August 13, 2009
Still shorting the soybean complex...
With the soybean complex (and many other markets as well) having consolidated sideways for some nine months now, I believe the odds have skyrocketed for a MAJOR move one way or the other. While pundits everywhere seem to be hyping the inflation concept, and recommending investors therefore invest, as buyers, in any number of commodity markets, I firmly believe they have it all backwards...There certainly will be some markets that go through bull phases, but in general, I still believe we are in an environment in which the majority of commodity prices will continue to fall, in some cases quite sharply, and am therefore primarily interested in markets in which I can be short...And, the first place I absolutely and aggressively want to be short is the soybean complex, which is, I believe, the most overpriced commodity on the board, especially now as we head towards harvest (and ample immediate supplies) in the Northern Hemisphere.
With soybeans still trading over $10.00 a bushel, I have zero doubt that farmers worldwide will be planting this crop fencepost to fencepost, with the result being those "shortages" we are supposedly now facing will quickly (surprisingly to the experts) become surpluses...And those $10.00 soybeans will just as quickly, if not more so, be trading at $7.00...or even $6.00...
As noted on the chart following, FOR THE PAST 35 YEARS, EVERY TIME THERE HAS BEEN A DYNAMIC BULLISH SPIKE IN SOYBEAN PRICES, WITHIN 15 MONTHS OF THEIR HIGH TICK THEY HAVE BEEN BACK DOWN UNDER $6.00 A BUSHEL and I do not think it will be any different this time around.
With our basic unit of two puts and one call costing roughly $12,000, as opposed to $3930 for the same in Soybean Oil, I am still using the Soybean Oil contract as my primary vehicle to short the soybean complex...Oil is currently is trading in the high 30's and I fully expect to see it, sooner or later, trading in the low 20's (minimally). If I am right, this means there is something like $8000 to $9000 per futures contract between where this market is today and where I think it is headed.
In May I made the point this market looks very much like many other bear markets I have seen in soybean oil...Now some four months later I continue to see it that way...so part of what follows here is essentially a reprint of my May 8th newsletter...
Some Soybean Oil bear market histories...
Rallies, and consolidations, 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 today'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 38.5 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 December 2009 chart with the position I would recommend taking, immediately...
Total cost for one unit of 2 puts and 1 call is about $3930...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 30 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...
So it's the same trade as it was in May...Yes, it's frustrating to sit here and wait for months while nothing happens, but the fact remains, this stuff WILL go somewhere, sooner or later, and I intend to be there when it happens....ABSOLUTELY.
And finally...I do have some very definite (and assuredly worthless) opinions about opportunities in Bonds, Gold, the Dollar, Sugar and Cattle,. Hopefully I can get something out on them in the near future.
Give me a call if you're interested in any of this...