February 13, 2020
The best statistical setup I have ever seen…
Now that the absurd notion of the Coronavirus crippling the world economy is fading…and now that Stocks have FULLY recovered from their fear induced selloff three weeks ago and are now making new all-time highs (as predicted here)…I firmly believe we are about to see a concurrent lift off in a number of commodity markets that recently took price hits due to the supposed “global crisis.” And my number one candidate for a sizable rally is still Soybean Meal, the single largest source of protein feed for the world’s livestock.
With this idea, which I still consider to be the best data based trade I have ever recommended (which does NOT mean it WILL work), what I want to show you are the charts and historical data that lead me to this conclusion.
The bottom line is that, in 19 of the past 20 years, between mid-January and July, there has been at least one Double Digit percentage rally in Soybean Meal…with 15 of those 19 years having seen at least a 26% upswing…With this in mind, and my firm conviction that ALL of the US row crops have formed MAJOR bottoms since last fall, and while I might be dead, dead wrong, my minimal objective is to see a 20% rally, or $6000 per futures contract, between now and the July Soybean Meal expiration…I would add that, per what you will see on the charts below, that I pretty much expect to be in this trade right up until mid-July, the reason being (as is quite evident on the charts) that this July contract seems to remain quite volatile right up until the very last day it trades.
I continue making this recommendation against a backdrop of what I would also consider to be the most universally bearish attitude among analysts that I have seen in decades…All I seem to hear is, “Farmers should be ready to sell any rally. Supplies are plentiful. Any upside potential will be limited.” And you KNOW what I think along those lines…My opinion, formed through experience, is that NOTHING big in the markets ever gets predicted by the supposed “professionals”(as a group), and I believe this has always been especially true in the grains…where, with every major bottom that I have seen these last 40 years, relatively NOBODY was bullish…to which I would also add, EVERY one of those bottoms was accompanied by MOUNTAINS of supply (which is usually only the reason why prices HAVE BEEN low).
As always, I am obligated to state that these are all my own opinions. And as strong as they are, I obviously might be dead, dead wrong…and if I am, it just as obviously can lead to losing every dollar you invest…So with that being said, I will tell you that I AM CONVINCED THAT WE HAVE SEEN THE LOWS, MOST LIKELY FOR YEARS TO COME, IN ANY NUMBER OF AGRICULTURAL MARKETS…AND A YEAR FROM NOW I EXPECT TO HAVE SEEN POTENTIALLY SUBSTANTIAL RALLIES…PRETTY MUCH ACROSS THE BOARD…And I therefore recommend DISCARDING/IGNORING all of the easily formulated bearish “logic” that seems to be everywhere…and get down to figuring out what you want to buy…and then DO it.
And for me…Buying Soybean Meal is the place to start…Again…Maybe I am dead, dead wrong…but THIS is the trade I currently want to be in…
Here are data and charts going back 20 years…
What I’ve done below is break out EVERY double digit rally in July Meal since 2000…which includes 9 years that had more than one such rally…And the main point here is to note all the years that DID have rallies…and how big they were in percentage terms (year after year)…and then be aware that every 10% move in Meal at today’s prices translate to about $3000 per futures contract…
I would also note that I am NOT suggesting that Meal can ONLY go up…A highly important aspect of my recommending the “1 & 1” (units of 1 call and 1 put) is understanding that this market DOES have sell offs as well…and the 1 & 1 is specifically designed to deal with what happens if Meal DOES go lower from here.
If tables put you to sleep, everything on this table can be seen on the charts that follow…
Rallies in July Meal Mid-January to July Expiration since 2000
And here are charts of all those rallies (and to be clear, not the entire Jan to July activity)…which hopefully will make it visually easier to understand WHY I want to be long…from NOW until mid-July. Again DO note that some years had several double digit percentage rallies…as well as the fact that quite often there are some fairly sharp moves, in the final month or two of trading, right up until the mid-July expiration. And also to remind you one more time, just because this market has rallied so many times does NOT mean it will happen again this year.
Every $10 move in Soybean Meal = $1000 per futures contract.
All charts above are by Aspen Graphics
With having counted 29 solid rallies during the preceding 20 years, to say the least, being positioned on the long side certainly seems to make sense…? AGAIN, religiously using the 1 & 1, which does allow you to reposition at better strike prices if the market initially goes DOWN.
If you have actually read this far, I will now point out something quite significant that has only occurred to me while compiling these figures and charts…
After having noted that the bull moves can start on any day, or any month, I have also observed that there are a LOT of big moves that have taken place during the last few months that this contract trades…which means that, with less time, option prices for NEW 1 & 1’s initiated several months from now (say, in May) will probably have become relatively much cheaper than they are today…prior to a period in which large percentage moves still seem to be a strong possibility. This has nothing to do with the present, but it does lead me to suppose that I will have some sort of involvement here all the way into the July expiration…even after perhaps having liquidated 1 & 1’s we are buying today…If I haven’t made this point clearly enough, just go back through the charts above and note the movement between May and July on the charts that do include that time frame.
Here is the position I would recommend at current levels…
And just as an example regarding the final month or two of trading, the very same recommendation above, costing $1664 for a 1 & 1, might be $750 with 6 potentially volatile weeks to go…which gets interesting when you consider that something like a 10% swing could still be $30…or $3000 per futures contract…This however, is still a down-the-road situation that may, or may not, make sense when we get there.
If Soybean Meal goes dead sideways until expiration, you could lose 100% of your investment.
If it goes down $10-$15, you sell everything and use the same funds to reposition using lower strike prices…
And if it keeps going down another $10-$15, you sell everything again and reposition again…as many times as you need to…
When and If the market turns up…and it certainly might not, but according to history, SHOULD do so…? You then do everything you can (psychologically) to just let it go on the upside.
It might not work, but I honestly think this is the best recommendation I have ever made.
Call me if you are interested…And just to say it, there ARE more aggressive option combinations that are just as valid as the 1 & 1…Combinations that are based on the assumption that we WILL get the 20%, or more, rally that I believe to be possible.
I’d also add that the markets will be closed on Monday…AND would note that the Presidents Day weekend has, at times, represented a turning point for the grains in the past…I am in this trade…and staying it it.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Soybean Meal