The Hightower Report

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The stock market enters the Tuesday trade somewhat weak and poised for a move below the prior session’s lows. With the market also managing another new low for the move in the prior trading session, it is clear that the flow of earnings reports is not fully countervailing investor’s fears of slowing in the US economy. We think the market was hopeful that some form of fresh stimulus might be forth coming from Washington but instead the focus is on extending unemployment benefits. In an election year, votes apparently dominate over constructive thinking and therefore the only thing expected from Washington is more inefficient deficit spending. With IBM earnings failing to inspire the bull camp overnight and the trade already bracing for negative news from a US Housing starts and permits report the bear camp should be fairly confident. The bulls really need to see something positive from Goldman earnings or the erosion on the charts will continue to unfold. While upcoming earnings reports could prompt periodic support to stock prices, we seriously doubt the fears of a double dip recession are going to be put down until the Chairman of the Fed attempts some positive cheerleading on Wednesday. Fortunately for the bull camp, we still don’t detect a high level of anxiety in the marketplace, but we also don’t detect much in the way of optimism and that should allow the trend to remain down.

Earnings Reports Today
07/20 Apple, Inc. (AAPL)
07/20 Gilead Sciences, Inc. (GILD)
07/20 Linear Technology (LLTC)
07/20 Allscripts-Misys Healthcare Solutions Inc (MDRX) after close
07/20 Altera Corp. (ALTR) after close
07/20 Seagate Technology (STX) after close
07/20 Yahoo, Inc. (YHOO) after close
07/20 Biogen Idec, Inc. (BIIB) before open
07/20 Goldman Sachs Group, Inc. (GS) before open
07/20 Johnson and Johnson (JNJ) before open
07/20 PepsiCo, Inc. (PEP) before open
07/20 TD Ameritrade Holding Corporation (AMTD) before open

S&P 500: The September S&P in the early action managed to forge another new low for the move and that would seem to suggest that the bear camp saw the earnings reports released after Monday’s close as bearish. Failing to get a lift off IBM earnings has to disappoint a large portion of the market as that company is usually a key bellwether issue. Technically the S&P appears to be poised for a slide to 1040.00 and perhaps even down to 1037.50. Somewhat surprisingly, the markets have continued to shake off potentially unnerving Euro zone events and that suggests that classic slowing fears in the US are the main focal point of many traders.

DOW: Seeing the IBM earnings come and go without a definitive lift in equities prices probably emboldens the bear camp. In fact, with another new low for the move seen overnight in the September Mini Dow, we have to give the bear camp a distinct edge, especially into the US scheduled data flows later this morning. Ultimately we see a downside target in the September Mini Dow down at 9,800 but a higher low around 9,930 could be seen if the housing numbers are mixed or countervailing later this morning. Until the Fed Chairman takes the stand in his semi annual testimony to Congress tomorrow, the headlines are likely to favor the bear camp.

NASDAQ: The Nasdaq appears to have found some value on the charts as it managed to reject a fresh new low for the move in the prior trading session. While IBM earnings didn’t seem to help the broad market overnight, it is possible that some tech sector shares found some supportive information in that earnings report. However, the inability to hold above the 1800 level early this morning could be a key bearish technical signal for many traders. News of slack sales from Texas instruments overnight would seem to give the bear camp an added fundamental edge this morning, especially since general expectations are calling for some type of decline in US housing numbers later this morning. Ultimately we see a downside target in the September Nasdaq down at 1772.00.

TODAY’S MARKET IDEAS: We don’t expect to see aggressive downside action but we do expect prices to consistently work lower again today.

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NEAR-TERM MARKET FUNDAMENTALS: Better than expected weather in the northern Midwest over the weekend and forecasts for more of the same this week are dominating traders’ attention to start the week. Several major growing areas that needed rain got relief over the past week including the Ohio River Valley, southern Indiana and Ohio and parts of the mid south. The western and NW Corn Belt also saw moderate rain totals with the north central Corn Belt seeing unwelcome heavier rains. Temperatures are not expected to be as extreme as previously feared in the northern Corn Belt to start the week. A cool air mass may push 90 degree temperatures out of the northern tier of the Midwest today and possibly tomorrow, but a surge of hot air is expected to bring 90 degree plus temperatures to virtually all of the Midwest by mid week and into Thursday. A final push of very hot air is expected on Thursday and this may bring the hottest temperatures of the year into the north central Midwest. Forecasts then call for a surge of cooler air into the central and western Midwest on Saturday that would push the hot air into the mid south, the Ohio River Valley and the East Coast. Heat is not the only major feature of this week’s forecasts. Unstable air and the clash of hot and cool fronts in the northern Corn Belt are expected to bring moderate to heavy rains in a wide band running from eastern Nebraska through all of Iowa, northern and central Illinois and all of Indiana and Ohio. The heaviest amounts in the center of this band could be 4 inches or more with the entire band expected to see at least 1 inch. The USDA will release its weekly Crop Progress reports this afternoon. The overall good-to-excellent rating stood at 73% on last week’s report. Some analysts are expecting the rating to be unchanged to slightly lower this week. Corn planting is set to start in Argentina by mid August. West central areas could use more moisture, but moisture levels are considered favorable in the east. China saw showers in the SE corn areas of the NE corn belt this weekend with scattered showers in the NE of this region. Temperatures remain warm to hot and more rain is needed. The Commitments of Traders report for the week ending July 13 showed very heavy buying by trend-following or managed funds. These traders were net buyers of 75,787 contracts to increase their net long position to 92,984 contracts. The biggest net long position held by these traders was near 313,000 contracts in February, 2007. Index funds were net sellers of 5,232 contracts.

TODAY’S GUIDANCE: Profit taking and commercial selling helped to take the market lower overnight as traders are concerned that the yield reductions that were feared last week will not materialize. More selling is possible with the start of the day session, and this could take the December contract back near the 100-day moving average which stands near 384 3/4 this morning. First support in the December contract is at 391 3/4, with next support at 385. First resistance is at 4.10 1/4 and then at 4.35.

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NEAR-TERM MARKET FUNDAMENTALS: Several factors suggest that the soybean market could struggle to add much more premium over the short-term including a less threatening weather outlook, news of a slowdown in unloading grain shipments in China and news of a much larger than expected net long position from fund traders in the COT reports. At the port in Dalian China an explosion at an oil pipeline has caused the closing of 80-90% of the shipping berths including iron ore and Agricultural imports. South Korea is tendering to buy 25,000 tonnes of non-GMO soybeans. Argentina crush in May jumped to 4 million tonnes, up 11% from last year. The market continues to find support from fears of stressful weather during the sensitive pod-setting period for US soybeans in early August. Traders are also concerned with the potential sharp drop in production of higher oil-yielding crops in Canada and Europe and from concerns for the sunseed crops in Russia. November soybeans posted a new high for the move early on Friday only to close lower on the session. The market ran out of buyers on the early advance and November soybeans pushed lower on the day before firming into the close. This came amid firmer bids for cash soybeans at the Gulf which traders said was in response to strong demand. While China is still a strong importer, spot basis levels in the US fell 10-15 cents in many locations due to increased producer selling. Evening up ahead of the weekend was considered a major feature on the day with some light to moderate activity in the old crop/new crop soybean spreads with old crop gaining on new crop on the day. Some forecasts call for hot and dry weather to last through the end of July and into early August, which was considered supportive on a day marked by profit taking. The weather forecast to start this week is far less of a concern for the soybean crop as the crop can do well in a hot and wet environment as compared with concerns for a hot and dry week ahead. The northern Corn Belt cools down for a few days and then temperatures jump back to the mid-90′s later this week. The ridge moves across the country in the next few weeks but there appears to be plenty of rains for the delta and southern half of the Corn Belt to see the potential for improving crop conditions ahead. Traders see a 1-2% decline in crop ratings tonight. The Commitments of Traders Futures and Options report as of July 13th for Soybeans showed Non-Commercial traders were net long 59,789 contracts, an increase of 58,094 contracts. Commodity Index traders held a net long position of 175,212 contracts, an increase of 5,932 contracts for the week. For meal, Non-Commercial traders were net long 60,185 contracts, an increase of 12,212 for the week. The Nonreportable traders were net long 15,102 contracts, an increase of 2,997 contracts for the week and this pushed the Non-Commercial and Nonreportable combined traders net long position to 75,287 contracts, up 15,209 contracts for the week. For Soybean Oil, Non-Commercial traders were net short 18,108 contracts, a decrease of 18,174 contracts for the week. The Nonreportable traders were net long 263 contracts, an increase of 7,367 contracts on the week. Commodity Index traders held a net long position of 104,171 contracts. This represents a decrease of 2,077 contracts in the net long position held by these traders.

TODAY’S GUIDANCE: A much wetter forecast for the drier areas of the US along with the COT report which showed aggressive buying and a hefty net long position from fund traders are forces which could pressure the soybean market over the near-term. Farmer selling is on the rise and prices are favorable and unless the rains in the forecast for the coming week do not materialize, the market may be close to a near-term peak. Some traders think there is too much rain in the forecast but crop conditions are likely to improve this week and next week if the weather comes in as expected to start this week.

TODAY’S MARKET IDEAS: Trend-following fund traders were aggressive net buyers of 57,660 contracts for the week to shift to a net long position of 34,057 contracts which is higher than expected. Selling resistance for November soybeans comes in at 986 1/2 with key resistance at 993 3/4. Look for set-back to at least 955 early this week. December oil support is back at 38.40. December meal looks vulnerable to a set-back to near 278.60 with selling resistance today at 289.20.

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NEAR-TERM MARKET FUNDAMENTALS: The wheat market continues to find support from lower production forecasts outside the US along with a burst of import buying to start the week. Traders said that this helped wheat to post a modest gain overnight in the face of substantial selling in corn and a lower soybean market. This left the December contract near last week’s highs with the wheat/corn spread also near its recent highs in the December contracts. India posted a slight reduction in its 2009 wheat crop to 80.71 million tonnes versus a previous estimate of 80.98 million. While this is a minor reduction, it is the latest in a long list of countries that have reduced crop estimates in wheat, and one analyst notes that traders are nervous that the trend will continue. Iraq bought 350,000 tonnes of wheat from various origins including Russia, Canada, Romania and the US. A private buyer in Israel is tendering to buy 24,000 tonnes of feed wheat. Very hot weather in the US hard red winter wheat belt may have brought some last minute stress to that crop prior to harvest, but traders do not expect this to be a major issue. The hottest temperatures have been in the western portion of the central and south central Plains. So far, they have remained south of major spring wheat areas and this is expected to continue this week with temperatures in that region staying mainly in the 80s. Growing areas in Canada to the north remain cooler with excess soil moisture and cool temperatures thought to be adding to the risk of disease there. Sources indicate that warmer temperatures are needed, but they are not expected this week, at least not on a sustained basis. Some increase is possible later in the week, but the big surge of very hot air that is expected on Friday is expected to push to the east, into the north central Midwest, missing the Canadian Prairies. Forecasters then call for cool air to push south into the weekend which would further reduce temperatures on the Canadian Prairies. The Commitments of Traders report for the week ending July 13th showed more net buying by funds. Trend-followers were net buyers of 17,124 contracts to reduce their net short position to 36,592. This is less than half the size of their net short position in wheat just a few weeks ago. These traders were also large net buyers of 16,032 contracts in KC wheat. Index funds were net buyers of 2,377 contracts.

TODAY’S GUIDANCE: Wheat shows no sign of pausing as fund buying, export demand and the improved competitive position of US wheat on the world market all provide support. Of course, the main factor in wheat is crop weather which could bring further downward revisions in Canada and Russia. First support in the December contract remains at 5.96 1/2 and then at 5.88 1/4. Next resistance is at 6.35 to 6.40.

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Strong export demand and forecasts for lower production over the next month or so could keep the hog market well-supported, despite some disappointing cash market prices over the past week or so. August hogs managed an abrupt about-face yesterday, forming a key reversal to the upside. We recall that it was a sweeping reversal DOWN last Friday that appeared to set the negative tone to the market earlier this week. Yesterday’s rally erased all the losses since that reversal, as the market traded to its highest level since July 2nd. The move was helped along by bullish export data, as the USDA reported US pork exports for May totaled 362.8 million pounds, up from 352.7 million in April and 306.9 million a year ago. Exports claimed 22.4% of pork production in May, the highest percentage since June 2008. The stronger stock market also lent support, and the weaker dollar improves the export outlook. The CME Lean Hog Index as of July 12 came in at 78.65, down 40 cents from the previous session and down from 80.43 the week before. The estimated hog slaughter came in at 404,000 head yesterday. This brings the total for the week so far to 1.195 million head, up from 1.164 million a year ago. Hogs are not getting much support from the cash pork market. Yesterday’s cutout values, released after the close, came in at $81.15, down 97 cents from Tuesday. While this was up from $80.99 the previous week, it was their second lowest level since April 12th. Feeder Pig imports from Canada for the week ending July 3 came in at 65,787 head, down from 67,603 head the previous week and below the 4-week moving average of 77,519. Feeder pig imports for the year have reached 2.4 million head, down 10.3% from last year. Total hog imports reached 84,470 for the same week, down from 86,415 the previous week and below 4-week moving average of 96,847. Cash hogs are expected to trade steady to lower today. Some scheduled plant closings Friday and Monday could keep packer demand lower over the next few sessions. The monthly export data that was released yesterday was for May, which is a significant time lag. While that was bullish news, a better indicator of how export movement is going might be cash pork prices, which includes the daily cutout and individual cuts such as loins. If the recent trend of lower pork prices reverses, it could provide a more current indicator of improving export demand.

TODAY’S GUIDANCE: Yesterday’s reversal to the upside outdid Friday’s sweeping reversal to the downside in both scope and volume. Initial upside targets include retracement levels at 82.05 and 82.775, and eventually the June 22nd high at 85.10.

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While the domestic demand outlook for the beef sector has been flat, export business is looking strong, and that has allowed cattle to resume its bullish posture. Supportive psychological factors, namely stronger equity market action and a weaker dollar, have been backed up by some bullish fundamental data. Monthly export data from May gave the market its initial lift yesterday, and August live cattle traded to their highest level since May 13th after breaking out above the recent highs. The USDA reported US exports of beef and veal in May at 203.6 million pounds, up from 177.20 million in April and 160.5 million a year ago. The market was also helped later in the session by reports of surprisingly strong cash cattle sales in Texas and Oklahoma, where they traded at $94, up from $91.50-92 the previous week. This occurred despite a lower trend in cutout values from the previous week. Yesterday the boxed beef cutout was down 14 cents at mid-session and closed 48 cents lower at $153.98. This was also down from $155.62 the prior week and the lowest it has been since June 18th. The estimated cattle slaughter came in at 131,000 head yesterday. This brings the total for the week so far to 392,000 head, up from 373,000 a year ago. A heat wave that is moving into the central part of the US has been a bearish demand concern, but the stronger outside markets and now bullish fundamental data have overcome that factor. With some weather forecasters calling for this pattern to extend well into August, the demand issue could resurface at some point.

TODAY’S GUIDANCE: With yesterday’s rally August live cattle have achieved a key retracement off of the May-June break, and holding these levels could possibly set the market up for a move back to the June highs up around 95.50. A previous resistance level at 92.35 becomes support. Next resistance comes in at 93.30 and 94.275.

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The December contract pushed below last week’s lows overnight to its lowest level since March 3rd. While the new lows were minor, today’s day session may bring a test of whether investors are poised to continue selling. The Commitments of Traders report on Friday showed that trend-following funds continued to be net sellers as they gradually whittle down what had been one of the larger net long positions in any agricultural market. This comes as the USDA’s Crop Progress report showed continued improvement in the overall condition of the cotton crop through this past Sunday. The overall good-to-excellent rating rose to 67% on yesterday’s report. This is up 2% from the previous week and up 5% from two weeks ago. The 10-year average good-to-excellent rating is 53%. Squaring is at 79%, and 26% of the crop is setting bolls. Hot and humid weather and rains on the periphery of tropical storms have left the crop well watered from the Texas Panhandle through the Southeast with the exception of some scattered moisture deficits in central Texas, northern Mississippi and Alabama, and in parts of the Carolinas. Texas stands at 71% good-to-excellent. Drier conditions are expected today and tomorrow with the exception of some scattered light showers in parts of the Delta and points east. Forecasts call for hotter temperatures as the week wears on with the possibility of well above normal temps in Texas and the Delta starting next week. Economic numbers out this week include the US Trade Balance today, Retail Sales tomorrow, and some manufacturing data on Thursday along with the regular weekly Export Sales and Jobless Claims reports. Recent data have pointed to slowing on many fronts and this is raising concerns about the pace of consumer demand in the US through the end of the year. Stocks registered for delivery against the ICE contract fell again yesterday to 217,358 bales from the previous day’s total of 229,859 bales.

TODAY’S GUIDANCE: The overnight erosion suggests that the downtrend is resuming based on an improving crop outlook in the US and potentially sluggish consumer demand. However, it remains to be seen if there are enough sellers in the market at this level to generate sustained losses over the short term. It may take stepped up hedging pressure to fuel the downtrend and to spark further selling by investors, and both of these segments of the market could back off from selling if the market turns higher based on outside indicators. Increased export sales this week could also shift sentiment to the positive side, although the past two weeks’ totals were already above the average needed each week to reach the USDA’s export projection for 2010/11. First support is near 73.00 in the December contract. First resistance is at 74.09 and then at 75.25 to 75.27.

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The sugar market followed last Friday’s bad technical action up with a mostly inside day, but the rejection of the sub 17.00 level in the October contract seemed to alter the patently bearish tone toward sugar at the end of last week. In fact, the capacity to hold above Friday’s lows and then finish up over +2.0% on the prior close has to be seen a positive technical sign. With some fund and tech buying also cited during the Monday trade, it would appear that news of higher sugar output from India was given little attention yesterday. Apparently Indian output for the incoming production year was lifted to 25.5 million metric tons from just 18.7 million last year, and since the market managed to rally through that news, the trade must be focused on either the slow movement of the Brazilian crop or positive cash demand expectations. Noted strength in cash prices Monday suggests that perhaps demand is good enough to continue lifting prices, and that prompt supply has also remained a little tight. With Thailand recently tendering for some sugar despite that country being the second largest sugar exporter, there is obviously some interest in continuing the general uptrend that has been in place since the early part of May. However, the specs were still long sugar in the last COT positioning report, and the weather in Brazil doesn’t look to be a source of uncertainty. Those factors could eventually leave significant resistance up at the 18.00 level in the October sugar contract. In other potentially supportive demand side news, Bangladesh plans to import 50,000 tonnes of sugar before mid-September to meet its near-term needs, and the Philippines also looks to import 150,000 tonnes of sugar by the end of September. Therefore as long as outside market forces don’t undermine physical commodity markets, the bull camp looks to retain near term control.

TODAY’S GUIDANCE: Don’t forget the already overbought COT positioning in sugar, but it might not pay to fight the uptrend pattern until big picture macroeconomic issues create a bearish environment again or sugar flow through Brazil starts to weigh on the international sugar market.

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Our longer term viewpoint is bearish for cocoa, but tightness in New York and London are supportive near-term. Exchange stocks continue to decline, which should keep bears cautious. London is trading at a stiff premium to New York, and nearby London contracts are trading at a premium to the deferred contracts. The large number of contracts still open on the soon-to-expire London July futures is also sparking concerns that as much as four-fifths of the exchange stocks could be used up in the delivery process, leaving precious little for the September delivery. On top of that, heavy rains in the Ivory Coast are raising concerns over disease problems. Supplies tend to be tight this time of year, ahead of the main crop arrivals which begin in October, and there seems to be a concern over the chance for some extreme tightness this year. September cocoa came under mild pressure yesterday but remained well entrenched within its recent trading range. A late sell-off in the British Pound weighed on the cocoa market, and the ongoing delivery situation with the London contract appeared to have little impact on NY prices yesterday. Cumulative port arrivals in the Ivory Coast for this season continue to gain ground, but they still remain close to 1% behind last season’s levels. Heavy rains continue to have a negative impact on this season’s cocoa crop in the Ivory Coast, due to transportation issues and the potential for disease outbreaks. ICE exchange warehouse stocks were down 30,187 bags to 4.073 million. A selling trend from fund traders and speculators as indicated in the recent COT reports could be seen as a short-term bearish force. It may not take much in the way of positive action in London to spark a significant run higher in New York.

TODAY’S GUIDANCE: With a potentially volatile situation developing in London, the NY futures could be taking their cues from that market over the near term. The US stock market was higher in overnight futures trade, and if it continues to gain ground today, it in could also lend support. If the market breaks out of the recent consolidation with a move above $3028, it would be considered supportive. Look for support at $2974 and consider $3084 and $3227 as upside objectives if $3028 is taken out.

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While the coffee market has been trading in relatively large ranges over the past few session, prices have kept gravitating back towards the 164.00 level in September coffee. The recent delivery issues with the London contract have kept prices at elevated levels, but there has been little in the way of direction during the past two weeks or so. The market started yesterday’s session under heavy pressure but was able to recover a large portion of those losses by the end of trading. Recent dry weather conditions in Colombia and Vietnam are likely to have a negative impact on this season’s production. However, temperatures still have not come close to reaching freezing levels in Brazilian growing areas. Tight deliverable stocks for both the NY and London contracts underpinned coffee prices over the past month. However, expectations for large increases in Brazilian and Colombian production this season hang over the market. The upcoming supply surge may prove to be the key factor in September coffee heading lower, as production from Colombia and Central America should ease the deliverable stocks situation once supplies start flowing northwards. There may be further upside left for September coffee, but the recent trading range has been posting higher lows and lower highs. With the shadow of huge production from South America hitting the markets soon, another move back towards the high may prove to be as high as September coffee will trade for awhile.

TODAY’S GUIDANCE: Key support for September coffee comes in at 156.85 with 164.40 and 167.20 as resistance. While yesterday’s initial sell-off was unable to follow through to the downside, there are still too many negatives on the fundamental side to feel that the chances for another run at last month’s highs are any more than remote at best.