3.90% lower over the past two weeks at $14.77 per share. I will add another unit at a much lower price to lower the average cost of the long position.

Crude oil made a new low on Wednesday. However, the situation in the Middle East is a reason why prices may find support on the downside. When it comes to natural gas, the bearish reversal on the weekly chart was a sign that lower prices were on the horizon, and the price could fall to test the 2016 low of $1.611 and the 1995 bottom of $1.61 per MMBtu. While a technical rally could be in the cards for the natural gas market, the recent action suggests that sellers will look to add to short positions if the price of the energy commodity picks its head up over the coming days and weeks.

 

Grains                                                             

Soybeans moved lower since January 14, but corn was little changed and wheat prices posted a gain. While we are in the heart of the winter season in the US, this is a time of the year to put grains on your radar. The 2020 planting season will begin in March. Each year, the world requires more agricultural products to satisfy the needs of a growing world population. Volatility in all grain prices is likely to increase as the planting season approaches. We could see lots of price variance up until the growing season and beyond if the weather conditions do not cooperate and threaten another bumper harvest in 2020. Moreover, the “phase one” trade deal signed by the US and China on January 15 sets the stage for the return of a substantial addressable market for US crops in 2020. Therefore, I will be looking to buy soybeans, corn, and wheat futures, call options, and ETF products on any price weakness in the coming weeks.

 

March soybean futures declined by 3.03% over the past two weeks and was at $9.1375 per bushel on January 22. Open interest in the soybean futures market rose by 3.81% since last week. Price momentum and relative strength indicators on the daily chart were in oversold territory on January 22.

The March synthetic soybean crush spread moved a higher over the past week and was at the $1.0475 per bushel level on January 22, up 7.75 cents since January 14. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The move higher could be supportive of soybean prices over the coming week.

March corn was trading at $3.8875 per bushel on January 22, which was only 0.06% or one tick lower on the week.

Open interest in the corn futures market fell by 1.27% since January 14. Technical metrics were above neutral territory in the corn futures market as of Wednesday. The price of March ethanol futures fell by 2.47% since the previous report on the back of the weakness in energy futures. March ethanol futures were at $1.3430 per gallon on January 22. The spread between January gasoline and ethanol futures narrowed to 25.04 cents per gallon on January 22, down 3.96 cents since last week.

 

March CBOT wheat futures were 1.63% higher since last week. The March futures were trading $5.7775 level on January 22. Open interest rose by 7.77% over the past week in CBOT wheat futures. Technical metrics were rising in the lower region of overbought territory on Wednesday. Wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts.

As of Wednesday, the KCBT-CBOT spread in March was trading at a 85.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread widened by 13.75 cents since January 14. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market. Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts.

I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I would be a scale-down buyer of beans, corn, and wheat on price weakness.

The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage.  Farmers are now watching the spread to determine how best to utilize their acreage during the upcoming 2020 planting season.

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved higher over the past week and was at the 2.3720:1 level on January 22, down 0.0253 since last week. The ratio is below the long-term norm. The beginning of the year is an excellent time to put the corn-bean ratio on your radar as any significant moves in the spread could provide clues about the path of least resistance for the prices of the grain and the oilseed futures markets. On January 22, the spread was at a level that provides few clues about farmers planting behavior in the coming months. If it continues to decline, farmers would likely increase corn crops at the expense of soybeans when it comes to the planting season in the early spring.

The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months.

 

Copper, Metals, and Minerals

Base metals and industrial commodities were mixed over the past week. Copper on COMEX fell, but the red metal posted a small loss on the LME because of the one-day price lag. Aluminum, lead, zinc, and tin prices all moved higher, but nickel was lower compared to its closing price on January 13. Iron ore edged lower, lumber moved to the upside, but uranium fell marginally from the previous report.

Copper moved 3.78% lower on COMEX, while the red metal posted a 0.26% loss on the LME since the last report. Open interest in the COMEX futures market moved 1.57% higher since January 13. March copper was trading at $2.7650 per pound level on Wednesday. Copper is one of the leading barometers when it comes to the trade war between the US and China. The “phase one” agreement pushed the price of the red metal higher and above the $2.80 level before the recent selling. Copper is a leading indicator in the base metals sector. The next technical level on the upside is at just under $3 per pound. Copper has been consolidating at a higher level so far in 2020, but the latest report on stockpiles at the LME likely weighed on the price of the nonferrous metal.

Since the previous report, copper inventories rose significantly on the LME, but stocks continued to decline in COMEX warehouses. Political and labor issues in Chile could continue to impact production, and the de-escalation of the trade war has been a supportive factor for the price of the red metal. Low global interest rates have also been bullish for the price of copper. Copper had been building a base between $2.80 and $2.90 per pound since mid-December, but it slipped below the $2.80 level as inventories suddenly increased.

The LME lead price moved higher by 2.67% since January 13. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel fell by 3.05% over the past week. The export ban in Indonesia began on January 1, 2020. Tin rose 2.46% since the previous report. The illiquid metal is climbing towards the $18,000 per ton level. Aluminum was 1.42% higher since the last report. The price of zinc was up 3.40% since January 13. Critical support was around $2355, with resistance at $2550 in the zinc market. Zinc moved below the bottom end of its recent trading range and tested the $2200 per ton level, but the price bounced higher and above the $2430 level over the past week. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The path of least resistance of the US dollar could also impact prices. The current level of global interest rates is supportive of the prices of nonferrous metals.

March lumber futures were at the $425.20 level, up 1.14% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed paused at the December meeting. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The price of uranium for February delivery was down just 0.20% at $24.55 per pound. The volatile Baltic Dry Index fell another 9.94% since January 14 to the 689 level as shipping demand tends to decline during the winter months in the northern hemisphere. February iron ore futures rose 0.51% compared to the price on January 14. Open interest in the thinly traded lumber futures market decreased by 1.28% over the period.

LME copper inventories exploded 25.33% higher to 162,925 metric tons since last week. COMEX copper stocks fell by 2.39% from January 13 to 34,395 tons. Lead stockpiles on the LME were down 0.34%, while aluminum stocks were 6.27% lower. Aluminum stocks declined to the 1,309,050-ton level. Zinc stocks moved 0.15% lower since the last report. Tin inventories moved 1.66% higher since January 13 to 7,050 tons. Nickel inventories were 7.39% higher compared to the level on January 13. The export ban from Indonesia took effect on January 1, so consumers likely increased inventories over the past month.

The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The trade deal provided some support for the sector, but further progress would serve to strengthen prices in the sector.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.66 per share on Wednesday, down 11 cents over the past week. Lower uranium prices weighed on the prices of all producers.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 68 cents on January 22, down 11 cents since last week after US Steel issued a warning on earnings in December. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level for the next twelve months. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

US Steel shares were at $9.97 per share and moved 8.62% lower since January 14 after the company’s warning.

We own two units of FCX shares at an average of $10.56. The stock was trading at $12.32 on Wednesday, 89 cents lower since the previous report. I will maintain a small long position in FCX shares.

The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on trade between the US and China over the coming months. China is the demand side of the fundamental equation for the raw materials in the industrial sector. Any disappointment that leads to an escalation of protectionist policies would weigh on the Chinese economy leading to selling in base metals and other industrial commodities. However, the “phase one” deal and further progress should eventually send prices higher. I remain cautiously bullish on the prospects for base metals and industrial commodities prices in 2020.

 

Animal Proteins

The price action in the meat futures markets was quiet over the past week. Cattle and hog prices slipped lower over the period. The animal protein futures will be watching grain markets for clues on feed prices over the coming months. The trade deal between the US and China could mean higher animal feed prices are on the horizon, which could hasten the processing of beef and pork. At the same time, the ongoing pork shortage in China could cause US exports to increase dramatically over the coming weeks and months.

February live cattle futures were at $1.26175 per pound level down only 0.53% from January 14. Technical resistance is at $1.2790 and $1.3000 per pound. Technical support stands at around $1.23125 per pound level, as the market continues to trade at the top end of its trading range. Price momentum and relative strength indicators were on either side of neutral readings on Wednesday. Open interest in the live cattle futures market moved 2.00% higher since the last report. The total number of open long and short positions in the live cattle futures market moved higher since mid-October.

March feeder cattle futures underperformed live cattle as they fell by 1.84% since last week. March feeder cattle futures were trading at the $1.43050 per pound level with support at $1.41325 and resistance at $1.47750 per pound. Open interest in feeder cattle futures fell by 1.48% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs.

Lean hog futures outperformed the cattle futures since the previous report, but they also declined. The active month February lean hogs were at 67.550 cents on January 22, which was 0.19% lower from the level on January 14. Price momentum and the relative strength index were below neutral readings on Wednesday. Support is at 65.400 cents with technical resistance on the February futures contract at 72.60 cents per pound level, the January 2 high.

The forward curve in live cattle is in contango from February 2020 until April 2020. From April 2020 until August 2020, a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through April 2021, when backwardation returns until June 2021. The Feeder cattle forward curve is in backwardation from January 2020 through March 2020 and then contango from March 2020 through November 2020.

In the lean hog futures arena, there is contango from February 2019 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months now that the trade war de-escalated. China needs US pork exports given the current situation, and we could see purchases as a result of Chinese concessions as the nation continues to suffer from a severe shortage of pork. The hog market continues to wait for more progress on trade and the potential for Chinese buying of US pork.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the February futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.86790:1 compared to 1.87440:1 in the previous report. The spread decreased by 0.65 cents as live cattle became less expensive compared to lean hogs. The spread moved towards the historical norm.

We are now in the middle of the winter, which is the height of the offseason for demand in the US. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. A rise in the Brazilian real and Argentine peso could provide support for meat prices. Lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. Grain prices over the coming weeks could also impact the path of least direction for the prices of meat futures. As we move towards the 2020 peak grilling season in the US that begins in late May, the focus will shift towards increased consumption.

I believe that any dips in the prices of cattle or hog futures over the coming days and weeks will create scale-down buying opportunities.

 

Soft Commodities

Three of the five members of the soft commodities sector posted losses over the past week. Coffee, cotton and FCOJ prices moved lower since the last report. Sugar and cocoa futures prices rose since January 14. The most significant percentage move on the upside came in the cocoa futures market, which rose to the highest price since the week of May 7, 2018.

March sugar futures rose 2.37% since January 14, as the price of the sweet commodity was around the 14.66 cents per pound level. Technical resistance is at 14.79 cents with support at 13.10 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is a critical level of support. The value of the January Brazilian real against the US dollar fell over the last two weeks and was at the $0.239350 level against the US dollar on the February contract, down 0.99% over the period. The Brazilian currency remains near its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency remained above the critical support level since 2015, during the extended period of weakness. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were rising in overbought territory as of January 22. The metrics on the monthly chart crossed higher from a neutral condition and are headed for overbought territory. Sugar made a new high above its 2019 peak, and the next significant target on the upside is the early 2018 high at 15.49 cents per pound.  Open interest in sugar futures was 6.71% higher since last week. Open interest has been rising with the price, which is a bullish technical factor for the sweet commodity.

March coffee futures continued to correct lower over the past two weeks as they fell 3.39% since January 14. March futures were trading at the $1.1100 per pound level. The first level to watch on the downside is $1.0580. Below there, support is at around $1.025 on the continuous futures contract. Resistance is at $1.4245 the December 17 high on the nearby contract. The resistance on the continuous contract is at $1.3840 per pound. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $36.00 on Wednesday. Open interest in the coffee futures market fell by 0.20% since last week. I am holding a small long core position in the coffee futures market and the JO ETN product after taking profits scale-up in late 2019. Volatility has increased in the coffee futures market. Supply concerns over Brazilian production in the off-year for crops have been supportive of the price of the soft commodity since mid-October. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. Coffee has made higher lows since reaching 86.35 cents in mid-April. The ultimate target is the November 2016, high at $1.76 per pound. Coffee had moved into overbought territory on the short-term chart and crossed lower. Price momentum and relative strength displayed deeply oversold readings on Wednesday. On the monthly and quarterly charts, the price action remains bullish as price momentum crossed to the upside. As I wrote in the previous report, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.” I will begin rebuilding a long position over the coming week.

The price of cocoa futures exploded higher over the past weeks. On Wednesday, March cocoa futures were at the $2803 per ton level, 5.57% higher than on January 14. Open interest rose by 13.35%. Relative strength and price momentum crossed higher in oversold territory on the daily chart and were in overbought territory on January 22. The price of cocoa futures rose to a new peak and the highest price since May 2018 at $2859 per ton on the March contract on January 22. We are long the NIB ETN product at $25.76. NIB closed at $32.65 on Wednesday, January 22. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is at $2914 per ton. On the downside, short-term technical support stands at $2388 per ton.

March cotton futures edged 0.35% lower over the past week. On August 26, the price of nearby futures fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. March cotton was trading at 71.13 cents on January 22, just below the recent high. On the downside, support is at 65, 61.73, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 4.15% since January 13, which is a bullish sign for the price. Price momentum and relative strength metrics were above neutral readings on Wednesday. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures. Cotton is moving into a time of the year when the price tends to peak. Volatility in the fiber futures increased over the past week.

March FCOJ continued to move lower since last week. On Wednesday, the price of March futures was trading around 96.30 cents per pound. FCOJ nearby futures moved 0.26% lower over the past week. Support is close by at the 94.25 cents level. Technical resistance is at $1.00 per pound. Open interest rose by 2.88% since January 13. The Brazilian currency could support the price of FCOJ futures if it posts gains against the US dollar. $1 per pound could become a critical pivot point for the OJ futures market if it decides to rebound.  FCOJ put in a bullish reversal on January 22 on the daily chart.

Source: CQG

The chart shows the bullish pattern on Wednesday that could be a sign that OJ found a bottom and will now move back above the $1 per pound level.

Keep an eye on cocoa over the coming week as the price is moving towards its technical resistance level at $2914. A break above that level could send the price over the $3000 per ton level. After a significant correction, coffee could be back in the buy zone. I would look to buy on further weakness with a tight stop on the coffee futures market. Sugar continues to sit near the recent high without any help from the Brazilian real. The price action in the sugar futures market has been bullish as it rose and remains above the October 2018 high of 14.24 cents per pound. Cotton is moving into the time of the year when the price tends to peak, which could lead to a test of the 80 cents per pound level. FCOJ at below $1 per pound is historically inexpensive. The bullish reversal could lead to a significant recovery.

 

A final note

The next two significant events facing markets are the impeachment trial of President Trump in the US and Brexit at the end of this month. Iran will continue to be a nagging issue hanging over the crude oil market. High levels of stockpiles in natural gas look like they will push the price of the energy commodity towards the March 2016 low.

Meanwhile, low global interest rates continue to support precious metals prices, and the trade deal with China is not bearish for the prices of copper, base metals, and other industrial commodities. I continue to favor the upside for the commodities asset class over the coming weeks and months.

Until next week,

 

Andy Hecht

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.   

 

 

 

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