Friday, May 30, 2008

Stock, Treasury Futures Too Erratic

One mistake that many traders make is that they always trade the same futures, no matter how erratically or unreliably they trade. This is a costly mistake, but people can throw away their money if they want to.

I am back to trading the grains today, mainly because they have good liquidity and strong momentum. I expected that there would be stiff support outside the current trading ranges that might push corn and soybean prices back within those very tight recent trading ranges. That is exactly what has happened today. If the momentum is strong enough, it make push margin requirement higher again.

Monumental Momentum in Grains

Wow! What a rebound!

With the exception of a temporary sell-off for wheat mid-session, all three major grain products rebounded with strong momentum today. Corn and soybeans went up and never looked back. Both have recovered to well within their recent trading ranges. Good day for grains!


Corn, Soybeans Rebound Back Inside Trading Ranges

The forceful sell-off of both corn and soybeans yesterday suggested the possibility of a bearish break-out. However, today, both have rebounded higher to within the recent tight trading ranges for each. On the left chart here for each of them, we are seeing the very tight trading ranges of recent days, and on the right side, we are seeing today's rebound. Despite both being trapped within a very tight trading range with very low volatility for the past several weeks, the CME hasn't lowered the limit amounts, although they have lowered margin requirements within the past few days.

Wheat prices have also rebounded today, but unlike corn and soybeans, wheat still remains in a downtrend.

Corn - prices still appear a little soft

Thursday, May 29, 2008

Focus: Be Here Now -- The Power of the Mind!

For the past few weeks, I have been pondering upon the power of the mind. I am now convinced that much of what we accomplish in life will be directly related to our thoughts. I have read and strongly recommend the book "As a Man Thinketh" by James Allen. I have also been particularly fascinated with the parable in Luke 18 of the Bible that is known as the Parable of the Unjust Judge. While it is not very commonly known, it is one of my favorites. Jesus told the parable and told his followers that its purpose was "that men ought always to pray, and not to faint" (Luke 18:1). I have found that this commandment to pray always is closely related to this concept of controlling our minds.

I am referring to something much more powerful than the mere idea of restraining our thoughts from vice and temptation, from the prurient or the violent. That is certainly important, but it is only the very beginning. What I am talking about here is much more powerful, and perhaps even more needed. I am talking about taking complete control of our attention and thought faculties to direct and focus them toward virtue and toward specific ends -- toward accomplishment. I am not talking about mere achievement, but accomplishment! This is not just having, but being!

As a young man, I read a book which I can no longer remember, that suggested that if we could control our minds, we could thereby control all of our personal circumstances. I think the book was written by Parley P. Pratt, but I can no longer recall precisely or find the reference that so profoundly affected me.

What I am suggesting here is not mere repulsion of temptation or revulsion from vice. I am talking about constant and focused management of attention.

When I was in my early college days, the school required that I attend a class on developing good study habits. In the text for the class, I remember being fascinated with a chapter called, "Be Here Now". In this chapter, the author discussed the need for students to manage and direct their thoughts toward ends that would yield positive results. He talked about how we are constantly finding our thoughts "straying" toward unwanted, unfocused, and even unintended directions. We lose them. I suppose that yes, we "lose our minds" when we lose our focus. We don't suddenly become raving lunatics, but instead of acting, we become acted upon. We allow others, perhaps even from realms unseen, to refocus us toward their objectives rather than our own. What I am suggesting here, then, is more than turning from thoughts of vice; I am talking about keeping them riveted on accomplishment of good, whether it is improving the conditions of our families, achieving world peace, or making a livelihood in the financial markets.

This is what was meant by the author of the chapter when he told us to "be here now". He said that as we recognize that our thoughts have strayed, we must once again take control of our attention and return it to our own ends. We must gently retake our thoughts and return them to focus on our own ends, thus acting rather than being acted upon. We must train ourselves to act rather than to react. We must gently, gradually train ourselves to be in the moment without distraction. We must "be here now".

Most people, I am convinced, spend their lives of quiet desperation allowing their thoughts to be almost continuously distracted to unproductive and unfocused activities. Television is probably the most common and perhaps the most destructive. What a great way to lose our locus! I am finding that even watching CNBC is, in essence, giving up control -- or better yet, attention -- of one's thoughts to television anchors, producers, and advertisers. As soon as we turn on the television, we yield up our minds to someone else. When we do so, we are essentially turning our minds over to someone else to be "acted upon". We are essentially turning our minds lose to be bandied about like a tiny toy sailboat on the seas of the earth. We can't possibly control the directions of our lives if we are controlled by the winds of the world's ideas.

Prayer is an intentional turning of our attention and focus of thoughts, but rather than yielding up ourselves to be "acted upon", through prayer, we are intentionally focusing our thoughts outside ourselves. We are changing the locus of our focus toward partnership with the Divine. Prayer becomes empowering because we become engaged with the Ultimate Partner -- God. Could there be anything more empowering than constant communion with Deity?

This is an important concept for us as traders. It is not my intent here to be exhaustive in my reflections on this blog. This posting is only a beginning -- a planted seed. Over the weeks and months to come, it may develop and grow, or -- heaven forbid -- it may die for lack of nourishment. That would not mean that the seed wasn't good. It would only mean that it was malnourished. It is important that I recognize that my unwillingness to nourish the seed says nothing about the value of the seed.

One of my objectives, as I move forward with my trading career, is to "be here now". It is to manage the focus of my attention and thoughts toward my goals, both financial, behavioral, and emotional. This will improve my trading. Better yet, it will improve my life!

Slight Blog Redesign

Frequent visitors may have noticed recent changes and a slight redesign to this blog. I am not a full-time blogger, and frankly try to minimize the amount of time I spend writing for it. I am, first and foremost, a trader, not a blogger or writer. Thus, I had put off some changes that I had wished to make for several weeks.

I had wanted to change the image at the top of my blog for several weeks. It was beginning to feel somewhat stale. I have created several images for the top of my blog, and will now begin to change them with greater frequency.

I have also finally taken the time to study how to widen the posting area of the blog. This should make it somewhat easier to read, since more text can appear on the screen. I have very subtly changed the right-hand-side sections that include my profile, news, tags, and the listing of recent posts. This change was minor.

I would like to eventually add another section on the left side, but currently, I feel no sense of urgency about this.

Wednesday, May 28, 2008

Stocks Struggle to Stay Above Water

Meanwhile, the stock indexes are struggling to keep their heads above water. Yesterday's settlement price is the turquoise-colored line on the left chart. As long as crude oil prices remain strong, I don't believe stocks will be able to sustain a rally. I have been trading primarily the Dow and 10-year treasury indexes for the past two weeks, with a few grain trades thrown in for good measure.

Crude Rallies, and Grains Go Along for the Ride

Crude Rally
Corn Rally (Soybeans too, not pictured)

Soybeans Rally to Midlin Space

Soybean prices have rallied slightly along with crude oil, but are only slightly above yesterday's settlement price. Grain trading today has been listless and with little conviction to move the market in one direction or another. This is a very weak rally.

Corn remains down for the day. However, since the price of corn is near the low of its recent trading range, there is a good chance for a rally from these levels.

Corn and soybeans have both remained within a very tight trading range in recent weeks, making trading difficult. This is why I have traded them both much less over the past 3-4 weeks. Corn is trading with a very tight range of about $5.80 to $6.10, and soybeans prices have been trading a range of about $13.25 to $13.80. Some traders may ask, "Why not trade between those ranges, selling at the top and buying at the bottom?" I prefer not to do this because without a solid trend, price charts tend to look more like radio static than sine waves. The results are unreliable and often disastrous to my account balance.

Which would you rather try to trade?

Radio Static, or...

A Sine Wave?

Crude Oil Recovery Saps Energy From Stock Rally

Crude oil is now higher for the day leading into the close of energy trading for the day. This is sapped the energy out of what would have been a nice stock market rally today. The charts have moved inversely to one another, and seem to speak for themselves. Each charts shows the 15 minute (left) and 3 minute charts (right). No sustained rally can occur in the stock index futures with crude oil at such elevated levels.

Crude Oil
S&P 500

Stock Sizzle Turns to Fizzle?

The stock market rally that was fueled by the durable goods news has failed to follow through, and has now moved back to flat, as shown on the left chart above by the turquoise-colored line. Has the stock market sizzle now turned into a stock market fizzle? This is somewhat disappointing.

Perhaps the news of Dow Chemicals' 20% price increase has deflated the balloon somewhat, adding to inflation fears. A 20% price increase is a stark and ominous price escalation, and could have strong inflationary repercussions as it ripples through the economy. What other companies will implement similar price increases?

Treasuries Near Interest Rate Breakout

This chart shows a strong drop in prices today, with a commensurate rise in interest rates. There appears to be fairly firm support at a rate just below 4% for the 10-year treasuries. If prices break downward through this interest rate barrier, we may see a bear market in treasuries. I will be watching this development very carefully. Trends in treasuries and interest rates tend to be some of the longest-lasting ones.

Grains Move Lower, Bucking Bullish USDA Data

Following the weaker price of oil, grains have moved lower overnight, with corn taking the worst drubbing in terms of a percentage decline in prices. This is somewhat surprising, given that the weekly crop data released yesterday afternoon by the USDA was bullish for both corn and soybean prices. This could set us up for a more bullish price surge later.

The USDA announced that saturated soil conditions have held corn seedling emergence to a frightening deficit of 46 points at this point in the planting season. Likewise, soybeans emergence is a very soft 12% so far, with soybean planting at only 52% of normal for this point in the season. Often, farmers will plant soybeans following the wheat harvest, but cooler and wetter soil conditions are delaying the wheat as well, reducing the probability of double-cropping this year. All this tends to be supportive of prices, but heavy selling in the crude oil markets is having a spill-over effect in grains.

Dollar Finds Footing

The Dollar has once again found its footing at a price point close to its all-time low. It is once again on the rise. The lower crude oil price and stronger Dollar is helping to fuel a stock market futures rally this morning. I wouldn't be surprised if we see a triple-digit up day for the Dow. We find out over the next several hours. There is never a dull moment in the financial world. If the market moves against someone today, sentiment a few days later can bring with it huge shifts in what is popular. Traders must therefore be quite fleet of foot and maintain a keen eye toward market sentiment at all times.

Crude Crumbles, Thanks to the Saudis

After the dramatic parabolic rise of the price of crude oil last week to $135/barrel following the U.S. government reports of huge draw-downs in inventory, this week there is an entirely different sentiment, fueled today by the announcement of the Saudis that they will supply more crude oil to world markets. What a difference a day makes!

The Saudis have expressed the belief that the correct price for crude oil is between $60 and $70 per barrel. While I don't hold such a bearish opinion for crude oil prices, I would certainly feel inclined to join in the chorus of crude oil consumers who would thank the Saudis for helping to collapsed an overheated crude oil price.

The only question now is: Why did it take them so long?

Durable "Good"

Durable goods orders for April were substantially better than expected. Total durable goods were down .5%, but only a fraction of expectations. When transportation is taken out, durable goods were 2.5% higher, much better than expected. The only negative here is that durable goods order data tends to be extremely volatile month-to-month.

Between the continuing drop in crude oil prices, and the durable goods order surprise to the upside, this has the potential to stoke a nice stock market rally. Stock market futures are responding accordingly.

Tuesday, May 27, 2008

Interest Rates on Hold

While treasury prices are mixed today on weak economic data, this daily chart suggests that treasuries are still in a holding pattern. This often makes trading somewhat difficult.

Stocks Back to Flat

As consumer confidence reaches a 16-year low and home prices continue to fall, investors are realizing today that crude oil isn't the only headwind for higher stock prices. The Dow has lost its rally and is back to flat now.

Corn, Soybeans Plunge with Crude Oil

As expected, the two biofuel grains, corn and soybeans, have opened sharply lower with the price of crude oil.


What Happened to the Canadian Dollar?

Hint: The fate of the Canadian Dollar is closely tied to its exports in oil. The Canadian Dollar is considered to be one of the "commodity" currencies, because the value of the currency, like the Canadian economy, is closely tied to the value of its commodity exports.

This chart shows the US Dollar paired against the Canadian Dollar, so this chart moves inversely to the value of the Canadian Dollar, also known as the Loonie.

US Dollar Rallies -- For Once!

A rally today of the US Dollar may also be contributing to the sell-off in crude oil. Or is the sell-off in crude contributing to today's rally in the US Dollar? The 120 minute chart on the left seems to signal that the US Dollar is struggling to form --- and sustain -- a floor in the 71.75-72.00 range.

Gold Plunges Too!

I always view sell-offs in the gold markets as an opportunity to buy. Gold is down today by about $25/ounce, and it is almost certainly in sympathy to the sell-off of crude oil. Similarly, when the price of crude oil rises sharply and/or the value of the US Dollar drops, gold also responds by rising.

Buuuuuy Equities!

This rally in stock futures today has one explanation: OIL! Since the plunge in equities last week was driven by the high price of crude oil, this rally can only be explained by today's plunge in the price of oil. If you have read John Mauldin's newsletter to which I posted a link over the weekend, you would also know what the forecast is for the price of crude oil, and especially that impact of all that oil sitting in tankers off the Iranian coast. Needless to say, the strength and duration of this rally will depend largely on the strength and duration of the sell-off in oil. But for now, BUY equities!

Seeeeeell Crude!

This sell-off is very likely due to profit-taking rather than a change in the outlook of the fundamentals. In fact, the fundamentals data, even over the weekend (attacks on Nigeria oil production, for example), is very supportive of high crude oil prices. It may be short-lived, lasting until crude oil looks cheap and buying steps into the markets again. But for now... SELL!

I've a hunch this could impact corn and soybean prices when the open for the day session today. This could make the soybean trading session particularly interesting today, given the breakdown in talks between the farmers and government of Argentina over the weekend.

Although the price of wheat often moves somewhat in sympathy with corn and soybeans, the deepening drought in Australia should start to put a more solid floor under the price of wheat. I don't expect as much impact today on the price of wheat from this crude oil sell-off.

Sunday, May 25, 2008

If Speculators Cause Prices to Rise, Then Why Are Prices Higher for Non-Exchange Commodities?

Answer: Because Speculators Don't Cause Prices to Rise

The chart shown here is a small excerpt from an article written by John Mauldin this weekend. It shows the price escalation of exchange-traded versus non-exchange traded commodities. The funds that are not traded via futures on an exchange, which haven't attracted the attention and investment of speculative traders, have risen much more rapidly and to higher prices than the futures-traded commodities. If speculative funds had influenced prices to rise, the opposite would have been the case. Exchange data also supports this conclusion, since the minority speculative positions are equally divided between longs and shorts.

Erroneous assumptions cause erroneous conclusions.

In his excellent newsletter published this weekend, John Mauldin wrote a superb article on the subject of speculative trading and its impact on commodity prices. He presents both sides of the argument without bias, and then proceeds to analyze the various viewpoints. He then also presents a fascinating scenario of both the short-term and long-term probabilities for prices of crude oil moving forward. He also presents a fascinating case about why Iran may be parking millions of barrels of oil in tankers off its coasts, keeping much of the world's tanker supply tied up, and what will be the impact on oil prices. It is a very interesting write-up that I strongly recommend. This is a "must read" for anyone who wants to be informed on the subject without bias. It can be found here:

Whither the Price of Oil? by John Mauldin

Great isn't it?

Mauldin's conclusion, in the end, is that "coincidence is not causality".