The live cattle market spent all of spring and early summer in a tight trading range roughly bound by $155 on the high side and supported near $147 on the low side. The market has finally created some action by falling through the support near $148 over the last two weeks with the current low now near $145. 50. Chart readers would see the fall through this level as a breakout and anticipate further weakening of the cattle market. However, there are two very good reasons this may be a short trap triggering a reversal rally into expiration.
The Dollar Index made an interim high when the market appreciated Janet Yellen’s dovish statement following the March FOMC meeting. The market has consolidated over the last couple of months between the recent highs and the support that has built up around 93 in the Index. The Dollar’s decline over the last couple of weeks has been bought by commercial traders. We sent a COT buy signal last night. It was based on these factors and triggered by an upturn in our proprietary short-term market momentum indicator.
Indecision, fear and uncertainty continue to strengthen their grip on the markets as we head towards the Federal Open Market Committee’s FOMC meeting beginning today as well as a possible Greek default by the end of the month. Faced with the possibility of correctly forecasting the actual events of the FOMC and the Greeks versus trading the reality of the markets’ collective reactions, investors are taking chips off the table. Here’s a brief look at why chips are stacked a bit differently than they have been since the ’08 economic collapse and the one pocket of the interest rate sector that could benefit substantially should indecision, turmoil and volatility be the effects of this month’s economic announcements.
Currency destruction usually usually places a sovereign national bank at the pointed ends of its citizens’ collective swords. The country’s citizens watch helplessly as they wake up each morning less financially secure than they went to bed the previous night. This general sentiment is why the Japanese Prime Minister, Shinzo Abe’s popularity is counter intuitive. His political platform has been based on the public destruction of the Japanese Yen in a last ditch effort to end 25+ years of secular deflation. As a result of Shinzo Abe’s platform and with the help of the Bank of Japan’s Governor Harihuko Kuroda, they’ve driven the Yen down approximately 20% versus the U.S. Dollar in the last year. Commercial traders are making a strong case that we may be nearing the end of this decline.
This was a light week thanks to those who gave their all. Thank you to those we honor and support and kindness to the families they’ve left behind.
We began with the development of a classic small speculator short trap in the cotton futures market for Equities.com. We’ve been watching it build all week and finally issued an official COT Buy signal in our nightly discretionary email. Free Trial Available
Thanks in part to the lightened writing duties this week, I was able to step back and survey the markets as a mosaic. I find this exceptionally helpful in determining the big picture themes. In this case, we determined that these 9 charts are screaming DEFLATION. The world’s bankers may be trying talk rates higher but the boots on the ground are still mired in excess capacity and economic slack.
We used a slightly longer chart this week, going back just over a year to highlight the sideways action that has been the dominant feature of the cotton futures market and also to demonstrate the effectiveness of the commercial traders’ actions within this set of circumstances.
The grain markets may finally be perking up in spite of declining energy costs and record harvests. We’ve previously mentioned the oat futures as the first of the grain markets to budge in, “Combining Buy Signals in the Oat Futures.” Today, we’re looking at soybean meal and the set of indicators we use to drown out the voices of hyperbole both in print and on TV. Quantitatively speaking, the soybean meal futures have triggered a COT Buy Signal. More importantly, you can see the consistency and magnitude of these plays on the chart below.
This has been a tremendously active week with big volatility and important market turns. We have to begin with last week’s gold platinum spread. We outlined the case in our Gold, Silver, Platinum and Copper Outlook. This week, April platinum traded down to nearly a $50 per ounce discount to April gold. Currently, this spread has rebounded to approximately a $5 discount. That’s as much as $4,500 profit depending on the entry point.
This has been a tumultuous week in the equity markets as news events and political leveraging have sent markets in China and Greece down by more than 5% and 11%, respectively. Here in the US, Wednesday’s action attempted to mimic the global markets but was met by a solid bid in the S&P 500 and Dow Jones Industrial Index around the Thanksgiving lows. Meanwhile, the Russell 2000 found support near the critical 1150 level that has propped it up since late October. We published a short take in Equities.com earlier in the week projecting expected weakness in the equity markets due to the shift in the commercial traders’ position over the last couple of weeks. This has led many to ask exactly how we use these reports to forecast trading opportunities in the commodity markets. We’ll use this week’s piece to explain our approach in detail within the context of today’s equity markets.
We frequently describe the discretionary portion of our COT Signals advisory service as a three step process. First of all, we only trade in line with the momentum of the commercial traders. It has long been our belief, three generations worth, that no one knows the commodity markets like those who whose livelihood’s rest upon the proper forecasting of their respective market. This includes the actual commodity producers like farmers, miners and drillers along with the professional equity portfolio managers using the stock index futures to hedge and leverage their cash portfolios. Tracking the commercial traders’ net position provides quantitative evidence of both the long and short hedgers’ actions within an individual market. The importance of their net position lies in the collective wisdom of this trading group. Their combined access to the best information and models is summed up by their collective actions. The final part of the commercial equation lies in tracking the momentum of their position. Their eagerness to buy or, sell at a given price level is equally important as the net position. We only trade in the direction of commercial momentum. Finally, commercial trader momentum is the bottom indicator on the chart below.
The second step of this process is how we translate the weekly commitment of traders data into a day by day trading method. Commercial traders have two primary advantages over the retail trader. First of all, they have much deeper pockets and they have the ability to make or, take delivery of the underlying commodity as needed. Secondly, they have a much longer time horizon. Think, entire growing season or their fiscal year on a quarter by quarter basis. Therefore, we have to find a way to minimize risk and preserve our capital. We do this by using a proprietary short-term momentum indicator on daily data. The setup involves finding markets that are momentarily at odds with the commercial traders’ momentum. If commercial momentum is bearish, we are waiting for our indicator to return a short-term overbought situation. Conversely, if commercial traders are bullish, we wait for a market to become oversold in the short-term. The short-term momentum indicator is labeled in the second graph.
Once we have a short-term overbought or, oversold condition opposite of commercial momentum, an active setup is created. The trigger is pulled when the short-term market momentum indicator moves back across the overbought/oversold threshold. Waiting for the reversal provides two key elements to successful trading. First of all, it keeps us out of runaway markets. Markets are prone to fits of irrationality that catch even the most seasoned of commercial traders off guard. News events, weather issues and government reports can all wreak havoc unexpectedly. Waiting for the reversal also provides us with the swing high or low that is necessary to determine the protective stop point that will be used to protect the position. Everywhere there is a circle, red or blue, was a trading opportunity in the S&P 500 this year. Within each circle, the highest or lowest value was the protective stop point. It is imperative to know the protective stop prior to placing any trade. This allows the trader to determine the proper number of contracts to trade relative to their portfolio equity. Risk is always the number on concern of successful trading. Currently, the protective stop levels are 17980 in the Dow, 1189 in the Russell 2000 and 2079 in the S&P 500.
Currently, the Dow, S&P 500 and Russell 2000 all contain this same set of circumstances. Given the lofty valuations, the speed of the recent rally and recent global economic developments it seems prudent to expect a retreat from these highs. Clearly, that is what the commercial traders, who were MAJOR buyers at the October lows believe is about to happen. We’ll heed their collective wisdom as they’ve successfully called every major move in the stock market for 2014.
Commercial soybean growers who hadn’t hedged their crop early in the year have taken a pounding on prices all summer long. As is seasonally predictable, the market did get somewhat of a harvest rally moving from a low of $9.04 in the November soybean futures contract up to current levels around $10.25. Negative price action has accompanied this rally as growers have sought to unload whatever they could ahead of the USDA’s November World Agriculture Supply and Demand report. The primary takeaway in the soybean market is the nearly 8% increase in this year’s crop estimate, now at 3.958 billion bushels versus their previous estimate of 3.927 b/bu. The only kind note in the report was the trade’s general expectation of 3.967 b/bu.
More interesting than the fundamental action is the increasingly negative technical picture taking shape as you can see on the chart below.