May 8, 2009
Time to be aggressively short the Soybean Complex
I believe a number of commodity markets have becoming roaring opportunities to go short, with the Soybean Complex and Live Cattle still being at the top of my list.
After crashing from extreme record highs last year, many commodities quite normally found a bit of a bottom during the past 5-6 months (no market can go straight down forever) that has lately, especially this week, spurred a lot of chatter from the "experts" and talking heads about all the government spending being inflationary, and that we should therefore be viewing the recent rallies in various commodities as signaling the beginning of a new bull market in the futures arena.
I firmly disagree...I think the bear market in commodities is far from over.
First up, I would start by saying that virtually NONE of those same experts EVER were saying "get short!" last year. The truth is, up until mid 2008, we were in massive speculative bubble in which prices were rising to absolutely stupid heights, and considering the fact we are now hardly on the verge of some rip-snorting worldwide economic lift off, I would suggest many commodity prices are now probably on their way back down to levels more in line with where they traded for the past 25-30 years.
Secondly, I would say that anyone who doesn't understand, for example, that $11.00 Soybeans (with severely lower production costs than a year ago) will lead to monstrously ramped up acreage, from Minnesota practically to Antarctica, needs their head examined. I've seen this cycle too many times in the agricultural sector during my 29 years of living with the insanity of being a futures broker...where huge price run ups spur dramatically increased production, which then absolutely overwhelms demand, which is then followed by two to three year price crashes, usually resulting in prices falling ALL the way back to the previous lows (or worse).
This 35 year chart of Soybeans is a perfect example of what I am referring to...Believe me, all of those surges to $9.00 or $10.00 were accompanied by tons of "expert" bullish rhetoric, both right at the highs and then all the way back down to the $5.00-$6.00 range.
This is NOT a commodity that anybody can even remotely talk about "peaking" in possible production. Every spring, in both the northern and southern hemispheres, farmers decide what they'll plant and how much of it...So what would you expect them to do with prices like these? And what path, then, would you expect prices to eventually, or immediately, begin taking?
Some Soybean Oil bear market histories...
I'll state again that rallies are a normal aspect of bear markets, and with this in mind, I have provided a few historical examples of bear markets in Soybean Oil that are almost mirror images of what we are seeing today in Soybean Oil, and for that matter, in many other markets.
Do note that in all of these cases, rallies and/or consolidations (perhaps lasting from two to six months) do occur, but in a bear market, as a trader, you are supposed to be selling into, or shorting, those rallies...as sooner or later, prices tend to resume their downward path by then sometimes falling on what can only be described as "straight down". Take a look at these five examples, then compare them to what Soybean Oil looks like today...
Now here's a chart of what Soybean Oil looks like as of Friday's close...Compare it to all of the charts above...
About the only difference I see between 2009 and these previous years is that Soybean Oil is currently trading at 40 CENTS, as opposed to the fact those five examples (covering almost 20 years) expired at an average of 18.50 cents...which more or less give you an idea of what may be where prices eventually end up...The point is, even though Soybean Oil has come down since last July, it is still relatively in the STRATOSPHERE, and therefore has PLENTY of room to fall further from here.
What now follows is the same August chart with the position I would recommend taking, immediately, with Soybean Oil having just closed back on its highs for the past six months...
Total cost for one unit of 2 puts and 1 call is about $3900...What I am really trying to show you is my own perspective here...that, in my opinion, there are EXCELLENT odds this market is either going up 6.5 cents from here, which will allow me to get back the entire $3900 invested and then use that money to take a new short position at higher levels, again with the 2 & 1...Or, we'll see this contract repeat some version of all those historical examples, and continue sharply lower, which would then mean a potential return of 3 to 4 times that $3900.
From a risk versus reward standpoint, I don't think it gets any better than this:
1. We are still at severely elevated prices, which, to me, means we are NOT going to see some quiet, whimpering sideways action.
2. Every bull market in this complex going back at least 35 years has failed and then fallen to sharply lower levels.
3. I can therefore put my money on the table and have, I believe, an excellent chance to recoup 100% of those funds if I am wrong...with an equally excellent chance to make a triple (or a double if it just trades to 33. cents) if I am at all right.
Bottom line is, though, I don't EVER know what is going to happen in this stuff. I just try to make halfway intelligent educated guesses about what I think is coming, then put my money, and yours, into situations where I can manage the risks but still have what I would call fairly dynamic profit potential...And this trade, guys, is exactly that, and then some...Which is why I personally want to be "all over it".
I'm on it. I may end up looking as stupid as all those "experts" I am forever mocking...But I think this is a big one....Give me a call if you're interested...