February 24, 2002
War in Ukraine was the bullish rumor.
Now it's a fact & I think the row crops
are going TOTALLY in the tank…
As I have written for decades, while fundamental factors matter, it is my very strong opinion that the overwhelming majority of price changes in the markets are more a function of mob psychology than anything else…that where prices go, as well as how far and how fast they do so, is determined by globs of money, from both the public and large speculative funds, chasing opinions which are primarily generated by a herd mentality analysis that originates with supposed “experts” in the brokerage houses and financial media…And while this has always been the case to some extent, it has become especially true in today’s Information Age where the news is instantaneous, “loud”, repetitive and flowing from an avalanche of talking heads all at the same time…such that it is only natural that the trading masses DO often converge into one unanimous opinion, most notably at the END of bull (or bear) markets…wherein prices DO reach the point that every possible buyer, professional and otherwise, has gotten on the wagon…in kind of a “Who’s the last fool?” sort of scenario…Which almost inevitably is then followed by the “surprise” of a market reversal and the bullish “story” getting blown out of the water.
I mean, really, it happens ALL the time…Whether it was the Dot-Com Boom (when NASDAQ lost 65% in 1 year) , or $147 Crude in 2012 (when it dropped $110 to $37 just 6 months), or the Stock Market at the top preceding The Great Recession, or most lately ARKK Innovation (down 60% in 1 year), it’s always the same old story. Sounds great. Makes sense. Never gonna stop. No WAY it stops here! The story all over the place…and then it craters.
And though I have definitely been wrong for a while, I continue to believe that is exactly where we are now regarding the row crops. Specifically, the Ukraine Invasion has been absolutely dominating the news for the past 3 weeks, and with it, the whole world trading world having recently been “informed” that Ukraine is a major global grain exporter, the Corn, Wheat and Soybean markets have been pushing sharply higher since the beginning of February…thus culminating last night, as the bombs started falling, in what I can only describe as one of the most classic “rumor and fact” reversals I have ever seen in the markets, with Corn having been big limit up (35 cents)for most of the night, only to close up 5 cents, with Soybeans doing very much the same, up 90 cents, and then closing down 18 cents and more than a dollar below its 5:00 AM high.
Both of those look like MONSTER reversals to me…Maybe they hang around a bit, for a few days, or weeks, but the 50 year studies I have presented recently on tops in both of these markets also suggest that the next thing we see, literally from right here…can be straight down…where anybody who hesitates to Sell, or Get Short, just gets left behind…looking for a rally to “get in”…that never comes…
The truth is, it ain’t guys like you and me who really move the markets. Rather, it’s really about what the large Spec Funds are doing…as their money sloshing around IS what takes prices from one extreme to another…
Commitment of Traders
Each week, the commodity exchanges transmit a summary of all positions held by various types of traders, breaking them down into three categories…Large Commercial Traders, Large Speculative Funds, and Small Speculative Traders…with the Commercials and the Funds, who typically are on opposite sides of the market, being the two dominant forces in moving prices. The Commercials are actually handling the commodity and in the market as hedgers, while the Large Speculative Funds are just in there doing that…speculating…and providing the Commercials with someone to take the other side of their hedges…And long story short, IT IS ALL OF THAT SPEC MONEY THAT MOVES THE MARKETS AROUND…AS THOSE GLOBS OF FUNDS GET IN AND OUT OF THE MARKETS…WHICH OCCASIONALLY RESULTS IN THEM ALL BEING HEAVILY ON ONE SIDE OF A MARKET, BULLISH OR BEARISH…WHICH INEVITABLY…EVENTUALLY…LEADS TO THEM GETTING OUT OF THOSE TRADES…WHICH OFTENTIMES IS PRECISELY WHAT CREATES SOME DEVASTATING REVERSALS AT COMMODITY MARKET TOPS.
And while Commitment of Traders (charts following) is not a perfect indicator, nor does it necessarily provide the timing of potential reversals, what it does show you is that THE FUNDS GET IN…AND THE FUNDS GET OUT…AND WHEN THEY DO, IT CAN MAKE FOR SOME BIG FAST MOVES.
We’ll see. Maybe I am still wrong but I believe this has become one of the great short crop trades of all time…and I CONTINUE TO RECOMMEND SHORTING CORN, SOYBEANS, SOYBEAN OIL, AND COTTON. I THINK THEY WILL ALL BE DOWN AT LEAST 25-30% WITHIN THE NEXT 2-3 MONTHS.
Here are some option ideas I like here…but I should point out that there are numerous ways to go about taking these positions…
It may be hard to accept, but the calls used in this “1 & 1” are essentially throwaways. You are hoping that the call disappears in values as the market falls away from here. But conversely, if the market is moving higher, it DOES allow you to potentially recoup 100% and reset at higher prices.
Dollarwise, these are all big moves…but the actual price moves, relative to what is NORMAL for all these markets, ARE NOT THAT BIG.
My recommendation is to own some kind of short position in all three major areas…Corn, Soy and Cotton…I think they are ALL going to drop at least 25-30%, but have no idea which of them will go first, fastest, or biggest…And per the math, a decent winner in any of them, and total busts in all of the others, would probably still put you into a solid profit…But as they all do kind of move together, my guess is that if one is really going, the others will be as well…And of course, I am obligated to tell you that if none of them go, you could lose every dollar you have on the table.
The think the top is here and NOW…What could be possibly be more bullish than everything that has been touted in these markets recently?
Get in touch if you want a piece of this…or want to get MORE if you are already on board.
All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: all of them