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NET
COMMERCIALS AND THE HURRICANE PREMIUM
by James
West
buythebottom.com
forever a student of the markets
September 25, 2006
Is
the oil market pricing out a hurricane premium?
I
think that after last year’s hurricanes, a lot of funds were betting
that at least one storm in 2006 would damage oil rigs in and around the
Gulf of Mexico. This is pure speculation on my part, but if this was
indeed the case, so far, this bet is dead wrong. By this same time last
year, hurricanes Katrina and Rita already made landfall. There are
roughly two months left in the hurricane season, and the probability of
a hurricane impacting the oil
industry is getting smaller by the day.
When
it is all said and done, nobody knew (knows) for certain how the 2006
hurricane season would play out. And since hurricanes pose a very real
danger yet are virtually unpredictable, the oil market was probably
pricing in a hurricane premium. My guess is that this premium is around
five dollars, but more importantly…it looks like this premium is
leaving the oil market. This is what exacerbated – in my mind – the
recent oil decline, which is now over 20 percent from top to bottom.
However,
this is only my interpretation, which is not really all that important.
What is truly critical is recent commercial activity. They have been
buyers in this market for five weeks straight, and like I said before,
NOT because they think oil is headed back to forty dollars.
Broad
Markets
Russell
2000 [ http://www.buythebottom.com/rut.html ]
Net-commercial position slipped to 9 715 contracts two weeks ago, at
which point in time I became a little bit more cautious with the market.
The most recent cot data, shows that net-commercial position jumped up
to 12 213; the highest it’s
been since May 31st, 2005. So far I maintain the view that as
long as net-commercial position is above 10 000, the stock-market rally
is still breathing (even if it’s taking its last few breaths). Pay
close attention to this number in the next little while, I think it is a
good barometer for future market direction.
S&P
500 [ http://www.buythebottom.com/spx.html
]
Net-commercial position decreased by 4919 contracts…Is this
bearish? Sure, but what I find even more troubling, is that large
traders were very big buyers last week, and currently have a net long
position of 33 670 contracts. They are the trend followers, and they are very
bullish on this market; in fact going back 20 years, this is the most
bullish reading in terms of their net-long position that I could find.
For me this is a big red flag. It is far too early to jump to
conclusions but extra caution is strongly advisable.
NASDAQ
100 [ http://www.buythebottom.com/ndx.html
]
Net-commercial position decreased over 11 000 contracts in the span
of the last two weeks. Another red flag? You bet ya. I am somewhat
hesitant to call it a top right here, but undeniably the picture is
turning bearish.
Dow
Jones [ http://www.buythebottom.com/indu.html
]
Net-commercial position increased by 4571 contracts. This marks the
third straight week of commercial buying. What this means in the big
scheme of things, I am not sure, but this is one of the reasons that I
am hesitant in calling a top. I think over the next month or so, we will
get a better idea as we keep track of the cot report.
Commodities
Crude
Oil [ http://www.buythebottom.com/wtic.html
]
Net-commercial position has increased for five consecutive weeks, by
a grand total of 72 924 contracts. What is also very interesting is
that the price of oil has been steadily declining for the past 4-5
weeks, from a high of 77.5 to a low of 60. I think there is an
excellent chance that oil will bottom in the area of 55 to 60 dollars.
Personally I do not think that oil will go down below 57.5. (...Frankly,
I did not think that oil will go below 65). But it is what it is, and we
have to go from here. Now, commercials have been buying for five weeks
straight...so what does this mean? Nothing more than the simple fact
that risk/reward favors the long side. If oil starts making lower lows,
then I will look for a bottom in the high 50s. If oil trades sideways
and commercials continue to accumulate, this market will be setup for a
picture-perfect rally. And finally, if oil puts in a strong rally, right
away, I would be hard pressed to make an educated guess without first
seeing corresponding cot data.
Gold
[ http://www.buythebottom.com/gold.html
]
Gold is setup for a rally, whether or not it rallies is a different
story. To put it in perspective, the last time commercials
were this bullish on gold was August of 2005...Now September's reaction
low is at 570 and from the commercial activity thus far, it looks like
it may hold...If it doesn't, then the next area of support is
June's reaction-low at 540 to 550.
US
Dollar [ http://www.buythebottom.com/usd.html
]
Net-commercial position increased by 2 712 contracts. Two weeks ago,
net-commercial position decreased
by 8 275 contracts. The COT data is still telling me that this
market is setup for a rally. So far, the rally is nowhere to be seen.
The USD bottomed in the 84 dollar area, and rallied to as high as 87. In
other words, this market is trading sideways, WHILE the yellow line is
gently sloping down, hinting of commercial distribution. So if we indeed
see a rally, it will probably fall well short of exceeding previous
reaction-highs at the 92.5 dollar level.
Regards,
James
©
2006 James West
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CONTACT
INFORMATION
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when
sending your email)
The
opinions of FSU contributors do not necessarily reflect those of
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