- A great year for stocks as equities close near record highs
- Gold back above $1520 per ounce as all precious metals move higher
- NYMEX crude oil ends 2019 above $61 while natural gas was below $2.20 on December 31
- Agricultural commodities were mostly higher on the week
- Q4 reports for subscribers will come out over the next week- The next weekly report on Tuesday, January 14
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:
On Thursday, December 26, stocks continued to power higher in the session following the Christmas holiday in the US. The UK markets were closed for Boxing Day. The NASDAQ rose to above the 9000 level for the first time, which the other leading indices moved to record levels. The March 30-Year Treasury bond futures were 0-12 high to the 156-24 level. The March dollar index was at 97.115 down a bit on the session. Grains edged higher led by wheat, which was 8 cents higher on the March contract on the CBOT. Crude oil and oil products moved higher as did natural gas, which rejected levels under $2.20 per MMBtu. Gold continued to gain along with silver. Platinum and palladium prices also moved to the upside. Copper made a new high at over $2.85 per pound on the March futures contract. Meat futures posted gains across the board. Sugar edged higher, but FCOJ, coffee, cocoa, and lumber prices declined. Cotton was unchanged. Bitcoin gained $25 to $7300 per token. Many market participants took Thursday and Friday off as the holiday fell in the middle of the week.
On Friday, the stock market was quiet in holiday trading. Given the recent gains, all of the leading indices have risen into overbought territory, so the VIX index moved higher to the 13.43 level, up 0.78 on the session. US 30-Year Treasuries rose by 0-09 to the 156-24 level. The dollar index fell sharply to settle at 96.546, down over 0.500 on the session. Corn posted a marginal gain, and wheat prices rose. Soybeans corrected lower on the final day of the week. Crude oil and product prices were steady, but natural gas fell even though the EIA reported a larger than expected inventory withdrawal of 161 bcf for the week ending December 20. Gold was higher, but silver declined a bit. Platinum fell, while palladium posted a gain. Live cattle and lean hogs edged lower, while feeder cattle posted a marginal gain. All of the soft commodities, including lumber, moved higher on Friday with coffee and cocoa, leading the way on the upside. Bitcoin slipped by $35 to $7265 per token.
On Monday, stocks moved lower as the end of the year approaches. All of the leading indices posted losses on Monday. March 30-Year Treasury bonds slipped 0-17 to 156-12, and the March dollar index futures contract fell to the 96.407 level. Soybeans moved 10 cents highs, but corn and wheat prices posted marginal losses. Crude oil made a new high at $62.34 on the February NYMEX contract on hostilities in the Middle East but closed with small losses on the session along with oil products. Natural gas fell below the $2.20 per MMBtu level again. Gold posted a marginal decline, while silver edged higher. Platinum gained, while palladium was down a touch. Lean hogs were higher, but live cattle and feeder cattle prices posted marginal losses. Cotton edged higher to just shy of 70 cents per pound, while all of the other soft commodities and lumber prices moved to the downside. Bitcoin was $20 higher to $7,285 per token on the day before New Year’s Eve.
On Tuesday, the final day of 2019 and the decade, a late day rally took all of the leading stock indices higher. Corn slipped, but beans and wheat edged higher. Crude oil and oil products moved lower on the session even though problems in Iraq surrounding the US embassy caused buying early in the day. Natural gas was virtually unchanged as the price remained below the $2.20 per MMBtu level on the active month February NYMEX futures contract. Gold was higher, while silver slipped. Platinum rallied above the $970 level, and palladium moved back over $1900 per ounce. Meats all posted small losses on the final day of December. Cotton, sugar, and coffee prices declined, but FCOJ and cocoa moved higher. Bitcoin was $75 per token lower to the $7210 level. Happy New Year!
Stocks and Bonds
2019 came to an end after a period where today’s highs were tomorrow’s lows in the stock market during December. It will be a challenge for the upward trajectory of the stock market to continue. With equities in overbought territory, the higher the stocks rise, the greater the odds of a sudden and sharp correction to the downside. For the optimism at the end of 2019 to carry into the new decade, the markets will need to see further progress on trade, robust economic conditions, and calm on the international front. I believe stocks are at levels where the risk of a selloff is elevated. Q4 2019 has been the polar opposite of the same period in 2018.
The S&P 500 moved 0.23% higher since the previous report, while the NASDAQ moved 0.22% to the upside. The DJIA posted a 0.08% gain since the last report. The bull market in stocks has been in place for more than a decade, and 2019 was a banner year.
Chinese stocks outperformed US stocks since last week.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $43.63 level on Wednesday, which was 1.18% higher than the closing level on December 18. Technical support is at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. FXI traded to a high of $43.86 over the past week as the Chinese stocks are close to breaking out to the upside.
US 30-Year bonds moved lower from last week. On Tuesday, December 31, the March long bond futures contract was at the 155-18 level, down 0.56%. As I wrote since the last Fed meeting, “All signs are that the central bank will pause over the coming months, and perhaps until after the 2020 Presidential election before making any changes to monetary policy. There is always a chance that an event may trigger a move by the Fed. However, in the absence of any dramatic changes in the global economic or political landscapes, the US central bank appears to be finished with its adjustment to short-term interest rates. Meanwhile, the trend of lower global interest rates is likely to continue.” Nothing has changed over the past week.
Open interest in the E-Mini S&P 500 futures contracts rose by 0.39% since December 23. Open interest in the long bond futures fell by 2.18% over the past week. The VIX edged higher since the previous report. The volatility index was at the 13.78 level on December 31, 8.76% higher over the period.
As I wrote last week, “I have moved to the sidelines on VIX-related positions. I will likely remain out of the market for the rest of 2019. However, any dip down to 11 or lower on the VIX would be a tempting level to buy VIX-related products with a 2:1 reward-risk profile. The path of least resistance for the stock market remains higher, given all of the bullish news over the past weeks.” I will continue to buy dips in VIX-related products in 2020 for short-term trades. I will look to take profits on long positions on rallies where the payoff is at the 2:1 level or higher. I expect lots of volatility in 2020, which will make the VIX a useful trading tool.
The dollar and digital currencies
The March dollar index declined since December 24. The contract posted a 1.24% loss since last week. The index settled at 96.058 on Wednesday. Interest rate differentials continue to provide some support for the dollar index despite the reductions in the Fed Funds rate over recent months. However, the dollar index traded to its lowest level since mid-July last week on the continuous futures contract. Technical support at 96.000, while resistance is at 97.405 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 last week and is threatening the pattern of higher lows and higher highs that has been in place since February 2018 at the end of 2019.
The euro currency was 1.18% higher against the dollar since last week’s report on the March futures contract. We could see more volatility in the dollar index over the coming weeks and months as the 2020 Presidential election nears, which could change US policies starting in early 2021. I expect 2020 to be a volatile year in the currency markets. Over the past week, the pound found support around the $1.30 level and rose back to just under $1.33 as the UK prepares for Brexit from the EU.
Bitcoin did not move all that much over the past week after trading to a new low at $6420 in mid-December. Bitcoin was trading at the $7,228.29 level as of December 31, as it moved 0.74% lower than the value on December 24. The recent crackdown by the Chinese on digital currencies put pressure on cryptocurrency prices. Ethereum rose by 1.09% and was at $130.08 per token on Wednesday. The market cap of the entire asset class moved 0.26% lower as it outperformed the price action in Bitcoin. The number of tokens increased by 26 to 4986 tokens since December 24. 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 far fewer tokens. On Wednesday, it stood at around $191.734 billion. Open interest in the CME Bitcoin futures fell by 13.82% since last week. The level to watch on the downside in Bitcoin is around the $6,420 per token level, the recent low. Resistance is at $7,965 per token.
The Canadian dollar moved 1.35% higher since last week. Open interest in C$ futures rose by 9.34% 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. The C$ put in a bearish reversal on the daily chart on October 29 and followed through on the downside. However, I expected the currency to make a higher low against the US dollar, which appears to have occurred. The support level for the Canadian currency is at just above $0.75 against the US dollar on the active month March futures contract.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 1.44% since last week’s report as the progress on trade provided a boost for the Australian currency.
The British pound posted a 2.22% 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. 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.
The Brazilian real moved higher against the US dollar since December 24, as it moved to the upside by 2.08%. The real remains not far above its multiyear lows. 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 at the end of 2019.
Gold and silver posted gains over the past week. Platinum and palladium prices also rose since the previous report. All of the members of the precious metals sector posted a double-digit percentage gain in 2019.
Gold, silver, platinum, and palladium prices all moved higher since last week. Gold was above $1520, silver was flirting with $18, platinum was just below $980, and palladium was above the $1900 level on December 31.
Gold rose by 1.22% since last week, while silver was 0.38% higher. The price of February gold was just at the $1523.10 per ounce level on Wednesday, while March silver was at $17.921 per ounce. February gold futures reached a peak at $1571.70 on September 4, and March silver climbed to $19.87 on the same day.
The price of January platinum rose by 2.76% since last week was just below $980 per ounce. The level of technical resistance is at $1009.30, with support at $917.40 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 remained strong since the previous report. The midpoint price of the metal was at $5780 per ounce on December 24, unchanged on the week. Palladium rose by 3.21% since the previous report. The price traded to a new peak at $1974.60 on December 17 on the March futures contract and closed at the $1909.30 per ounce level on Wednesday. Palladium fell by over $90 per ounce on December 20 as gravity hit the bullish palladium market, but the price came right back.
Open interest in the gold futures market moved 5.19% higher over the past week. The metric reached a new record peak of 772,096 contracts on December 30. The metric moved 0.51% higher in platinum while it was 2.24% lower in the palladium futures market. Silver open interest rose by 4.64% over the period.
The silver-gold ratio moved a bit higher since the last report.
The daily chart of the price of February gold divided by March silver futures shows that the ratio was at 84.92 on Wednesday, up 0.64 from the level on December 24. 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 on the active month contracts when both gold and silver were on the recent highs. 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 kept pace with gold since the last report. Gold moved up by 1.22%, the GDX was 2.16% higher since December 24, and GDXJ rose by 3.00% 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. Last week, GDX and GDXJ outperformed gold on the upside. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.60% gain since December 24, outperforming the price action in the silver futures market. I continue to believe that both gold and silver prices will head higher.
Platinum and palladium moved in higher since December 24. March Palladium was trading at a premium over January platinum with the differential at the $931.50 per ounce level on Wednesday, which widened from the previous week to close to a record level. January platinum was trading at a $545.30 discount to February gold at the settlement prices on December 24, which narrowed since the previous report.
The price of rhodium, which does not trade on the futures market, was unchanged over the past week and was at $5,780 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 are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, which is still almost double the current price. However, markets rarely move in a straight line. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Nothing changed in the rhodium market, as it continues to exhibit strength.
We are long the PPLT platinum ETF product, which moved 2.11% higher since December 24. 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 above the $1000 and $1200 resistance levels 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 $12.44 on December 31, up 20 cents per share since last week as it 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. I view any weakness as an opportunity in precious metals for the long term. Over the past years, precious metals have exhibited weakness during the final month of the year. Gold and silver fell to lows at $1046.20 and $13.635 in December 2015, which have become critical long-term technical bottoms in the two leading precious metals. At the same time, the beginning of a new year has traditionally been a bullish period for precious metals prices. We will find out shortly if they come out of the gate with rallies as the new decade begins tomorrow.
Energy commodities edged mostly lower during the final week of 2019. Crude oil and oil product prices posted marginal losses, while gasoline crack spreads fell sharply, and heating oil processing spreads slipped a bit lower. Brent crude oil marginally outperformed WTI as February futures rolled to March on the final day in December. Natural gas recovered just a touch, and ethanol posted a loss. Rotterdam moved higher over the past week.
February NYMEX crude oil futures fell just 0.08% over the past week. March Brent futures moved 0.26% lower since December 24. February gasoline was 2.14% lower, and the processing spread in February posted a 13.08% loss since last week as gasoline underperformed the price of crude oil over the period. February heating oil futures moved 0.71% lower since the previous report, and the heating oil crack spread was 2.61% lower since last week.
Technical resistance in the February NYMEX crude oil futures contract is at $62.34 per barrel level, the high from December 30, with support at the $60.02 level. Crude oil open interest rose by 1.10% over the period. The price of crude oil continued to grind higher through the end of the year as OPEC production cuts and progress on trade between the US and China provided support for the price of the energy commodity. The problems surround the US embassy in Baghdad, Iraq provided support during the final days of 2019.
2019 was a year where oil-related equities underperformed both crude oil and the stock market. Sector rotation could cause value-seeking market participants to flock to the inexpensive shares in 2020. Meanwhile, Iran continues to pose a clear and present danger in the oil market. Therefore, any price spikes are most likely to come on the upside, as we witnessed in mid-September with the attack on Saudi oilfields that temporarily knocked out production.
As we head into 2020, Iran continues to pose a threat to production, refining, and logistical routes for crude oil in the Middle East. The potential for changes in US energy policy could cause volatility in the oil market based on the outcome of the 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.
The spread between Brent and WTI crude oil futures in March moved higher to the $5.22 per barrel level for Brent, which was $0.03 above the level on December 24. 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. Crude oil continues to work its way higher in the aftermath of the OPEC meeting and de-escalation of the trade war between the US and China. However, the higher the price climbs, the more the chance of a correction rises.
US daily production stood at 12.9 million barrels per day as of December 20, according to the Energy Information Administration, which was 0.10 million above the previous week and at a record peak for daily output. As of December 20, the API reported a decrease of 7.90 million barrels of crude oil stockpiles, while the EIA said they fell by 5.50 million barrels for the same week. The API reported a rise of 566,000 barrels of gasoline stocks and said distillate inventories rose by 1.68 million barrels as of December 20. The EIA reported an increase in gasoline stocks of 2.00 million barrels and a decrease in distillates of 200,000 barrels. Rig counts, as reported by Baker Hughes, fell by 8 last week to 677 rigs in operations as of December 27, which is 208 below the level operating last year at this time. The recent steady decline in the number of rigs with daily output at 12.9 million barrels per day level was a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The latest inventory data from both the API and EIA was bullish for the price of oil over the past week.
OIH and VLO shares moved lower since last week. OIH fell by 1.41%, while VLO moved 1.53% lower since December 24. Rising crack spreads in 2020 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. 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 have done 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 0.74% lower since last week’s report. I continue to use tight stops on long positions in the ERX product. Oil-related equities edged lower over the past week, which weighed on the ERX product.
February natural gas futures were at $2.189 on December 31, which was 0.78% higher than on December 24. The futures contract traded to a high of $2.926 on November 5. Natural gas traded at its lowest price since August and at the lowest level at this time of the year since 2015, when it hit $2.151 on December 31.
The nearby expiring January contract fell to a low of $2.138 at the end of last week. Natural gas has traded at its lowest level in December in years because of the high level of stockpiles at the start of the winter season and a general tone of bearish sentiment in the market.
The EIA reported a higher than expected withdrawal of 161 bcf, bringing the total inventories to 3.250 tcf as of December 20. Stocks were 19% above last year’s level, but 2.1% below the five-year average for this time of the year. Natural gas stocks are significantly higher than last year at this time, but the larger than expected withdrawal lifted the price back over the $2.20 level, briefly before it declined to a lower low. This week the consensus expectations are that the EIA will report a withdrawal of 82 bcf from storage for the week ending on December 27 because of warmer temperatures around the Christmas holiday. The EIA will release its next report on Friday, January 3, 2020.
Open interest rose by 0.36% over the past week. Technical resistance is at $2.290 per MMBtu level on the February futures contract with support at $2.151. The $2.138 per MMBtu levels stand as technical support on the continuous futures contract with resistance at $2.753 per MMBtu. 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. Natural gas put in a bearish reversal on the daily chart on November 25 as well as on the weekly chart. The island reversal on the daily and weekly charts have been a powerful bearish force for the energy commodity. Price momentum and relative strength on the daily chart remain below neutral conditions.
Meanwhile, attempts at any substantial price recovery have proved uninspiring. The GASL ETF product outperformed natural gas over the past weeks. GASL was trading at $9.80 per share on December 31, 0.91% lower from last week. Natural gas is due for a recovery, but the price action has been awful. GASL profits have more than compensated the losses from trading on the long side in the futures and related products. I was on the sidelines in the natural gas market at the end of the year.
February ethanol prices moved 1.90% lower over the past week. Open interest in the thinly traded ethanol futures market moved 3.82% higher over the past week. With only 679 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product was up 1.65% compared to its price on December 24, and the price of February coal futures in Rotterdam rose by 0.65% over the past week.
The EIA oil and natural gas inventory numbers for the week ending on December 20 will come out after the New Year’s holiday. Late Tuesday, the API reported a larger than expected 7.8-million-barrel withdrawal of crude oil from inventories for the week ending on December 27. Gasoline stocks fell by 776,000 barrels, while distillate stockpiles rose 2.8 million barrels over the period. The API report was bullish for the energy commodity.
The risk of a price spike in oil remains greater on the up than on the downside, given the continuing tensions with Iran and the latest incidents in Iraq. However, the risk of a correction in the oil market will rise with the price as the energy commodity tends to take the stairs higher, and the elevator to the downside.
In natural gas, the price action continues to be bearish for this time of the year.
As the forward curve over the coming months shows, the peak price at $2.189 in February, which was only 1.70 cents per MMBtu higher than last week. With April futures at $2.149, if the current trend continues, we could see a return of sub-$2 prices over the coming months and a test of the March 2016 low at $1.611 per MMBtu. However, the oversold condition of the market could increase the chances of 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 could be a target for the price action if a recovery develops over the coming week. However, time is not a friend for natural gas bulls. The longer the price takes to recover, the lower the chances of any significant move to the upside.
I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. Since December 24, the price of BG shares moved 0.88% higher to $57.55 per share on December 31. 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. UGAZ recently underwent a reverse split. I expect volatility to continue in both energy commodities. As of December 31, the medium-term path of least resistance in oil was higher while gas was still lower.
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 0.44% higher over the past week at $15.94 per share. I will add another unit at a much lower price to lower the average cost of the long position.
I expect lots of volatility in the energy sector in 2020. During the first half of the year, the weather, events in the Middle East, and inventories should guide prices. In the second half, the US election that will determine the future of energy policy in the world’s leading producer of oil and gas could cause wide price variance in both markets.
Soybeans, corn, and wheat futures posted gains over the past week. In 2020. The path of least resistance for grain prices will continue to be a function of the ups and downs of the trade war between the US and China. The USDA will release its first World Agricultural Supply and Demand Estimates report of the year on Friday, January 10, at noon EST.
January soybean futures moved 0.69% higher over the past week and was at $9.4300 per bushel on December 31. Open interest in the soybean futures market fell by 6.71% since last week. Price momentum and relative strength indicators on the daily chart were in overbought territory on December 31.
The March synthetic soybean crush spread moved lower over the past week and was at the 97.25 cents per bushel level on December 31, down 7.25 cents since December 24. 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 recent price action in the March crush spread is not supportive of the price of beans as it has moved lower.
March corn was trading at $3.8775 per bushel on December 31, which was only 0.97% higher on the week.
Open interest in the corn futures market rose by 0.81% since December 23. Technical metrics were in overbought territory in the corn futures market as of Tuesday and were leaning lower. The price of January ethanol futures fell by 1.90% since the previous report on the back of the price action in gasoline futures. February ethanol futures were at $1.3920 per gallon on December 31. The spread between January gasoline and ethanol futures narrowed to 29.85 cents per gallon on December 31, down 0.99 cents since last week.
March CBOT wheat futures were 3.28% higher since last week. The March futures were trading $5.5875 level on December 31. Open interest rose by 1.85% over the past week in CBOT wheat futures. Technical metrics were rising in overbought territory on December 31.
As of Wednesday, the KCBT-CBOT spread in March was trading at a 72.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 7.75 cents since December 24. 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. The spread is edging away from the highest level in years as 2020 begins. 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.
My positions in the grain markets continue to be very small, given the time of the year and the recent price volatility. I have minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The weather in South America will drive prices higher or lower over the coming weeks.
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. In early 2020, farmers will be watching the spread to determine how best to utilize their acreage during the upcoming 2020 planting season.
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 2.4362:1 level on December 24, up 0.0229 since last week. The ratio has been trending higher since before the summer of 2019, but it turned lower in November and then bounced. The end 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 December 31, the spread was above the long-term norm, if it continues to rise farmers will likely plant more beans than corn during the 2020 crop year.
We are now in the heart of the winter season in the grain markets in the northern hemisphere. The weather south of the equator could cause prices to move, but trade issues continue to be the most significant factor for the prices of these agricultural products.
Copper, Metals, and Minerals
Copper edged a touch lower over the past week on the COMEX while it rose on the LME. The base metals that trade on the London Metals Exchange were mixed over the past week. March Iron ore was high, but February uranium edged lower. Lumber posted a gain since the previous report. The Baltic Dry Index continued to decline during the heart of the winter season as shipping activity tends to fall during the coldest months of the year in the northern hemisphere.
Copper moved 1.08% lower on COMEX and moved just below the $2.80 per pound level, while the red metal posted a 0.69% gain on the LME since the last report. Open interest in the COMEX futures market moved 2.13% higher over the past week. March copper was trading at $2.7970 per pound level on Wednesday. The price of the red metal rose at the end of 2019. Rising price and increasing open interest tend to be a validation of a bullish trend in a futures market. 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, as copper is the leading force in the base metals sector.
Copper had been trading in a range from under $2.50 to around the $2.70 per ounce level, but it broke higher on December 6. Since the previous report, copper inventories continued to fall on the LME, and stockpiles on the COMEX moved lower. While political and labor issues in Chile could impact production, the trade war had been the most significant issue as it weighed on the demand side of the fundamental equation for the red metal. Since mid-December, copper moved above the top end of its trading range on the back of the news of a “phase one” trade agreement.
The LME lead price moved higher by 1.25% since December 23. 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 1.52% over the past week. Nickel had been correcting after significant gains over the past months on the back of the export ban in Indonesia that will begin on January 1, 2020. Tin fell by 2.45% since the previous report. Tin had been trading on either side of the $16,600 per ton level, which has become a pivot point for the base metal. The illiquid metal recently moved back above $17,000 per ton but slipped back below at the end of the year. Aluminum was 1.34% higher on the week. The price of zinc was up just 0.02% since December 23. 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 had been flirting with the $2355 level over the past weeks. 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.
March lumber futures were at the $426.20 level, up 1.26% 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 fell 0.40% to $25.05 per pound. The volatile Baltic Dry Index fell by 1.18% since last week to the 1090 level as shipping demand tends to decline during the winter months in the northern hemisphere. March iron ore futures rose 0.99% compared to the price on December 24. Open interest in the thinly traded lumber futures market increased by 1.06% over the past week.
LME copper inventories dropped by 2.63% to 147,125 metric tons since last week. COMEX copper stocks fell by 5.02% from last week to 37,951 tons. Lead stockpiles on the LME were down 0.60%, while aluminum stocks were 0.53% lower. Aluminum stocks declined to the 1,477,725-ton level. Zinc stocks moved 1.86% lower from the last report. Tin inventories moved 2.30% lower since last week to 7,210 tons. Nickel inventories were 4.51% higher compared to the level on December 23. The export ban from Indonesia takes effect on January 1.
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 as we head into 2020.
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 $1.91 per share on Wednesday, up three cents over the past week.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.32 on December 24, down 20 cents since last week after US Steel issued a warning on earnings. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level for the next year. The details for the call option are here:
US Steel shares were at $11.41 per share and moved 4.04% lower on the week after the company’s warning.
We own two units of FCX shares at an average of $10.56. The stock was trading at $13.12 on December 31, 13 cents higher 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 send prices higher. I am cautiously bullish on the prospects for base metals and industrial commodities prices going into 2020.
The meats all posted gains over the past week. The “phase one” trade agreement between the US and China opened the door for potential pork exports from the US to China, where there is a severe shortage of the meat. The African Swine Fever has killed off a significant percentage of the Chinese pig population and spread beyond China’s borders to neighboring countries in 2019. After dipping into strategic frozen pork reserves in 2019, China will need to import pork to meet the 2020 requirements. The de-escalation of the trade war and optimism over shipments of agricultural products from the US to China has lifted the price of lean hog futures since the early December low at around the 65 cents per pound level on the nearby February futures contract. Nothing changed over the past week. However, as we move into 2020, the focus will shift to the peak season for demand, which begins in May.
February live cattle futures were at $1.259250 per pound level up 0.08% from last week. 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 near the top end of its trading range. Price momentum and relative strength indicators were just below neutral readings on Tuesday. Open interest in the live cattle futures market moved 0.26% lower since the last report. The total number of open long and short positions in the live cattle futures market moved higher since mid-October but recently leveled off.
March feeder cattle futures outperformed live cattle as they rose by 1.15% since last week. January feeder cattle futures were trading at the $1.45325 per pound level with support at $1.40550 and resistance at $1.47400 per pound. Open interest in feeder cattle futures fell by 2.22% 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 live cattle futures since the previous report. The active month February lean hogs were at 71.425 cents on December 31, which was 1.03% higher on the week. Price momentum and the relative strength index remained well above neutral readings on Tuesday. Support is at 65.400 cents with technical resistance on the February futures contract at 76.625 cents per pound level, the November 13 high.
The forward curve in live cattle is in contango from December 2019 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 June 2021. The Feeder cattle forward curve is in backwardation from January 2020 through March 2020 and then contango from March 2020 through October 2020 when a slight backwardation develops until November 2020.
In the lean hog futures arena, there is contango from February 2019 until June 2020. From June 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 appears to have 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. Nothing has changed in the meat markets since the previous report.
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 lower as the price of live cattle underperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 1.76304:1 compared to 1.7797:1 in the previous report. The spread decreased by 1.666 cents as live cattle became less expensive compared to lean hogs. The spread moved towards the historical norm.
Trade had been the most significant factor facing the animal protein sector. We are now in the winter months, 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, while lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. At the start of next year, the focus will begin to shift towards the peak season for demand that starts in late May.
The agreement between the US and China that could open the door for pork exports could be extremely bullish for the lean hog futures market in the US. The all-time high in the lean hog futures market came in 2014 when the PED virus killed over seven million pigs in the US, lifting the price of nearby futures to a peak at $1.33875 per pound. I believe that and selling that takes the lean hog futures market lower will create a buying opportunity over the coming weeks.
Four of the five members of the soft commodities sector posted gains over the past week. FCOJ prices moved lower since last week’s report. Sugar, coffee, cocoa, and cotton futures prices rose since December 24. The most significant percentage move on the upside came in the cocoa futures market which rallied on the final day of the year.
March sugar futures rose 0.37% since December 24, as the price of the sweet commodity was around the 13.42 cents per pound level. Technical resistance is at 13.67 cents with support at 13 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 rose over the last week and was at the $0.25060 level against the US dollar, up 2.08% since last week. 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 recent 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 above neutral territory as of December 31. The metrics on the monthly chart crossed higher from a neutral condition. Sugar made a new high for 2019 on the continuous futures contract at 13.67 cents per pound in mid-December and remained not far below that level at the end of the month. Above the recent high, the significant target on the upside is the October 2018 high at 14.24 cents per pound. Open interest in sugar futures was 0.44% lower since last week.
March coffee futures continued to be volatile over the past week, but they rose by only 0.23% since last week. March futures were trading at the $1.2970 per pound level. The first level to watch on the continuous contract on the downside is $1.2490, the recent low. Below there, support is at around $1.200 on the March 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. 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 $41.74 on Wednesday. Open interest in the coffee futures market fell by 0.14% since last week. I am holding a small long core position in the coffee futures market and the JO ETN product. 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 were on either side of neutral readings on Tuesday. On the monthly and quarterly charts, the price action remains bullish as price momentum crossed to the upside. The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.
The price of cocoa futures rebounded over the past week. On Tuesday, March cocoa futures were at the $2540 per ton level, 3.97% higher than last week. Open interest fell by 4.10%. Relative strength and price momentum crossed higher in oversold territory on the daily chart and were on either side of neutral readings on the weekly chart. The price of cocoa futures rose to a new peak and the highest price since May 2018 at $2783 per ton on the December contract. We are long the NIB ETN product at $25.76. NIB closed at $29.29 on Tuesday, December 31. 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 now stands at $2388 per ton. I added to long positions during the recent correction.
March cotton futures moved 0.51% higher 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 69.05 cents on December 31 after rising to a high of 69.72 on December 31. On the downside, support is at 60, 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 4.81% since December 23. Price momentum and relative strength metrics were in overbought territory on Tuesday. The metric remains in an oversold condition on the monthly chart but crossed higher. I continue to believe that the price level limits the downside prospects for the cotton futures market. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures.
March FCOJ moved lower and under the $1 per pound level over the past week. On Tuesday, the price of
March futures was trading around 99.75 cents per pound. FCOJ nearby futures moved 3.06% lower over the past week. Support is at the 97.90 cents level. Technical resistance is at around $1.0480 per pound. Open interest fell by 2.07% since December 23 as futures rolled from January to March. OJ tends to rally early in the winter season, but that did not happen in 2019. In November 2016, FCOJ hit its all-time peak at $2.35 per pound. This year, the price of orange juice has been weak and was below the $1 per pound pivot point. The Brazilian currency could support the price of FCOJ futures if it posts gains against the US dollar. $1 per pound is a critical pivot point for the OJ futures market.
As we move into 2020, the weather in growing areas and crop health will be the primary factors determining the path of least resistance of prices. Sugar and coffee prices will reflect conditions in Brazil. Cocoa will move with the West African crop, as the surcharge is likely to support the price of the primary ingredient in chocolate. Cotton will be watching trade progress between the US and China. Meanwhile, FCOJ is another commodity that will take the lead from production in Brazil as well as conditions in the growing regions of the US. Soft commodities tend to be one of the most volatile sectors in the commodities asset class, and 2020 should be no exception.
A final note
I wish everyone a happy, healthy, and safe New Year and all the best for a profitable 2020!
Starting on January 2, I will be posting my comprehensive quarterly reports for Q4 2019 and outlook for Q1 2020. I will not post a report next week because of the work involved in the quarterlies. However, I will return on Tuesday, January 14, with the first weekly report of 2020 and will issue the next on Wednesday, January 22, to return to the Wednesday schedule. The January 14 report will cover the price action from December 31 through January 14.
If there are any questions about anything, please do not hesitate to email me at any time!
Until next week,
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.