January 28, 2011
Some Incredible Histories…
I would almost say that no bull market in the history of futures trading has ended with anything but bullish news all over the place…that the old adage, “It’s always bullish at the top”, is as true today as it ever has been…Typically, you have a market that has been cruising, and has reached a price level that is relatively (or excessively) high compared to where it has been before, and all the news, statistics and analytical commentary points to even higher prices…But then the market stops, never for any “known” reason, and from one trading day to the next, turns and starts down. The news STAYS bullish forever as prices move lower and lower, often collapsing 25-35% in a matter of months. It’s the same old story over and over and over again.
Lately, I’ve been pounding away on the idea a number of commodities look like major shorting opportunities, with a particular emphasis on the precious metals and various agricultural commodities. With this in mind, what follows is a fascinating (to me anyway) study I just completed of Corn market tops going back about 50 years. What I discovered (or reaffirmed to myself) is that today’s markets are not at all different from anything we have seen during the past five decades. A top is a top. All bull markets do end. And as I said before, they are all accompanied by tons of opinion suggesting “there’s not enough to satisfy demand! Prices GOTTA go higher!”…But somehow they don’t. In fact they do VERY much the opposite…And what I think you’ll see here is fifty years of that very same situation repeating itself many times…Then I’ll ask you to compare all this very simply displayed history with what we are seeing today…
You will quickly note the overwhelming majority of these bull markets in Corn seem to almost stop on a dime and then go practically straight down. My guess is, this stems from the fact that NO MATTER HOW BULLISH THE RHETORIC, NO MATTER HOW SUPPOSEDLY TIGHT THE SUPPLIES, this crop is essentially being produced year round… Yes, supplies may get “low”, but when prices are high, one should never forget there is always a generally massive northern or southern hemisphere harvest coming within a few months…in other words, regardless of how excited analysts may get, we WON’T “run out” of Corn (or whatever the crop), and the futures markets do their job by taking prices to higher levels until those tight supplies have been “rationed”…and then…through decade after decade…we then see those prices frequently move RAPIDLY back towards the much lower levels that represent more balanced supply and demand.
I guess that’s a fancy way of trying to say, “This stuff goes up. And this stuff goes down”, but that IS the essence of commodity price movement. However you want to explain it, ALL commodity bull markets DO turn into bear markets…
Anyway…here is a history of how bull markets in Corn have ended for the past 50 years. See for yourself…and do ask yourself if you think ANY of these reversals were accompanied by a whole bunch of “expert” analysis even remotely suggesting the size and velocity of the reversals that were about to happen…I’d also add, what you see here in Corn is pretty much the same as what you will find in Soybeans, Wheat and Cotton.
There are no two charts that are identical but the end result is the basically the same in all five decades. About the only differences would be the price levels were much lower 40 to 50 years ago, and the percentage declines seem to get bigger as you move forward towards the present.
There are 26 charts here, or an average of about 5 per decade.
There are lots of ways they finish on the upside, whether over a matter of weeks or months…But when they turn, most of them start down quite vigorously.
On the way down, the majority of declines are almost non-stop…with very few lengthy consolidations or retracements along the way.
Virtually all of them have periods where the market is falling straight down…involving high numbers of consecutive lower daily closes.
Now take a look at the present…
Obviously, I don’t know if we have reached the top, but I’m personally willing to bet we have…or we’re very close…Two weeks ago we had a bullish USDA report CONFIRMING THAT SUPPLIES ARE TIGHT.
Here are representative samples from three DIFFERENT brokerage house research comments I have seen since the “bullish” USDA report (and to be clear, I totally disagree with them):
1. "Now we head into new highs with $7.50 type price projections to lean on..."
1. 2. "The rationing of pipeline minimum stock levels for soybeans and corn, and the fight for acres for soybeans, corn, wheat and cotton have many grain traders expecting futures to continue ratcheting higher. Initial price targets being talked about are $15-16 for soybean and $7-8 corn."
3. "Corn and soybean prices both need to rise to ration demand--simply put, demand is running too hot given tight inventories and limited acreage."
OK…Basically, they are all saying the same thing, and while I’m sure there must be some voices out there who are bearish, ALL of the analysis I have seen is pushing the same story…Supplies are tight. Prices have to go higher to ration demand and also influence farmers to plant various crops…And yes, they may all be right, and maybe prices are going a lot higher, but this is EXACTLY the same “rationale” I have seen at EVERY corn, wheat, bean or cotton top I can remember…I’d also say I spent my first 11 years in this business at a major brokerage house (Merrill) and cannot count the times I have seen the “pro’s”, as polished as their credentials and opinions may be, over and over totally get everything just dead ass backwards…ESPECIALLY when you can hear them all spouting the same market “logic”.
There’s an old saying in commodities: Any known fundamental is a worthless fundamental…In other words, anything that is “known” is already built into the market price…which is precisely where I think we are with Corn, Soybeans and Wheat…And I want to be short all of them.
I think the odds are high they all have the potential to come off at least 30-35% from current levels, and recommend immediately taking short positions using either futures (including the “mini” contracts) and or options in any or all of them. However, as I know you can’t always do everything, and fully expect to see all of these markets working somewhat in tandem, my primary focus will be positions in the Corn and Soybean Oil markets. Aside from the fact some of you made some fairly serious money when we were short these two markets in 2008, I feel like the size of these contracts, and their option prices, allow for better risk management as well as diversification.
Here is the long term chart, then a few possible approaches….
If you want to use futures, margin for the 5000 bushel contract is $2025… or $405 for the 1000 bushel “mini”.
By the “book”, you would add to the futures position when you have your initial positions off and protected…
Here is the put option I’d buy here…
And here is the Soybean Oil…The same sort of historical numbers apply here…Soybean Oil can, and does, drop 25-35% in a matter of months…just like those 26 historical Corn charts.
Here is a futures approach…
And here’s the option I like here…
Simply stated, when I look at everything here…the histories and the long term charts…I am left with the impression these are two great, great trades…REALLY…I’m in…Believe me…As always, I may be dead wrong but I do think there is some incredible potential on these pages…
Here’s a quick look at the Gold…I don’t think it’s acting like all the talking heads think it’s supposed to…I continue to think it has done very little so far…I still think we’ll see it at least under $1000 within the next 3-4 months (at the most maybe) and still look for at least one $100 down day along the way…
I still basically have no one on this trade…If you want some option prices, or are interested in futures, give me a call and I’ll help you figure out what to do…
Give me a call…or pass this along to anyone who might be interested…I keep saying it, but I truly believe it…Short Corn and Soybean Oil looks like a fantastic bet…